Political & Economic Environment

History aside, successive recent governments have worked closely with international finance to produce a country with more than respectable macro indicators, especially so when one considers the economic disaster of the first ten years without communism. The major legacy of those days – inflation approaching three digits – is now happily under control. Indeed, there are very few metrics about which this cannot be said, a most unusual situation both in the region and elsewhere. This transformation has come about through steady pressure of interest rates (averaging over 21% for 2003 and 2004) and some fiscal tightening, all closely observed by the inevitable trio of the World Bank, the IMF and the European Union.

The year 2004 ended with a new parliament and president, but the inheritance was good. Analysts agree that there is a sound platform on which to build prosperity, and with entry into the Union as of January 1st, 2007, the next five years look like a good time to be in power. Last year saw a prolonged political effect as the cycle hit its peak, ultimately leading to a change in Romanian leadership at all levels. Part of the legacy of 1989 (when so many walls came down simultaneously) is that political cycles seem to be synchronized across the CEE region. A new president came just at the end of 2004, as the ‘conservative’ Mayor of Bucharest Traian Basescu took over in a surprise victory over rival presidential candidate Prime Minister Adrian Nastase. Basescu was forced to form a government from a fragmented parliament created in simultaneous elections. Other peoples’ politics are always a distraction, but for the record the new coalition is formed around the Justice and Truth (DA) alliance under Prime Minister Calin Popescu-Tariceanu. A hydraulic engineer by background, he was a founder of the National Liberal Party (PNL) in 1990 which has joined in government with the Democratic Party (PD) under Emil Boc.

No one quite expected the Romanian economy to grow at any where near the speed it did since 2004. As a result, the latest briefing hints at problems connected with such rapid expansion. Verbatim, the IMF wishes to ‘prevent the risk of overheating resulting from macroeconomic imbalances that have emerged since late 2004.’ Inflation in the country reached 6,8% in November 2007 while in the last month of the year it droped further to stop at 6,7%.

According to the latest World Bank reports on Romania's Economic Outlook for 2008, the prospects of growth are looking positive yet slightly slower compared to previous years. At the same time a simultaneous increase of inflation has also been foerecasted to take place. The reason for the slow down have been associated with the growth of Romania's current account deficit and the weakening of the RON obseved in the last months of 2007. In line with World Bank reportings on the Romanian economy BCR has forecasted an inflation rate of 5,4% for the year 2008, while the end of 2009 inflation is expected to drop to 4,5%.

2007 profits form financial investments (shares, bonds, dividends, deposits and foreign exchange transactions) made exclusively by individuals exceeded 7,5 billion EUR, which constitutes a 65% increase compared to 2006. The medium and long term deposits of foreigners with Romanian banks increased almost 4 times between November 2006 and November 2007, reaching an all times high of 3,73 billion EUR according to data from the National Bank of Romania. Foreign Direct Investments into Romania increased in 2007 by 3,8 times reaching 7 billion EUR. National Bank of Romania analysts excpect the FDI trend to reach the same levels in 2008, while a slight drop is forecasted for 2009 dropping at 6,2 billion EUR. The economic growth for 2008 is estimated at 6,1% for the year 2008 and at 6,0% in 2009.

Population long-term credits (over five years) at the end of 2007 have increased by six times compared December 2005. The biggest increase of 6,39 times was recorded in the segment of LEU credits (old national currency), which surged from 3,3 billion LEU in December 2005 to 21.1 billion at the end of 2007. At the same time, long-term credits in foreign currency were 5,6 times higher at the end of 2007 compared to December 2005. Their cumulated value surged from the equivalent of 6,15 billion LEU to 34,72 billion in the mentioned period. The mentioned amounts refer only to credits with banking institutions.

Last year, Standard and Poor’s increased the sovereign debt rating of Romania: long-term foreign moved to BB+ (from BB) and long- and short-term local were raised to BBB- A-3 (up from BB+ and B respectively). With a ‘stable to positive’ outlook, this reflects the long term benefits from structural improvements in the public sector coupled with EU membership. Both of these should help boost public finances, but as the boom in retailing shows, increased public demand can be expected to produce a rise in tax revenues, whilst anticipating decreased servicing charges public debt. S&P held out the carrot that further reform could lead to an upgrade of the foreign currency to investment grade in the medium term. The new PM noted that the rating “is added stimulus for keeping the macro-economic equilibrium, by maintaining a low budgetary deficit and by further reducing inflation, as well as for achieving a healthy economic growth. We trust the fiscal reform measures we implemented will make the Romanian business environment more attractive and will accelerate the economic development”.

Between 2000 and 2004, Romania has received important grants from the EU through the Phare, Ispa and Sapard instruments that exceeded EUR 2.6 billion. For 2005 and 2006, Romania is set to receive from the EU some EUR 1 billion per year as pre-accession funds. The EU post-accession funds allocated for Romania (2007 to 2009) stand at EUR 11 billion, of which EUR 6 billion will be paid in this period (the rest of the payments to be made as the projects unfold). Romania's contribution to the EU budget will stand at some EUR 800 million in 2007, over EUR 800 million in 2008 and some EUR 900 million in 2009.

Romania is currently a member of the following International Organizations and a counter-party to the following International Agreements:

Organizations:

The United Nations
The World Bank
The International Monetary Fund
The World Trade Organization
The European Bank for Reconstruction and Development
The Bank for International Settlements
The Council of Europe
The Organization for Security and Co-operation in Europe

Agreements:

European Union (EU)
Central European Free Trade Agreement (CEFTA)
Free trade agreement with European Free Trade Association (EFTA)
Most Favored Nation (MFN) status with United States
Full NATO membership
Free Trade Agreements with Hungary, Czech Republic, Turkey and Moldova. In addition, has concluded a number of bilateral agreements concerning trade, avoidance of double taxation, and mutual guarantees of investments.