Earning from native pluses

Earning from native pluses

Top priorities in order to resume the interest of foreign investments and the urgent reforms to be implemented locally are analyzed by James Stewart, Vice President Treasury & Capital Markets, Raiffeisen Bank and Vice President, AmCham

Romania is the seventh largest population and the ninth largest country of the EU. It benefits from a strategic geographic situation, an educated low-cost labor pool, a dynamic S&M enterprise sector and good energy and agricultural resources. It is, however, one of the poorest countries in Europe. Somehow, the country does not exceed this status, despite its potential.


According to the European Attractiveness Survey 2012 report, Romania will be the sixth most attractive European country for investment over the next three years. This is encouraging news for the foreign investors and it is a call for action for the political class.


Still, the challenges come from the drastic decline of foreign investments in Romania lately, reaching the lowest value since 2003 (1.6 bln EUR, representing 1.2% of GDP). Top priority must be given to ensuring a predictable and transparent decision-making framework. The Government needs to create a strategy for each sector, then it must pass legislation that is in line with the strategy and to have an impact study on the legislation. From a fiscal  perspective, the most important issue to be guaranteed by the authorities is the predictability of the relevant legislation. As well, the sustainability of public finance is imperative, by extending the taxation basis, in the context of a reform measures package  of the fiscal system and administration, control and collection of budgetary  income system. In the short term, increasing the collection and reducing tax evasion are imperatives. These are necessary and available measures to take so that the state becomes an effective, stimulating and fair to the companies and citizens who honestly pay their fees and taxes. 



“In the absence of institutional and structural reforms, banking and financial crises can arise following different euphoria episodes in financial markets.”


But we, the business, are not here only to criticize the government but also to appreciate and support good policies and measures.


For instance, foreign investors’ attitude towards Romanian government securities changed quickly in January. The catalyst behind the parliamentary elections and the expectations of the Romanian local currency bonds being included in the JP Morgan Emerging Market Local Bond Indexes and Barclay’s index, boosted the interest of foreigners in local government securities. The reward was important. Foreign investors bought local government securities amounting to around EUR 3bn between December and February and so increased their local exposure to a historical maximum. These large inflows are important both for the government (allowing it to finance part of public budget deficit) and for the country as a whole (allowing it to cover part of this year’s external funding needs).


Such developments reveal a key lesson: financial markets and investors do reward good policies. And this is not related only to improvements in financial markets mechanisms, but also in case of progresses related to functioning of the overall economy (institutional and structural reforms). In fact, in the long-run, financial markets development and economic development are interdependent.


Public authorities in Romania still face important funding constraints. Available resources are scarce when taking into account public investments requirements in infrastructure, education system, healthcare system, research and development. Accordingly, the government must set up a strategy (key objectives, prioritization) and promote a friendly and predictable business environment. For instance, once receiving EUR 3bn from foreign investors in portfolio inflows it is important how the money is really spend. Constantly using borrowed money only for consumption purposes can make foreign investors losing their confidence at some point in time and wanting them back (a sovereign debt crisis). Also, inclusion of local T-bonds in international bond indexes takes into account only some minimal criteria aimed to describe a functioning market. More steps have to be made in order to have a fully functional local bond market and to increase its attractiveness for investors (i.e. set up of an effective debt management s  strategy, increase in transparency and communications with the market).


To the extent that these issues will be discussed and addressed in a formal framework, through a permanent and real dialogue and consultation between businesses and authorities, we are confident that the performance and the competitiveness of the Romanian conomy will improve.