7 January 2013 | By Lucy Burton
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26 October 2012
Romania’s political feuding is not helping the economy, as a much-needed IMF loan hangs in the balance
Recent elections in Romania have not eliminated the political instability and uncertainty that has plagued the country for some time. However, lawyers say the outlook is positive, citing work in infrastructure and a stable legal market as evidence.
Romania’s parliamentary elections on 9 December were meant to put an end to feuding among the country’s politicians, but the standoff between the prime minister and president has cooled only marginally since the vote.
Prime minister Victor Ponta’s leftist Social Liberal Union won an absolute majority in the election, but at the time of writing president Traian Băsescu was yet to give his blessing for Ponta to be re-elected. Even if he does reappoint the former lawyer, who was at the centre of a scandal earlier this year when he was accused of plagiarising his PhD thesis, the bad feeling between the pair is not expected to calm.
Many are concerned the Ponta-Băsescu dispute could damage agreement on a loan from the International Monetary Fund (IMF).
“In a country like Romania, a stable government makes a big difference to the economic outlook,” says Gabriel Sidere, managing partner of CMS Cameron McKenna’s Romanian offices.
“2012 was a challenging year [partly] because of the political uncertainty. The tension really took a toll on investor confidence and the new government needs to bring that back. Cohesion and stability in the political realm will be crucial.”
The majority vote at least points towards cohesion among voters.
“It’s a fact that in the past 22 years Romania has seen changes from right to left and left to right each electoral cycle,” says Mares Danilescu & Asociatii managing partner Mihai Mares. “This time the rule was again confirmed, with the only significant difference being the overwhelming majority the former opposition gained in the new parliament. As such, we expect a more stable environment in the coming years, with fewer changes in the administrative body.”
The hope for the longer term is that the political showdown will cool, leaving the government to focus on the country’s struggling economy after it agreed to a €20bn (£16bn) rescue package with the IMF in 2009.
“As everywhere, including in the Western democracies, this type of victory has its traps for the winners,” continues Mares. “It’s to be hoped that the new government will keep a policy of rigour in macroeconomics, as Romania is fully dependent on foreign investment and must send a positive signal to the international markets.”
It is a hope felt widely in the country’s legal market, with many lawyers saying the government needs to fix the mess it made in 2012 so it regains the trust it lost among investors.
“In an emerging market predictability is key - a main question for investors when they come into a market is, ‘what can we expect?’.” says John Fitzpatrick, Bucharest-based head of TMT (international) at CMS Cameron McKenna. “There must be transparency, too. People need a functioning court system so they know what will happen when they let their money go into an economy.”
Musat & Asociatii’s managing partner Mona Musat also points to the difficult but crucial task the new government has in regaining investors’ trust.
“The latest political issues have worn down some investor trust so the new government needs to start strengthening the relationship with business to recover the investment deficit and stabilise the exchange rate,” she says.
“In terms of opportunities, we expect the new government to support strong investment strategies with well-defined projects, including PPPs in areas such as infrastructure, natural resources, energy or transportation.”
Some are not positive about the outlook. Ţuca Zbârcea & Asociaţii deputy managing partner Ştefan Damian says he does not expect this year to be that different from last.
“The government won by a huge majority so, in theory, the political environment should be more stable,” says Damian. “But growth in the economy isn’t just reliant on Romania’s behaviour - it also depends on the EU and the countries that surround it.
“Growth this year, for example, is expected to be just 2 per cent. While a strong and stable government will have a positive effect assuming
certain agreements are concluded, it won’t cause a complete turnaround in investor confidence.”
Others agree, pointing to the country’s struggling economy as a key concern for the legal market.
“We expect 2013 to be a strenuous year as the private sector - the core of the economy - is still facing difficult times,” warns Musat, although she adds that the local legal market has registered an ascending trend in most areas of practice.
“So far, the legal market has succeeded in coping with the recession and I cannot foresee other events significantly affecting it in 2013,” she adds.
Despite weak growth and deep austerity measures Romania has held on to many of its gems - the most notable being energy and infrastructure, the latter of which is a growing area of interest for investors.
“As an emerging economy Romania has great potential for PPP
projects involving infrastructure development and rehabilitation, roadbuilding and various construction projects for institutional buildings such as hospitals and schools, as well as environmental protection,” Musat says. “Initiatives have been launched by local authorities, or the government in the case of strategic projects, and have been received with great interest by investors.
“Another hot area is competition and antitrust,” she adds. “More than 20 investigations have been initiated by the competition authority across a variety of industries such as telecoms, pharmaceuticals, financial services, energy and infrastructure.”
If the government reinforces trust in Romania, adds Fitzpatrick, the country might find itself with a growth spurt.
“When that happens Romania will be quite attractive,” he says. “There’s huge potential here - all kinds of projects need to be done. We’re not talking about building three new malls, we’re talking about substantive needs for the development of the economy. It’s ready for another boom.”
Firms seem to have kept themselves relatively busy - and optimistic - despite sluggish economic growth and falling wages. In August 2012 the average net salary in Romania was recorded at just €347, with the biggest fall in wages - 16 per cent - among industries relating to crude oil and natural gas, while the biggest increase was in the tobacco and telecoms industries, with growth of 24.6 per cent and 23.3 per cent respectively.
“A positive sign is that there were no major layoffs last year, showing confidence that there’s enough business in the market,” says Musat. “The business environment, although reserved, is showing optimism for 2013.”
Tomorrow never comes
So with quiet optimism in the market, how will the Romanian legal world look in the next five to 10 years?
“I can compare Romania with neighbouring countries, where change has happened much faster,” responds Damian. “In five to 10 years we will see something not that different from what we have now because the big firms are already here. Any major change would have happened in the 1990s - we have a market dominated by domestic firms.
“I’m not seeing Romania as a ‘new Turkey’- all the international firms won’t suddenly want to jump into the country. Today, the focus is much more on the eastern part of the world than the eastern part of Europe.”
Funding in the balance
The Ponta-Băsescu dispute is worrying, with many concerned it could damage the agreement of a loan with the IMF.
Romania does not have an economic foundation as solid as Poland or the Czech Republic for attracting long-term foreign investors, so its safety net relies on the support of the IMF.
Failure of the Romanian state to observe obligations in the standby agreement and to focus on wooing foreign creditors instead of the internal political situation may convince creditors to withdraw capital. Pressure could build and weaken the currency.
The IMF is watching Romania closely. In 2009 it and the EU bailed out Romania to the tune of €20bn (£16bn). The IMF has a €5bn two-year standby financing agreement for Romania that expires in March. In the election campaign politicians vowed to roll back austerity measures and lower taxes. This is unlikely to encourage the IMF to grant a fresh standby agreement.
Before approving the budget the authorities must focus on negotiating economic policies with the IMF and the European Commission, both in the current preventive agreement and in view of the extension for 2013.
However, we now have a political alliance that benefits from a comfortable majority. With little doubt the new government will reach a new understanding with international creditors - mainly because this is the only choice Romania has.
The result of negotiations over the EU’s 2014-20 budget are bound to be shaped to a great extent by the fiscal constraints of member states. The negotiating position of the Romanian authorities favours an increase in the size of the EU budget.
This stance is hardly surprising, given that Romania is a net beneficiary of EU funds, but could look contradictory in light of the poor record of EU funds absorption. So far, Romania’s certified absorption rate, including pre-financing, stands at less than 20 per cent compared with an EU average of more than 33 per cent. Any increase in the EU budget would place additional and unnecessary pressure on Romania’s budget deficit in the next EU fiscal exercise.
Low absorption can be put down to variables such as fragmented policy-making capability, an overambitious choice of operations for the first management period, cumbersome procedures, inexperienced human resources and a blame and fear-driven management culture.
Absorption is necessary for cohesion, as is the appropriate choice of priorities, so it is
crucial that the country should first define a development vision and then decide who in the administration is best placed to carry this through.
Ştefan Damian, deputy managing partner, Ţuca Zbârcea & Asociaţii
GDP (current US$, 2011): 179.8bn
Annual inflation (November 2012): 3.2%
Population (2011): 21,390,000
Life expectancy at birth: 73
Unemployment rate (second quarter 2012):6.9%
Source: World Bank, Romanian National Institute of Statistics