Romania: Country Profile

Country Profile | 10 Feb 2012

Romania has had a cumbersome and frail recovery with only modest gains expected in the medium term. The recovery should gradually
shift from exports to domestic demand as consumption gathers momentum. The government is committed to reducing the budget deficit
but future targets will be challenging. Romanian society is ageing as population declines.

KEY POINTS
Romania has had a cumbersome and frail recovery. Growth weakened in the second and third quarter of 2011 but real GDP
increased slightly above market expectations by 2.5% for the year(Euromonitor data shows 2.2 but officially it is registered at 2.5% yo-y). In 2012, real gains of 1.3% are forecast.

The budget deficit was cut to 6.8% in 2010 and the government managed to reduce it to 4.3% of GDP in 2011. The budget for 2012
calls for a deficit of just under 3% of GDP.

Romania is trimming the public-sector workforce to 1.1 million by the end of 2012, down from 1.4 million in 2010. The government
claims to have already eliminated 180,000 jobs.

In real terms, private final consumption rose by 1.9% in 2011 and gains of 3.6% are expected in 2012. Tax increases imposed as
part of the programme of fiscal consolidation slow the recovery of consumer spending. Somewhat stronger rates of growth are
forecast over the next several years but gains will not match those experienced prior to the recession.

FACTS
Area
237,500 square kilometres
Currency
Leu (= 100 bani)
Location
Romania borders on the Black Sea in the east and Ukraine and Moldova in the north, with Bulgaria in the south and Hungary and Serbia
in the west.
Capital
Bucharest

GOVERNMENT
Head of State
Traian Basescu (2004)
Head of Government
Mihai-Razvan Ungureanu (2012)
Ruling Party
A new centrist government - a coalition of the Democratic Liberal Party, Hungarian Union of Democrats in Romania and several
independent allies.
Political Structure
The country's president is non-executive and answerable to a parliament. Nevertheless, he exercises considerable influence. The
president is elected for a five-year term by the people. Parliament has two chambers. The Chamber of Deputies has 332 members,
elected for four-year terms on the basis of a list system and independent candidatures by the principle of proportional representation.
The Senate has 137 members, elected for four-year terms by proportional representation.

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Last Elections
Presidential elections took place in November and December 2009. Traian Basescu, the incumbent, was declared the winner over Mircea
Geoana by a narrow margin. Basescu received 50.33% of the vote while Geoana took 49.66%. Voters also gave overwhelming approval
to a non-binding referendum to abolish one of the two chambers of Congress and reduce the number of MPs. Emil Boc stepped down as
prime minister in February 2012 after widespread protests. He was replaced by Ungureanu who will serve as interim prime minister. Mr
Ungureanu has reshuffled the cabinet. The ruling coalition remains, with a narrow majority of 237 votes in the 463-seat parliament.
Political Stability and Risks
In terms of building a market-driven economy, Romania still lags behind some of its neighbours. Although there has been progress in
cracking down on corruption and organised crime, much more needs to be done. Failure to implement the programme of fiscal
consolidation could rapidly undermine the country's credit worthiness.
International Issues
Romania joined the EU in 2007. Corruption and nepotism are still problems but the EU has praised progress in both areas. However,
Brussels will impose a number of safeguards on the country. For example, it will be able to step in and cut subsidies if corruption or waste
is determined. Romania hopes to enter the eurozone in 2015.
Many Moldavians fear that Romania still has designs on their country, most of which was Romanian before the Second World War. The
present government has gone out of its way to reassure the Moldavians.
Government Finance
In the past, much of the government deficit was financed by remittances from Romanians working elsewhere in Europe. However, in
2009 the dollar value of remittances fell sharply as many Romanians returned home. The government was forced to turn to the EU and
the IMF for 20 billion in aid when lenders refused to finance the country's rising public debt. In order to ensure the delivery of the next
instalment of the loan, Bucharest was required to implement an austerity programme. This included a 5% increase in VAT, a cut in public
wages by 25%, healthcare reforms, reductions in pensions and jobless benefits and the release of more than 100,000 state employees.
The budget deficit was cut to 6.8% in 2010 and the government managed to reduce it to 4.3% of GDP in 2011. The budget for 2012 calls
for a deficit of just under 3% of GDP. Health and pension reforms have been approved but the target for 2012 will still be difficult to
meet. A comprehensive reform of the public spending on health is scheduled to begin in 2012. Bucharest will freeze wages and pensions,
continue shedding state jobs and revamp money-losing state companies.
In 2011, public debt rose to RON186,576 million, equivalent to 34.4% of GDP. In real terms, public debt rose by 8.1% during 2011.
Spending on social security and welfare represented 33.3% of government expenditure in 2011, followed by spending on economic
services (20.0%).

ECONOMY
Economic Structure and Major Industries
The share of the agricultural sector has contracted significantly over the past couple of decades but the sector still provides employment
for 25.8% of the work force. Private ownership of farmland makes up almost three quarters of the total. There are several million
subsistence and semi-subsistence farms. Most will disappear as funds from the EU begin to modernise the sector. Farm output rose in
2011, supported by favourable weather conditions.
The manufacturing sector makes up 24.5% of GDP and employs 19.3% of the work force. The share of traditional industries such as
textiles and shoes is declining, while that of automakers, car parts and engineering products has risen. Dacia, owned by Renault, has
experienced modest success in recent years, while Ford invested US$923 million in a factory in 2010 to produce 300,000 units per year.
In general, however, the Romanian automobile industry lags behind that of neighbouring countries. Manufacturing growth stagnated in
2010. A recovery led by automobile producers began in 2011. Many companies are having trouble getting credit after the Austria's
central bank announced its intention to cut financing for the Romanian subsidiaries of Austrian banks.
The mining sector is of special concern because it is the source of most resistance to economic reform. Mines producing copper, lead,
zinc, gold, silver and coal require substantial subsidies.
Tourism accounts for just 1.4% of GDP (compared to 4.9% in Hungary). The real value of tourism receipts fell by 4.6% in 2011 and
growth of just 0.8% is forecast for 2012. A modest recovery is expected in the medium term but Romania is not ready for a large
increase in the number of tourists.
Foreign banks dominate the financial sector with three of the country's four largest banks being based in Austria. This exposure could
prove to be a problem as the Austrian government forces its banks to cut back on lending in East Europe. Before the crisis hit much of
the lending was concentrated in non-productive sectors, particularly real estate, which was inflated by speculation. When the bust came,
Romania's banks were hit hard by domestic crisis, burst of the real estate bubble and withdrawn liquidity by foreign banks. Asset growth

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stalled in 2009 and 2010, while non-performing loans (NPL) rose from 6.5% in September 2009 to 14.2% in the same month in 2011.
Towards the end of last year, the NPL ratio started to fall to 14.1% in December.
After a year and a half of stagnation, the retail market in Romania is seeing a resurgence of development and retailer expansion.
Overview of the Economy
Romania was one of the EU's fastest growing member states in 2004-2008. Real GDP growth averaged more than 6% per year
throughout most of this period and investment surged after entry to the EU. A boom in consumer spending was driven by a rapid rise in
borrowing which left Romania highly vulnerable when the global financial crisis hit.
The economy began to weaken dramatically in 2008 and entered a sharp recession in 2009. Domestic demand contracted, capital inflows
abruptly fell and the exchange rate depreciated. The deterioration forced the government to turn to the IMF and the EU for loans
amounting to around 20 billion. A process of fiscal consolidation that began in 2010 weakened domestic demand, leading real GDP to
drop by 1.3%.
The economy faces other problems once it gets back on track. Romania has the lowest income per capita in central Europe, the weakest
environmental standards, the largest tax arrears, the most pervasive corruption and the lowest education spending. Unreported, untaxed
economic activity is estimated to represent nearly half of real GDP.
Foreign Trade
Romania has become well integrated into the EU trade. The EU's share of Romanian exports amounted to 73.7% in 2011. Weaker
external demand in the EU markets should hurt Romanian exporters in 2012.
Romania's external sector is heavily dependent on manufacturing with machinery and transport equipment accounting for the highest
share of the country's exports 42.8% in 2011.
The share of exports in GDP has been rising for several years and amounted to 35.8% in 2011. Exports grew by 29.3% (in dollar terms)
in 2011.
The current account deficit was 3.1% of GDP in 2011 and it should remain at the same level in 2012.
Economic Prospects
Romania has had a cumbersome and frail recovery. Moreover, it is still vulnerable to changes occurring in the international
macroeconomic context following adverse developments in the sovereign debt crisis. Growth weakened in the second and third quarters
of 2011 but real GDP increased by 2.5% for the year in 2011. In 2012, real gains of 1.3% are forecast.
Prices rose by 5.8% in 2011 well above the central bank's target of 3.0%. The government has allowed the country's currency, the leu,
to appreciate as part of its effort to control prices. Monetary policy is also being tightened.
In real terms, private final consumption rose by 1.9% in 2011 and gains of 3.6% are expected in 2012. Tax increases imposed as part of
the programme of fiscal consolidation slows the recovery of consumer spending. Somewhat stronger rates of growth are forecast over
the next several years but gains will not match those experienced prior to the recession. Public spending will rise very little in the medium
term.
Unemployment reached 7.3% in 2010 and remained at that level in 2011. Wages have fallen after the government introduced its
austerity programme. Romania is trimming the public-sector workforce to 1.1 million by the end of 2012, down from 1.4 million in 2010.
The government claims to have already eliminated 180,000 jobs.
A significant portion of the FDI that came to the country in recent years went to low-skill industries such as textiles and shoe making.
Another 15-20% of FDI went into retail and wholesale operations. Romania needs to attract more green-field investments in exportoriented manufacturing and services that demand higher skills. Inflows of FDI fell sharply in the first eight months of 2011.
Evaluation of Market Potential
Rates of real GDP growth should begin to improve only in 2013. The recovery should gradually shift from exports to domestic demand as
consumption gathers momentum. Restoration of investors' confidence will be a slow process. Rates of growth will be well below the
average realised prior to the recession.
With guidance from the IMF, the country's monetary and fiscal constraints should be alleviated as the economy strengthens. The domestic
market is still immature and has considerable potential to grow. Convergence to the EU living standards will depend on increased
investment and improvements in employment creation.
Further pressure arises from required accession-related spending which forces the government to co-finance a quarter of all postaccession EU grants (estimated to be 4% of GDP in 2009). In addition, Romania is required to contribute about 1% of GDP to the EU as a

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member. Some help should come from the 30 billion fund the EU has set aside to modernise Romania.

BUSINESS ENVIRONMENT
Bucharest has privatised a significant portion of the energy sector. More than 100 small, state-owned enterprises were scheduled for sale
in 2011 and officials are moving forward with plans for restructuring. The country will push ahead with plans to sell minority stakes in
several state-owned companies, such as Transgaz SA, Transelectrica SA and Romgaz SA, and majority stakes in others.
A flat tax (16%) on personal income and profits has been implemented in order to spur investment and draw much of the country's
sizeable black economy estimated at 40-50% of GDP into the legal sphere. Reforms to better deal with tax evasion are being
introduced. The VAT rate was raised to 24% in 2011 one of the highest rates in the EU. Regulated prices for commercial users of
electricity and gas will be scrapped before the end of 2013. Improvements in tax administration and efforts to reduce tax evasion are
other crucial parts of a plan to boost government revenue.
More extensive reforms of state-owned enterprises together with stronger regulation and market-oriented pricing are essential to boost
economic efficiency and strengthen growth. The accelerated absorption of EU funds is another priority. The government intends to focus
on strengthening the administrative capacity of units managing the funds and modernising the legislative and regulatory framework.
Corruption is regarded as widespread.

Table 1 Indicators of Business Environment: 2011

Indicator
Ease of doing business rank (out of 183)

72

Starting a Business
Cost (% of GNI per capita)
Time (days)

3
14

Dealing with construction permits

Time (days)
Cost (% of GNI per capita)

287
73

Employing workers
Minimum wage for a 19-year old worker or an apprentice (US$/month)
Ratio of minimum wage to average value added per worker

222.9
0.24

Tax rate
Total tax rate (% profit)

44.4

Labour tax and contributions (% of commercial profits)

31.8

Time (hours per year)

VAT (%)

222
24

Exporting
Documents for export (no.)
Time to export (days)
Cost to export (US$ per container)

5
12
1,485

Importing
Documents for import (no.)
Time for import (days)
Cost to import (US$ per container)

6
13
1,495

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Protecting investors
Strength of investor protection index (0-10)

Closing a Business
Time (years)
Cost (% of estate)

3.3
11

Source: Euromonitor International based on the World Bank

Note: The cost for starting a business is recorded as a percentage of the economy's income per capita. It includes all official fees and
fees for legal or professional services if such services are required by law. In the absence of fee schedules, a government officer's
estimate is taken as an official source. In the absence of a government officer's estimate, estimates of incorporation lawyers are used.
Figures for dealing with construction permits records all procedures required for a business in the construction industry to build a
standardised warehouse. Cost is recorded as a percentage of the economy's income per capita. Only official costs are recorded. All the
fees associated with completing the procedures to legally build a warehouse are recorded, including those associated with obtaining land
use approvals and preconstruction design clearances; receiving inspections before, during and after construction; getting utility
connections; and registering the warehouse property. The total tax rate measures the amount of taxes and mandatory contributions
borne by the business in the second year of operation, expressed as a share of commercial profit. Doing Business 2011 reports the total
tax rate for calendar year 2010. The total amount of taxes borne is the sum of all the different taxes and contributions payable after
accounting for allowable deductions and exemptions. Time is recorded in hours per year. The indicator measures the time taken to
prepare, file and pay 3 major types of taxes and contributions: the corporate income tax, value added or sales tax and labor taxes,
including payroll taxes and social contributions. Doing Business compiles procedural requirements for exporting and importing a
standardized cargo of goods by ocean transport. Cost measures the fees levied on a 20- foot container in U.S. dollars. All the fees
associated with completing the procedures to export or import the goods are included. The cost does not include customs tariffs and
duties or costs related to ocean transport. Only official costs are recorded.The strength of investor protection index is the average of the
extent of disclosure index, extent of director liability index and the ease of shareholder suits index. The index ranges from 0 to 10 with
higher values indicating greater investor protection. The cost of the proceedings for closing a business is recorded as a percentage of the
value of the debtor's estate. The cost is calculated on the basis of survey responses and includes court fees and government levies; fees
of insolvency administrators, auctioneers, assessors and lawyers; and all other fees and costs.

ENERGY
With proven reserves of 500 million barrels, Romania is largest oil producer in Central Europe. However, production has fallen
precipitously over the past two decades.
Romania dominates the refining industry in south-eastern Europe. The government privatised several of its refineries in 2005 and 2006
but capacity still exceeds domestic demand for refined petroleum products. With ample capacity, it should be possible for the country to
export a wide range of oil products and petrochemicals. However, years of low investment have left the refining industry in poor health,
requiring massive amounts of capital to modernise and improve efficiency.
A reorganisation is underway in other parts of the energy sector. The most controversial plan is to consolidate local electricity producers
into two state-run energy companies. The government hopes the plan will lead to higher output and the opportunity to export electricity
to other countries. The country also plans to complete a new nuclear facility with two reactors by 2020. Development costs are expected
to be US$5.8 billion.
Romania is Central Europe's largest producer of natural gas. The country has natural gas reserves of 0.6 trillion cubic metres and a
sizeable domestic market. A number of pipeline projects are planned to increase natural gas transport capacity but like their counterparts
in the oil industry, most producers of natural gas are terribly short of capital. As a result, production continues to fall each year.

SOCIETY
Population
Romania's population fell by 1.8 million in 1990-2010 and the downward trend is expected to continue for the foreseeable future. The
country's pool of workers is also shrinking. In order to compensate, policy makers must make gains in productivity a top priority. The
strategy will require large inflows of FDI as well as improvements in labour skills but the funds to implement such policies are extremely
limited.
Romanian society will also be ageing as population declines. The median age reached 38.9 years in 2012, up from 30.5 years in 1980. By
2020, the median age is expected to rise to 41.8 years. The ageing of Romania's population will increase pressure on the pension
system. Pensions, as well as other parts of the social policy framework are already under strain as the government struggles to meet its

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commitments to the EU and to modernise its economy.

Income and Expenditure
Romania's savings ratio amounted to 3.2% of disposable income in 2011 and it should rise in 2012.
The real value of consumer expenditure per capita rose by 2.0% in 2011. In that year, the indicator totalled RON15,692 (US$5,147). The
real value of disposable income per capita rose by 2.3% in 2011, when it totalled RON15,947 (US$5,349).

Statistical Summary
2006

2007

2008

2009

2010

2011

6.6

4.8

7.9

5.6

6.5

5.2

Exchange rate (per US$)

2.81

2.44

2.52

3.05

3.14

3.21

Lending rate

14.0

13.3

15.0

17.3

14.1

Inflation (% change)

GDP (% real growth)

7.8

6.2

7.7

-7.1

-1.9

1.5

GDP (national currency millions)

344,650.6

416,006.8

514,700.0

491,273.7

511,581.7

519,408.9

GDP (US$ millions)

122,695.9

170,617.0

204,338.6

161,109.0

163,108.8

161,793.4

21,582.9

21,526.1

21,465.9

21,402.5

21,335.9

21,267.1

Birth rate (per '000)

10.3

10.3

10.3

10.2

10.2

10.1

Death rate (per '000)

12.2

12.4

12.5

12.6

12.7

12.7

7,404.7

7,424.3

7,441.7

7,457.5

7,471.2

7,483.3

Total exports (US$ millions)

32,334.8

40,234.4

49,621.8

40,717.4

49,271.1

Total imports (US$ millions)

Population, mid-year ('000)

No. of households ('000)

51,114.3

69,786.8

82,931.4

54,366.6

61,400.1

Tourism receipts (US$ millions)

1,308.0

1,606.0

1,992.0

2,215.8

2,432.0

Tourism spending (US$ millions)

1,310.0

1,535.0

2,178.0

2,499.3

2,747.0

11,860.1

11,833.0

11,814.9

11,790.5

11,770.0

11,748.4

Urban population (%)

54.9

54.9

55.0

55.0

55.1

55.2

Population aged 0-14 (%)

15.5

15.4

15.3

15.2

15.2

15.2

Population aged 15-64 (%)

69.7

69.8

69.9

70.0

70.0

70.1

Population aged 65+ (%)

14.8

14.8

14.8

14.8

14.8

14.7

Male population (%)

48.8

48.7

48.7

48.7

48.7

48.7

Female population (%)

51.2

51.3

51.3

51.3

51.3

51.3

Life expectancy male (years)

68.7

69.2

69.2

69.4

69.7

70.0

Life expectancy female (years)

75.8

76.1

76.1

76.3

76.6

76.8

Infant mortality (deaths per '000 live births)

13.7

13.2

12.7

12.1

11.7

11.1

Adult literacy (%)

97.6

97.6

97.6

97.7

97.7

Urban population ('000)

Imports and Exports

Major export destinations

2011 Share (%)

Major import sources

2011 Share (%)

Europe

89.1

Europe

84.3

Africa and the Middle East

5.2

Asia Pacific

11.1

Asia-Pacific

2.7

North America

1.3

North America

1.6

Other countries

1.3

Other countries

0.9

Africa and the Middle East

1.1

Latin America

0.6

Latin America

0.9

2012 Euromonitor International

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