Romania attracts 50% of SEE foreign investments in 2005

Romania attracted over 50 pc of 2005 FDI in SE Europe
Nine O’Clock – October 18, 2006
by Sebastian Hubati

BUCHAREST – The total volume of foreign direct investments (FDI) attracted by Romania in 2005 and in the first half of this year amounts to USD 6.388 bln, according to World Investment Report 2006 by the United Nations Conference on Trade and Development (UNCTAD) released yesterday.

The figure accounts for 51.3 per cent of the total investments attracted by the seven counties in the South East Europe region. According to the Report, the FDI attracted by Romania in 2005 decreased by close to 2 per cent since 2004, in line with the relatively steady investment inflow trend in South East Europe and Commonwealth of Independent States. In this region, total FDI have slightly increased, i.e. by USD 100 M or 0.03 per cent as compared to 2004, to approx. USD 40 bln. The three major players in the region are the Russian Federation with USD 14.3 bln attracted, Ukraine with USD 7.8 bln (almost three times more than in 2004) and Romania with the approx. USD 6.4 bln. In the Central and South East Europe region, Romania ranks fourth in a top of the most active foreign investment absorption markets, outperformed by the Czech Republic (USD 11 bln), Poland (USD 7.7 bln) and Hungary (USD 6.7 bln).

According to the Report, by late 2005 foreign investments in excess of USD 23.8 bln were made in Romania, with FDI as a percentage in the GDP having dropped to 24.2 per cent in 2004 (approx. four per cent compared to 2004). Moreover, the FDI flows as a share in the gross fixed capital formation also decreased, by over 11 per cent, down to 28.1 per cent respectively.

As for the other future European Union member state, Bulgaria reported a more significant decrease in FDI in 2005, by 35 per cent, to USD 2.223 bln, but the share in the gross fixed capital formation (35.1 per cent), while substantially lower than the 68.1 per cent reported in 2004, was nonetheless higher than in Romania.

At a global level, foreign direct investments in 2005 grew for the second consecutive year, inflows having risen by 29 per cent to reach USD 916 bln. Nevertheless, world inflows remained far below the 2000 peak of USD 1,400 bln, the report points out. United Kingdom was in 2005 the largest FDI recipient with a total of USD 165 bln, followed at the top by the United States, China, Hong Kong, Singapore, Mexico and Brazil.

ARIS expects usd 6.2 bln in FDI in 2006, BCR privatisation not included

The high foreign investments attracted by Romania in 2005 were seen as primarily fuelled by the BCR acquisition by Erste Bank (although payment of the EUR 2.2 bln in the escrow account opened by the Romanian State with Citibank London, on October 12, 2006, was not registered in the Report) and by the privatisation of the natural gas utilities. Moreover, the UNCTADE Report mentions that a major contribution to the FDI level reported by Romania in 2005 was represented by the approx. 39 per cent growth of the merger and acquisition volume in the first half of the year, as well as the improvement of the business environment due to measures taken by Bucharest authorities in the context of EU accession negotiations. According to deputy director of the United Nations Information Centre in Bucharest Cristina Balan, the Report makes reference, in this respect, to the introduction of the 16 per cent flat tax rate and simplification of the real estate market legislation, more specifically with respect to foreign citizens’ right to own property, except for farmland and forest assets.

Further, positive effects of these measures are expected to reflect on this year’s results as well, according to secretary general of the Romanian Agency for Foreign Investments (ARIS) Florin Vasilache, who estimates Romania will attract a similar FDI volume in 2006 as well. Thus, total FDI in 2006, excluding the money paid by Erste Bank for BCR last week, are expected to amount to USD 6.2 bln.

Low pre-accession investments allow for positive post-accession prospects

Moreover, he added Romania is in no danger to follow the negative post-accession foreign investment path reported in Hungary and Slovakia, as the mistakes made by these countries can be prevented in Romania. The problem facing the two new EU members after the 2004 accession was the substantial decrease in foreign investments, because all big-sized State-run companies had been privatised and a competitive environment had not been created for attracting greenfield investments.

The Foreign Investors Council (FIC, a private association which brings together 114 multinational companies accounting for over 80 per cent of the total FDI in Romania) share this opinion, admitting that the Romanian business environment has improved and appreciating the positive trend in general investments and, since 2000, in greenfield investments as well. In this respect, the Report notes that in 2005 as many as 235 greenfield investment projects were implemented in Romania, as opposed to 171 in 2004 and 117 in 2003. However, according to FIC executive manager Ruxandra Bandila, a continuing upward FDI trend will not be the consequence of a highly stable and investor-friendly environment, but rather the effect of the delay with which transnational corporations and investment funds chose to take advantage of the investment opportunities offered by Romania. “Pre-accession investments were not as high as they were in the states having joined the EU in 2004, which is why after 2007 we will see substantial inflows,” Bandila said, and added that at least in the real estate market this trend is already evident, with major British, German and American investment funds already present in the market.

Threat of attractiveness fall in the medium run

In spite of the progress achieved, the business environment is still far from being very competitive, while the burden of increasing labour costs is ever heavier. According to the ARIS official, labour costs are estimated to increase by an average annual 12 per cent after accession; however, as a consequence of an educational system which proves unable to match the education supply with the demand for professional skills needed by multinational corporations’ new employees, expenses incurred with personnel training schemes are already burdening company accounts. Moreover, in-house, on-the-job training programmes carried out by multinational corporations with foreign accredited trainers are not recognised by relevant authorities in Romania. On the other hand, unless companies resort to training programmes for their Romanian employees, they will see themselves forced to bring expats on middle management positions, with comparable or even higher costs incurred.

According to the FIC official, the business environment may be improved not only by enhancing labour flexibility, but also by reducing bureaucracy and strengthening fiscal stability. Also, a closer dialogue is recommended between private companies and the Environment Ministry, regarding the commitments undertaken by Romania in the accession process, particularly with respect to the national emission allocation plan.

Romania’s outward investments, lower than Burkina Faso’s

Another fact reflected in the Report brings to the forefront the low level of investments by transnational corporations based in Romania, which dropped from USD 39 M in 2003 and USD 70 M in 2004 to USD 13 M last year. In this respect, Romania ranks 109th in the world, outperformed by countries such as Burkina Faso, but also by neighbours Bulgaria (USD 316 M in 2005) and Hungary (USD 1.346 bln in 2005). TNCs based in Romania, rather few, primarily operate in electronic and home appliance retail and only entered neighbouring markets such as Serbia, Bulgaria and the Republic of Moldova.