Country risk reference rating: Level 5 (5/9)
Country Risk Outlook: Stable
◆Political Risk
After reorganization, Romania’s new government is expected to maintain stability in the short term and continue to implement economic and political reforms pragmatically. The biggest political issue in Romania remains how to deal with corruption and speed up the process of judicial independence. An important aspect of Romania’s economic transformation is the promotion of privatization.
In recent years, the Romanian government has actively taken measures to attract foreign investment and participate in its privatization process. Romania has a large number of bilateral investment agreements to ensure the investment security of foreign investors. Romania’s political transformation is still not over, it is still under close supervision of the European Union, and the process of joining the Schengen countries still faces resistance.
◆Economic Risk
In 2013, Romania’s economy accelerated, but forced fiscal austerity and the slow expansion of bank credit affected business and consumer confidence, further restricting Romania’s economic growth prospects. Credit facilities provided by the International Monetary Fund (IMF) and the European Union, premised on austerity policies, are crucial for Romania to obtain private borrowing at preferential rates and ensure business confidence. But strict tightening fiscal policy could stoke political tensions and affect investor confidence.
In the fourth quarter of 2013, Romania’s economic growth rate reached 1.7%, the fastest growing among the 28 EU countries, driving the annual economic growth in 2013 to 3.5%. Romania’s fiscal stabilization plan has achieved significant results, and the decline in fiscal deficit and current account deficit has reduced its external financing pressure. In addition, the economic growth prospects of the euro area have improved. These factors led the country’s economy to once again lead the EU in the first quarter of this year, growing by 3.8% compared with the same period last year.
With the economic recovery in the Eurozone, the external economic environment of Romania has improved, and the strong growth in exports has led to the recovery of economic growth. Close ties with international institutions such as the IMF have improved Romania’s fiscal balance and financial conditions, and its current account deficit and foreign debt are at controllable levels.
◆Business environment
According to the regulations of Romania’s foreign exchange system, foreign exchange business under current accounts and capital accounts between residents and non-residents can be conducted freely, except for special regulations by the National Bank. Non-residents have the right to acquire, hold and apply foreign exchange financial assets, and can open foreign exchange and local currency accounts in Romanian banks, and foreign exchange can be freely converted. Foreigners working in Romania can remit all their legal after-tax income abroad.
The core principle of Romania’s “Investment Promotion Law” is to implement non-discriminatory treatment for domestic and foreign investment, implement national treatment for foreign-invested enterprises, and implement the same preferential policies for domestic and foreign-invested enterprises. The government mainly provides preferential treatment to investors in the form of state funding and provides free assistance in purchasing tangible and intangible assets. The specific amount depends on the situation. In terms of tax incentives, only enterprises in special economic zones or industrial parks can enjoy some tax incentives. In terms of industry preferences, the “Investment Promotion Law” stipulates that in the processing industry, power supply, gas supply, heating and air conditioning industry, water supply, cleaning, garbage recycling and harmless treatment of toxic substances, telecommunications-level information services industry; vocational training, technology Innovation and R&D activities; administrative and related services; and preferential treatment on environmental protection projects. In addition, investment in economically underdeveloped areas and areas with high unemployment rates will be supported.
Judging from the four indicators of tax system, investment convenience, infrastructure and administrative efficiency, Romania’s investment environment has achieved many positive changes after joining the EU. Romania welcomes foreign investment and is actively taking measures to attract more foreign investment. The crisis caused a sharp decline in foreign capital inflows to Romania, which has slowly recovered since 2012. In 2014, the government increased investment in transportation facilities, hoping to give full play to its strategic advantages as an Asia-Europe hub.
◆Policy suggestions
Romania’s national economy is growing steadily, but strict tightening fiscal policies may continue to affect investor confidence. Romania’s progress in joining the Schengen countries needs to be tracked. Joining the Schengen area means that Romania can further integrate into Europe.
In addition, attention should also be paid to the impact of Romania’s political changes on fiscal policy and exchange rate trends. Although the agreement signed with the IMF clearly stated fiscal austerity goals, political pressure related to the election made it difficult to achieve the goals. Changes in the economic situation of the Eurozone have a greater impact on Romania. Romania’s trade and investment are closely linked to the Eurozone. The economic development prospects and financial fluctuations of the Eurozone have a significant impact on Romania. Therefore, it is necessary to pay attention to the linkage between the Romanian economy and the Eurozone economy.
