ROMANIA: An Introduction
Romania – Country Overview
Author: Lavinia Ioniță Rasmussen, Partner, NNDKP
Romania sits at the junction of three highly relevant markets: the European Union (EU), the CIS and the Middle East, offering rich natural resources and a skilled workforce. With strong connections to the outside world and its EU and NATO membership status, Romania is home to one of the world’s best broadbands, sustaining a fast-developing IT industry.
As the second largest country in Central and Eastern Europe and the largest in SEE, Romania remains a consistent market opportunity for investments. Nevetheless, for the short term, any business investment analysis should factor in potential legal and tax changes derived from the political instability the country has faced in the fall of 2021.
Following a contraction in real GDP of 3.9% in 2020, Romania’s economy is reported by EU forecasts to have started a robust recovery driven mainly by domestic demand. Real GDP is forecast to increase by 5.1% in 2022 and 5.2% in 2023. In contrast, the inflation rate of 7.5% in the Q4 2021 is well above the 4% projected by the EU. The current spike could, however, continue to be interpreted as having a rather temporary nature, substantialy driven by pandemic-related factors.
Overall, Romania's economic advance in 2021 is amongst the highest in the EU, and, by the end of the year, the economy is expected to surpass its pre-pandemic level.
In terms of taxation, Romania has some of the most competitive rates in the EU, and throughout 2021 the tax framework has been relatively stable. The 16% corporate income tax and 10% personal tax, 5% dividends tax, and nil tax on income derived from qualifying holdings make it an attractive jurisdiction among the EU states.
More recently, a number of advances have been made towards digitalisation in the tax field, in particular in the relationship between taxpayers and tax authorities. In this context, a number of additional obligations and burdens for taxpayers have also been introduced, such as the Standard Audit File for Tax, the international standard for the electronic exchange of accounting data between taxpayers and tax authorities developed by the OECD and which becomes effective in 2022.
Through the National Recovery and Resilience Plan (NRRP) agreed with the European Commission and approved in late October 2021, Romania has undertaken to implement a set of reforms and investments to address the key challenges in the tax administration and fiscal system. These include the further digitalisation of the tax authority, the modernisation of the customs system and a review of the tax framework with the purpose of creating a fairer, more efficient and more transparent tax system capable of facilitating taxpayers’ compliance and eliminating distortions and loopholes. The sustainability and outcome of such measures will, of course, depend also on the effectiveness of concurrent structural reforms.
The real estate sector is another field that has seen interesting developments despite the impact of the COVID-19 pandemic.
The high demand for income-producing assets, along with low interest rates will force more and more investors to consider investment opportunities in countries that were less attractive 24 months ago. Romania is one of the countries benefiting from this trend with new institutional players looking at the local real estate market. Insurance companies are becoming active in the office investment market and foreign funds are scouting for new transactions. With this said, the sector clearly has its challenges that it is trying to overcome, while also looking to make the most out of potential opportunites brought by the current expansion of the commerce/e-commerce sector or by the adoption and assimilation of proptech.
Real estate players and the real estate market in general are also trying to understand how a hybrid work model will impact the demand for office space and how retail is affected by government-mandated closures and vaccination certificate requirements. The demand for these sectors is highly dependent on the evolution of the pandemic, and on the return of the employees to the offices and the cancellation of all restrictions. However, despite these insecurities, the office sector remained confident in Romania and most of the transactions initiated prior to the pandemic were closed.
However, since the start of the pandemic transactions in offices and retail seem to have cooled as the uncertainty of sustainability of rents and cash flows have increased bid-ask spreads. In logistics, yields have been compressed substantially, yet we are starting to see new capital interested in entering the market with the logistics sector enjoying strong tenant and investor demand. In the residential sector, despite the increasing prices in Bucharest, the average selling price is modest compared to other EU capital cities.
Agriculture in Romania is expected to go through a volatile period in the coming years, and to be characterised by a moderate degree of uncertainty, mainly due to the changes imposed on local farmers through the new approach related to the Common Agricultural Policy of the EU. However, one could speculate that they will find the necessary resources to adapt to the new realities imposed by the European Green Deal.
After an exceptional agricultural year in 2021, in the short term, the financial performance of agricultural businesses is expected to increase. This is due, on the one hand, to the use of agricultural technology, and on the other hand, to the fact that the increase in input prices will be offset by rising crop prices. Financial performance is however expected to be affected by the implementation of measures related to the environment, sustainability and biodiversity.
Predictably, the process of consolidating agricultural land will continue and, thus, Romania will remain an attractive option for investors looking for business opportunities.
One of the most interesting peculiarities Romania has is its banking sector, as the country has one of the lowest financial intermediation rates in Europe. Commercial credit is one of the main methods used to finance working capital needs. On the other hand, as GDP increases and Romanian companies become stronger, large transactions in the financing sector have become more common.
In the past five years, a significant trend has emerged, with Romanian-owned companies raising larger and larger tickets locally, and local banks supporting entrepreneurs through syndicated financing. The most active areas for financing have been agribusiness, healthcare and pharma, as well as IT. The local stock market has also seen a very substantial increase in the number of transactions, evolving from a virtually unknown market to one that has received emerging market status (by FTSE Russell), with several large companies being included in global indices.
In the energy sector, on October 4th 2021, Romania’s government approved the Integrated National Plan in the field of Energy and Climate Change (PNIESC) for the period 2021-2030. Romania remains committed to addressing global concerns through its internal policies and aims to contribute to energy security, decarbonisation, energy efficiency and innovation, while maintaining as a primary objective the supply of energy from internal sources.
The NRRP also sets strong objectives in the energy sector, consistent with those included in PNIESC. The NRRP includes specific investments and reforms in support of the endeavours to reach the national objectives set for 2030 on energy efficiency, energy consumption and the share of energy from renewable sources. In this respect, the NRRP provides for new investments in the installation of new renewable power production capacities (950 MW by 2024), through a technologically neutral competitive public tender between different technologies (wind and solar).
By 2030, pursuant to PNIESC, the share of energy from renewable sources in total energy consumption must include net installed capacities of 5.1 GW of solar and 5.3 GW of wind. In the period 2021-2030, Romania aims to install additional capacities of 6.9 GW from renewable sources.
The announced reforms and energy objectives have already boosted investments in the energy sector and the trend is expected to continue in the following year. The growth is also supported through non-reimbursable grants.
The infrastructure sector remains one of Romania's key challenges, historically impeding economic growth. Progress has been visible in recent years, with notable work carried out on railway rehabilitation projects and the construction of new motorway sectors. However, the slow rate at which new infrastructure projects are launched and the high level of bureaucracy, coupled with the relatively high rate at which public procurement procedures are challenged (and thus stalled) by unsuccessful bidders, have all contributed to a slow development of the much-needed new infrastructure.
At the same time, infrastructure projects may well prove to be a strong vector for economic growth in the following years, considering the significant amount allocated to infrastructure in the NRRP: more than EUR7.5 billion is planned to be used for transport infrastructure projects (the largest portion of the NRRP allocated to any sector), aiming to ensure by 2026 the modernisation of over 300 km of railway, the construction of over 400 km of motorway, as well as new metro lines in Bucharest and Cluj Napoca. Nevertheless, new projects and even budgetary allocations for such have often failed to materialise into actual infrastructure, so it remains to be seen if Romania will follow through with its current commitments.
As regards Romania’s reaction to the COVID-19 pandemic, at the beginning of 2020 the authorities declared a state of emergency that lasted for two months (16 March – 15 May 2020), which was then followed by a less stricter state of alert. During the state of alert, as a response to the evolution of the pandemic, Romanian authorities have imposed either relaxation or more restrictive measures.
The purpose of the restrictions is twofold: containing the outbreak and lifting the burden off the medical system to allow for a more effective treatment, especially in severe cases which require urgent care. As such, the state’s actions seem to mirror the pandemic’s evolution, through a hard-to-predict pattern of policy, in an effort to balance the safety of its citizens and the much-needed economic freedom for certain industries to recover.
In line with the general global situation, certain industry sectors have been substantialy affected by the pandemic, especially the ones dependent on human contact and interaction, such as the hospitality sector or the cultural and creative fields, whilst the digital sector thrived under pandemic conditions. However, as previously stated, a progressive recovery of Romania’s economy, fuelled by the pent-up domestic demand for restaurant services, leisure and culture is to be expected.
The recent political instability and any potential (yet hard to predict) legal and fiscal changes at country level, the evolution of the COVID-19 pandemic and the economic and geopolitical environment at regional and global level are all factors that could inhibit Romania’s evolution in the coming years. However, the opportunities offered by the NRRP, together with the long-term EU budget 2021 – 2027 (with a total value of EUR76 billion available for the next six years) are significant and plausible growth pillars.
Overall, Romania has a window of opportunity to embark on a steady post-pandemic recovery process, which, unless delayed by political factors, will shape it into an even more promising market for potential investors.