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Business Barometer Romania-Bucharest Romania Bucharest 2010 3rd Quarter uarter

The Business Barometer Romania-Bucharest is a quarterly business survey among 120 Romanian companies -Bucharest based in Bucharest. The survey provides detailed information on the development of the business climate in the city-region of Bucharest. The companies are randomly selected from the trade register of the Bucharest region Chamber of Commerce and Industry (BCCI). The Business Barometer is performed by the BCCI for MEYS Emerging Markets Research. The Business Barometer 3rd Quarter 2010 was carried out during October 2010. MEYS Emerging Market Research performs market research in the emerging markets of Eastern Europa, Asia, South America and Africa. Our main clients are Dutch companies operating in industry, trade and transport who are looking for new business oppor opportunities abroad. info@meys.eu www.meys.eu

Business Barometer Romania-Bucharest

3rd Quarter 2010

Introduction
After the economic slowdown in 2009, the Romanian economy is still struggling to get into the positive growth figures this year. In the first two quarters GDP growth rates were negative, a budget deficit which barely decreased and a public debt rising to 35 percent of GDP by the end of August. In accordance with the aid package of about 13 billion from the IMF, the Romanian government introduced several austerity measures to improve the general government budget. In July the government raised the VAT rate with five percentage points to 24 percent, a measure aimed at increasing the governments income. The increase led to a jump in the inflation rate to more than 7 percent. On the positive side, Romanian exports increased sharply and investments are picking up again. This mixed picture of the economy can also be seen from the results of the Business Barometer for the third quarter.

Slow economic recovery

Macro-economic situation
Although industrial production showed positive growth and the other main productive sectors showed also signs of improvement, economic growth in the second quarter was still negative. Especially production in the construction sector is still shrinking compared to the same period a year earlier. Looking at the expenditure side of the economy, exports increased very rapidly with an average growth rate of almost twenty percent in the second quarter. Domestic demand is also growing but at a much lower pace (1.1 percent). Growth in investments was still negative (-1.2 percent), but improved remarkedly compared to the previous four quarters with growth rates of minus thirty percent. In her latest forecast (November) the IMF projected a negative growth rate of minus 2 percent for 2010. This is a further downward revision from her earlier forecasts of July (-0.5 percent) and September (-1.9 percent).
Growth rates (%) 40 35 30 25 20 15 10 % 5 0 -5 -10 -15 -20 -25 2008 2009 2010 30 25 20 15 10 5 0 %-5 -10 -15 -20 -25 -30 -35 GDP by expenditure (%) 2009 2008 2010

II III IV

II III IV

II

II

III IV

II

III IV

II

GDP Construction Services

Industry Trade, repair

Private consumption Government expenditures Investments Exports

High budget deficit; increased public debt

As in many other countries in Europe the Romanian government increased its expenditures to stimulate en restore economic growth in the country. At the same time less revenues were received due to the economic slowdown and slow recovery. This two trends resulted in an continued large general budget deficit of more than 9 percent of GDP in the second quarter of 2010 and a public debt climbing to 29 percent of GDP in the second quarter. The IMF and the Ministry of Finance are expecting a budget deficit of -6.8 percent of GDP by the end of 2010.

0 -2 -4 -6 -8 -10 -12

General budget deficit (% GDP) 2010 2009 2008 I II III IV I II III IV I II

Public debt (% GDP) 30,0 25,0 20,0 % 15,0 10,0 5,0 I II III IV I II III IV I II 2008 2009 2010

Business Barometer Romania-Bucharest

3rd Quarter 2010

Strong growth in foreign trade

Since its highest level in March the lei depreciated with more than 4.3 percent against the euro. The depreciation of the lei resulted in a strong growth in exports during the first half of this year. But at the same time imports increased significanlty resulting in a continued trade deficit of about eight billion lei (EUR 2 billion) in the second quarter. For the period January-August the total trade deficit was EUR 6,09 billion compared to EUR 5,97 billion for the same period in 2009.
Volume foreign trade (mill. lei) 2008 2009 2010 Exports Imports

Exchange rate (Lei/EUR) 4,3 4,2 4,1 4,0 3,9 3,8 3,7 3,6 3,5 2008 2009 2010

60.000 55.000 50.000 45.000 40.000 35.000

I II III IV I II III IV I II

Inflation rate sharply on the rise; interest rate kept unchanged

Due to the VAT rate increase with five percentage points to 24 percent as of July, the annual inflation rate increased rapidly to more than 7 percent by September. Although consumer prices are up again after falling for several months the Central Bank held the interest rate at 6.25 percent. Loans by financial institutions to the private sector standed around 39,3 billion lei in August (EUR 9,8 billion) which is about the same amount compared to a year ago.
11,0 10,0 9,0 % 8,0 7,0 6,0 5,0 4,0 2008 2009 2010 Loans to private sector (mill. lei) 42.000 41.500 41.000 40.500 40.000 39.500 39.000 38.500 38.000 2009 2010

Inflation Interest rate

Due to the slow economic recovery in the first half of this year, the unemployment rate stayed at a relatively high level of more than seven percent. In her latest forecast (September) the IMF

High unemployment rate; lower rise in labour costs

expect a unemployment rate by the end of this year of 7.2 percent which is a downward revision from her earlier forecast in July (8.9 percent). The rise in labour costs was at a lower level compared to the first quarter of 2010.
Unemployment rate (%) 2009 2008 Labour costs index (%) 2010 25,0 20,0 15,0 10,0 5,0 0,0 I II III IV I II III IV I II III I II III IV I II III IV I II 2008 2009 2010

8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0

Business Barometer Romania-Bucharest

3rd Quarter 2010

Results Business Barometer 3rd Quarter 2010

The Business Barometer Romania investigates on a quarterly basis the change in the business environment in Romania, specifically in the capital of Bucharest. The countrys main economic centre. A survey was carried out among 120 private companies, randomly selected from five different economic sectors; construction, industry, trade, transport and financial services. The Business Barometer concentrates on two topics: the main obstacles to growth and the expected business performance in the next three months. The results of the Business Barometer represent - on a qualitative base - the development of the business community in the cityregion of Bucharest.

Part I: Main obstacles to growth

There are several obstacles which can have a negative or positive influence on the growth of private companies. These obstacles can be divided into six broad categories: finance, infrastructure, regulatory policies and taxation, labour market, legal system and crime.

Improvement in financing business activities

Finance
Of the companies surveyed, on average 23 percent finds financing of the business activities an important obstacle to their growth. This is a substantial decrease compared to the second quarter (42 percent). High interest rates and lending money by banks are the most important financial obstacles.
Finance is obstacle (%)

Total Transport Trade Industry Financial services

50 40 30 20 10 0

Construction 0 2010-II 2010-III 10 20 30 High interest rates 40 50 60

Lending money by banks Collateral requirements of banks

When looking at the five different economic sectors, there are relatively large disparities. For the sector industry 53 percent of the companies surveyed mentioned lending money by banks as a main obstacle to their growth. With the exception of transport, high interest rates are an important obstacle to companies in the city-region of Bucharest. For transport the most important financial obstacle is collateral requirements by banks.

Quality of infrastructure important obstacle to growth

Infrastructure
A good infrastructure is essential for companies to deliver their goods and services on the market on time. Infrastructure in this survey is defined as the physical infrastructure of a country or city. Not only roads, but also the availablity of electrcity and telecommunications (telephone, internet). About two out of three companies in the survey find infrastructure a main obstacle to their growth. This percentage was about the same as in the second quarter. The sectors transport and construction specifically find the quality and quantity of the physical infrastructure as a major obstacle to their business activities. Electricity (power outages) and telecommunications are mentioned by 21 percent and 3 percent of the companies respectively as an obstacle to growth.

Business Barometer Romania-Bucharest

Infrastructure is obstacle (%) Total Transport Trade Industry 65 Financial services Construction 0 2010-II 2010-III 20

3rd Quarter 2010

70

60

40 60 80 Electricity (power outages) Infrastructure Telecommunications

100

Regulatory policies and taxation

Tax rates major obstacle to growth

Governmental policies have major influence on the business environment. Not only through taxation, but also for example through regulations on labour, safety and the environment. According to the Business Barometer regulatory policies as an obstacle to growth have increased significantly in the third quarter compared to the previous period. The increase in the VAT rate last July is a main reason behind this increase. No less than 95 percent of the companies surveyed experience tax rates as a major obstacle, followed by labour regulations (58 percent). For the five economic sectors seperately, there are many differences. Besides regulatory policies on tax rates, the sectors construction, trade and transport experience labour regulations also as an important obstacle. Companies in the financial service sector experience business licensing and permits also as an obstacle.
Regulatory policies are obstacles (%) 36 35 34 33 32 31 30 2010-II 2010-III

Foreign currency regulations Environmental regulations Safety regulations Labour regulations Business licensing Customs regulations Tax rates 0 10 20 30 40 50 60 70 80 90 100 2010-III 2010-II

Labour market

Labour costs obstacle to competitiveness companies

A good functioning of the labour market is important to the development of the economy. The availability of (high)skilled workers, relatively low labour costs and a high labour productivity contribute to a competitive and healthy business environment. According to the companies surveyed, labour costs are the main obstacle for their business to grow. The availability of skilled workers in the third quarter is less of an obstacle except for construction. In this sector 80 percent of the companies find it difficult to find the necessary skilled workers.
Labour costs are obstacle (%)

100 90 80 70 60 50

Total Transport Trade Industry Financial services Construction 10 30 Labour costs 50 70 90

2010-II 2010-III

Availability of skilled workers

Business Barometer Romania-Bucharest

3rd Quarter 2010

Legal system

Contract violations undermining business confidence

An independent and objective legal system is of vital importance to the economic development of a country. A good functioning of the judiciary means that companies will do business among each other, knowing that contracts will be uphold before court and corruption is taken care of. In the third quarter 44 percent of the companies survey experienced the Romanian legal system as an obstacle to their growth. This is a small increase compared to the previous quarter (40 percent). No less than 80 percent of the companies surveyed experience contract violations by customers and suppliers as the main obstacle of the current legal system and 7 percent finds the judiciary an important obstacle to growth. The sector trade experience an above average problem with contract violations. The financial service sector experience an above average obstacle of the functioning of the judiciary.
Legal system is obstacle (%) 45 Total Transport Trade 40 Industry Financial services 35 Construction 0 2010-II 2010-III 20 40 60 80 100 Contract violations by customers and suppliers Functioning of the judiciary

30

Crime

Crime less of an obstacle to growth

Companies can be confronted with all sorts of crime. From pitty theft to organized crime which can have major influence on the growth of a business. According to the Business Barometer only 18 percent of the companies surveyed in the third quarter experience street crime and theft as an obstacle to their growth. In the second quarter this figure was 29 percent. The sectors industry and construction have above average problems with criminal activities when doing business.
Crime is obstacle (%)

30

Total Transport

25

Trade Industry

20

Financial services Construction

0%

15 2010-II 2010-III 0 10 20 30 40 50 Street crime, theft and disorder

Business Barometer Romania-Bucharest

3rd Quarter 2010

Part II: Developments in business performance

This second part of the Business Barometer contains questions on the expected business results of the companies surveyed in the coming three months. The results of these questions show the expectations of the business community for the short-term developments. The questions are about expected developments in turnover, profits, sales (volume), capital investments, inventories, number of employees, selling prices of goods and services produced and sales abroad (exports). Companies could answer if they expected a decrease, increase or no change in these business indicators for the next three months. The percentages for increase or decrease were taken together to get an indication of the expected changes in the above mentioned business indicators.

Business confidence

Ongoing low level of business confidence

For the next three months, the business confidence of the companies surveyed is relatively negative. About 11 percent more companies expect a decrease in their business performance instead of an increase. This is the same low level of business confidence as in the previous period. The government and the IMF forecast a small positive growth in GDP for the third and fourth quarter, but for the whole of 2010 GDP is expected to shrink by almost 2 percent.
2 0 -2 % -4 -6 -8 -10 -12 GDP Business confidence
f: forecast f

Measurement of business confidence: Expectations on the change in exports, domestic sales, prices, employment, investments and turnover are taken together to measure business confidence of companies for the next three months.

2010-I

2010-II

2010-III

Turnover and profits

Modest improvements in expectations of turnover and profits

Looking at the expectations on turnover in the next three months, 8 percent more companies expect a decrease instead of an increase. In the second quarter this figure was minus 13 percent. The sectors financial services, trade and transport are positive on the short-term development in their turnover. Industry and construction are very negative on their expectations. For expectations on profit the same pattern is viewed. Of the total companies surveyed 8 percent more companies expect lower instead of higher profits in the next three months. In the second quarter this figure was 13 percent. The sectors transport, trade and financial services are more optimistic. The sectors industry and construction are the most negative about the developments in profits.
Expected change in turnover (%) Total Transport Trade Industry Financial services Construction -50 -40 -30 -20 -10 0 10 20 30 -50 -40 -30 Expected change in profits (%) Total Transport Trade Industry Financial services Construction -20 -10 0 10 20 30

Sales
As a result of the slow recovery of the economy during the last few months with a return to positive growth figures not earlier than next year, expectations in the development of sales are negative but slightly improving. Overall 10 percent more companies expect a decrease in sales 7

Business Barometer Romania-Bucharest

3rd Quarter 2010

Expectations of sales volume less negative

instead of an increase in the next three months, compared to 12 percent in the previous quarter. Due to a growing world economy, companies in the sector transport and trade are the most optimistic about their sales volume in the next three months whereas the sector industry expect a further decline.
Expected change in sales (volume) (%) Total Transport Trade Industry Financial services Construction -45 -40 -35 -30 -25 -20 -15 -10 -5 0 5 10 2010-II 2010-III

Increase in capital investments; more pessimism on production prices

Capital investments and production prices

For the next three months 5 percent more companies expect a decrease in their capital investment instead of an increase. Industrial companies are the most negative about their investments, followed by financial services and construction. Compared to the second quarter of this year expectations in capital investments has improved or are stable in all sectors except for industry. Concerning the development in production prices, 19 percent more companies expect a decline in prices over the next three months. Specifically the sectors industry and trade are relatively more pessimistic about the development in prices of their goods and services produced. The sectors construction and transport are relatively the least negative on development in production prices.
Expected change in capital investments (%) Total Trade Industry Financial services Construction -20 -15 -10 -5 0 2010-II 2010-III Expected change in production prices (%) Total Transport Trade Industry Financial services Construction -50 -40 -30 -20 -10 0 2010-II 2010-III

Lower expectations on employment

Employment
Due to the economic recession, unemployment increased sharply in 2009 and continued to do so in 2010. For the next three months, 19 precent more companies expect a further decrease in the number of employees instead of an increase. All the sectors surveyed are more pessimistic about expected changes in employment, of which construction is the most negative.
Expected change in number of employees (%) Total Transport Trade Industry Financial services Construction -50 -40 -30 -20 -10 0 10 2010-II 2010-III

Business Barometer Romania-Bucharest

3rd Quarter 2010

Business Barometer Romania-Bucharest is issued on a quarterly basis by MEYS Emerging Markets Research in cooperation with the Bucharest Chamber of Commerce

Selected social and economic indicators Romania-Bucharest (2007)

Indicator Population Inhabitants/km2 Employment rateb (%) Unemployment rate (%) Bucharesta 2.225 225.932 1.222,4 222,4 62,4 4,1 1.382 35.012,1 012,1 100%d 17% 9% 13% 15% 22% 100% 9% 9% 37% 6% 31% Romania 21.537.563 90,3 40,3 7,1 1.042 15.967,6 100% 24% 11% 11% 10% 16% 100% 12% 9% 43% 7% 19%

Editorial Board: Marco Rensma, Yvon Koomen

Distribution: A subscription to the Business Barometer Romania-Bucharest can be ordered by sending an email to info@meys.eu.

Copyright 2010

Address: MEYS Emerging Markets Research Albert Plesmanweg 41N 3088 GB Rotterdam The Netherlands

Average net monthly earning (lei/employee) GDP per capita (lei)c % in regional GDP:

Phone: Email:

+31(0)10 294 4422 info@meys.eu

www.meys.eu

Sources on economy of Romania: INS Romania, Central Bank Romania, Ministry of Finance Romania, IMF

Industrye Construction Trade Transport & communications Financial services Structure of economyf: Industrye Construction Trade Transport & communications Financial services
Note:

Note: MEYS Emerging Markets Research cannot, under any circumstance, assume responsibility for damages resulting from the use of information provided by this publication. The information contained was provided by sources believed to be dependable. However, MEYS Emerging Markets Research cannot accept responsibility for its accuracy. No part of this publication may be reproduced, copied or distributed in any form or in any means, electronic or printed, without the permission of MEYS Emerging Markets Research.

(a) including county Ilfov (b) number of employed persons in the total population of working age (15 (15-64 years) (c) figures of 2006 (d) regional figures are from 2006 (e) includes mining, manufacturing, electricity, gas and water (f) in % of total number of units