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Analysis: political instability together with inflation and the euro exchange rate, at the top of the worries of investors

The increase of inflation, the depreciation of the leu and the accentuation of the financial blockage represent the main worries of investors this autumn, shows an analysis from Frames, made in the campaign ‘ Romania, where to?” which scans the economy after 30 years of capitalism.

‘The political instability has come back as main issue, the political noise leading to increasing worry alarm regarding the evolution of the economy. The Romanian economy is preparing for troubling times. In an international context full of challenges, from Brexit to the commercial war US-China and the economic troubles in Germany, the investors consider the state of the economy with much distrust’ the analysis shows.

According to a barometer of opinion made by the consultancy company Frames among 240 business people, managers and experts  in position of responsibility from the whole economic spectre, between 1-7 October, 46% of the investors consider that the economy goes into a wrong direction, 39% consider that the  direction is a positive one, and the rest avoided answering.

The main worries of the investors are connected to the growth of inflation, mentioned by 67% of the interviewees, the depreciation of the leu (54%) and the accentuation of the financial blockage (49%).

‘The increase of the prices  is the main worry for managers, this autumn. More and more companies try to cover the from prices the issues they face, from the dropping in sales to the financial blockage generated by the non-payment of the bills in time, the increase of salaries, forced by the evolution of the earnings  in the budgetary sector and the possible increase of prices in utilities (fuel, energy, gas, etc)in the perspective of the cold season’ show the conclusions of the analysis.

The growth of inflation is followed at the top of the worries of investors, by a possible depreciation of the leu, about which the majority of the investors consider that it  is to follow.

54% of the investors indicated the exchange rate around the level of 4.80 lei/euro

Asked what is the evolution of the European currency versus the leu over the next six months, 54% of the investors showed the exchange rate around the level of 4.80 lei/euro, 12% of the interviewees consider it as over the level of 4.8 lei, 23% expect the euro will go to 4.7 – 4.75 lei while 11% avoided answering.

‘The increase of macroeconomic imbalances will continue  to put pressure on the exchange rate. The deficit in the commercial balance will grow due to the significant imports of the last period. And as for exports, things go worse, as issues go wrong  in the partner countries such as Germany, the main commercial relation of Romania’ says Adrian Negrescu, the manager of Frames.

The  growing financial blockage is at the top of the worries of investors. In an economy where the majority of companies are weakly financed, the dynamics of payments and collection makes the difference between survival and insolvency.

Seven out of ten companies said  recently in a research of Frames that they purpone the payments willingly to cover the financial problems of urgent necessity.

‘As the managers estimated in the barometer regarding the state of the economy in 2019, launched at the beginning of the year, non-payment in due time of the bills has increased this year, and the loan has generalized in the economy. The ones mainly affected are the small companies, weakly capitalized, which, in the absence of a financial buffer which would allow them to survive until the collection of the bills, get into payment incapacity’ the analysis shows.

At the top of the worries of investors comes political instability again

Beyond the increase of inflation, the depreciation of the leu and the accentuation of the financial blockage, at the top of worries of investors comes back the political instability,mentioned by 39% of the interviewees.

Against the beginning of the year, political instability has surpassed, as importance for investors, the drop in orders, the crisis on the market of the work force and the evolution of fiscality, a sign that the political noise and its consequences come to put pressure on the business climate, increasing the lack of trust in the economy.

‘The fall of the Dancila government and the discussions about the new government were not taken into consideration at the moment  of the barometre, but these moments come to confirm that the political noise become more and more powerful, and the consequences can be significant. It is to be seen if the new cabinet manages to correct the numerous issues such as those of fiscality (OUG 114, overexcise on fuels, permanent fiscal changes, etc) or those on the work market ( overtaxation of part-time, access of foreign workers, etc) and thus, to increase the trust in the economy. In the perspective of the electoral year 2020, all these worries have a connection with the need for predictability of the fiscal framework, of the business conditions in Romania’ Frames says in the analysis.

All these worries determine many of the investors to adopt a policy of expectation, where the conservation of the resources  will be at the top. Many of the private investments could be placed ‘on hold’, the analysts say.

‘In constructions, for example, the discussions regarding the change of the programme ‘ Prima Casa’ and the limitation of the access to the real estate loan determined many developers, beyond the increase of prices, to suspend a part of the plans until the situation is cleared, as the majority of the tradings were connected to the Prima casa. Similarly, it also happens in transports where the new European legislation risks to affect significantly the domestic businesses.Other sectors, such as agriculture, where there are problems with subsidies or commerce, strongly influenced by inflation, the policy of small steps is at the top for the period to come’ the analysis says.

In the first Frames analysis in the campaign ‘Romania, where to?’ recently launched, the experts made an appeal to the necessary debate of economic issues in the electoral campaign for the presidential elections. The issues presented then as priority are confirmed by the business environment, in the Barometer made at the beginning of October.

Lack of predictability at the top

Asked what are the measures which the authorities should take over the next period to ensure a favourable investment climate for the economy, 74% indicated a predictable Fiscal Code.

‘The lack of predictability is the first, in a period where most companies have already started planning for 2020. Without a clear commitment in the matter of fiscality, the authorities will not do anything else but to accentuate the state of expectancy in the economy, fact which will be translated, firstly, in the annulment of investments and the limitation of activity’ the Frames study says.

The discussions in the public space, over the last period, regarding the change of the single quota and the introduction of new taxes for the business environment, with a view to making the budgetary balance even, increased the worries in the market, which was already confuse.

At the top of the worries of investors was the necessary extension of transport infrastructure, mentioned by 52% of the interviewees, the reduction of administrative bureaucracy (45%), the simplification of the methodology for access to European funds (32%) and the development of the services for IT support (29%).

‘Besides investments in infrastructure, without which foreign investment in the Greenfield sector is almost impossible, the business people want that the relation with the state to be simplified,  the reduction of the number of administrative documents being at the top. The purpose is that the interface between the company and the state to get to the level of a web portal, of a smartphone app, from which the investors can perform all their activities, starting with the company set up to approvals and taxes payment’ the analysis shows.

The Frames representatives say that the new government, irrespective of the political area, should face the business environment and  require, firstly private expertise in the development of a national budget which should focus on investments and include the necessary resources to prevent a possible economic crisis.

 ‘We have to prepare for 2020, a year full of challenges, of uncertainty’ Adrian Negrescu said, the manager of Frames.

The Frames barometer regarding the Romanian economy was made between 1 and 7 October 2019, through questionnaires online, phone and email, on a sample of 240 companies in various domains of activity, from commerce, financial services, agriculture, energy, textiles, IT, etc.