Business evironment

Main Macroeconomic Data

• GDP: EUR 117.02 billion (current market prices, 2009 forecast);
• GDP annual growth rate: -7.1% (current market prices, 2009 provisional data);
• GDP structure by sector: agriculture 6.4%, industry 23.7%, construction 9.8%, trade and services 50.1%, and net taxes on products 10.0%;
• Inflation rate (Dec./Dec.): 4.74% (2009);
• Unemployment rate (end of the year): 7.8% (2009);
• Trade balance (goods & services, fob-fob): EUR -7.02 billion (2009 provisional data);
• Current account balance: EUR -5.05 billion (2009 provisional data);
• External debt balance: EUR 78.66 billion (2009 provisional data);
• International reserves: EUR 30.86 billion (as of December 31st, 2009).

Economic Outlook
After a moderate increase in 2000 (2.1%), an average annual rate of growth of 6.2% during the 2001-2008 period has ensured the gradual decrease in the gap between Romania and other European Union (EU) member states. The real GDP growth rate of 7.9% in 2006 is one of the highest levels recorded in recent years, either domestically or across the EU. GDP per capita increased from EUR 2,022.3 in 2001 to EUR 6,363.6 in 2008.

During 2001-2008, domestic demand has been the main growth factor, recording an average of 9.4% p.a. An important factor in the growth of domestic demand was the adoption of the 16% flat rate of tax on profits and income, on January 1st 2005, which led to a decrease in taxes on personal income and company profits. This has stimulated the private sector to invest and, consequently, the ratio between consumption and investment has improved. Gross fixed capital formation increased, on average, by 15.1% p.a. between 2001 and 2008 and private consumption expenditure increased by 10.4% p.a. over the same period.
Economic growth, as measured by real GDP, continued at a high level in 2008, despite deterioration in international conditions for GDP growth, particularly in the second half of the year, which saw an international financial crisis, an increase in oil prices and a general inflationist trend across the EU. GDP increased by 7.1% in 2008 compared with 2007. This increase was driven mainly by domestic demand for investments, which has increased markedly since 1990, but required the attraction of external sources of investment. This, in turn, has increased the trade and current account deficits.
However, the economic boom between 2004 and 2008 has led to overheating pressures and unsustainable fiscal and external imbalances: real GDP growth in this period averaged 6.6%; inflation peaked at 8.4% in Q2-2008; the current account deficit reached 12.3% of GDP in 2008; banks and other businesses were increasingly reliant on short-term external funding; and half of domestic private credit was in foreign currency. Thus high external and fiscal imbalances increased Romania's exposure to the global economic downturn.
Under these circumstances, the authorities decided to seek external financial support. The European Union, the International Monetary Fund, the World Bank, the European Investment Bank and the European Bank for Reconstruction and Development responded by providing medium-term financial assistance of up to EUR 20 billion for Romania. This assistance is conditional upon the implementation of a comprehensive economic policy program, comprising fiscal consolidation and reform measures in the area of fiscal governance, structural reform and financial sector supervision.
The adoption of the policy program has contributed to an improvement in market sentiment and had a positive impact on the Romanian economy. Financial stress eased, pressures on the exchange rate declined and strains on the government securities market diminished with average yields on government bonds declining from 14% end-2008 to just above 10% in August 2009.
The tightening of access to credit and the decline in export demand resulting from the worldwide crisis caused the Romanian economy to plunge into a severe recession, which has been deeper than previously expected. For the third quarter of 2009, GDP in real terms was by 0.6% lower than in the second quarter of 2009 and registered a fall of 7.1% against the same quarter of 2008. Over the first three quarters of 2009, GDP was by 7.4% under the level of corresponding period in 2008. The estimated data for 2009 indicated a decline of the economic growth by 7.2% against the previous year. Many forecasts have seen a shallow recovery of the economy by end-2010.
As in many other countries in the region, the recession was led by a large drop of export volumes, followed by a very sharp contraction of domestic demand. The unemployment rate has jumped to 7.8% of the labor force at the end of 2009, up from 4.4% one year earlier. Although wage and price pressures are easing, headline CPI inflation has remained relatively high reflecting, inter alia, hikes in excise duties and increases in the public wage bill. However, at end-2009, the 12-month CPI inflation rate went down to 4.74%, compared to the similar 2008 reading of 6.30%.
A large balance of payments adjustment is under way. The current account deficit fell by about ¾ in the first half of 2009 compared to the same period of 2008. This reflects the sharp contraction of import volumes associated with the drop in domestic demand, which more than offset the decline of exports. Developments in the capital and financial account have been more favorable than projected, with higher rollover by corporates and stronger FDI inflows more than offsetting a slightly lower rollover rate for foreign banks. Against this background, pressures on the exchange rate have eased.
The European Commission forecast assumes these trends will consolidate over the coming quarters. The recovery of domestic demand is expected to follow with some delay given still rising unemployment and decelerating wage growth. Real GDP growth is expected to turn positive by the first half of 2010 leading to a moderate ½ % real GDP growth rate in 2010, gradually accelerating to 2½ % in 2011.
The recovery, however, will remain shallow because of a continued need for fiscal adjustment, diminished capital inflows, at least in comparison with the pre-crisis period, and the continued high rate of unemployment. There are upside risks to this macroeconomic outlook. Assuming that global financial markets do not go through another round of stress, the economy may recover slightly faster than projected in this baseline. On the negative side, the current political uncertainty could delay the implementation of measures aimed at stabilizing the economy and weaken the recovery in a still fragile external environment. The unemployment rate is expected to rise from 5.8% in 2008 to about 8½ % in 2011. Wage pressures have diminished considerably in the course of 2009 but are likely to re-emerge, although to a lesser extent, once the economy rebounds. The widening output gap, the declining domestic demand and the recent stabilization of the national currency exchange rate have significantly eased inflationary pressures over recent months. Yet, core inflation remains relatively high, following the increase in excise duties and structural rigidities in the labor market. Harmonized Index of Consumer Prices inflation edged down from 7.9% in 2008 to 5.6% in 2009 and it is expected to enter into the Central Bank end-2009 target band of 3.5 +/-1 %. For 2010 and 2011, a further easing to 3.5% and 3.4%, respectively, is anticipated.
As the economy returns to a more sustainable growth path, external balances are expected to remain in negative territory. In 2008, the balance-of-payments current account posted a deficit of EUR 16,897 million, up 1.3% year on year, accounting for 12.3% of GDP against 13.5% in 2007. At end-December 2009, the current account deficit was of EUR 5,054 million, 68.7% lower than a year ago, due largely to the narrower trade deficit for goods (EUR 6,754 million, down 64.7% year-on-year). As the projected rates of increase in imports exceed those in exports, both the trade and current account deficits are forecasted to go up by one quarter of a percentage point between 2009 and 2011.

Foreign Trade
In 2009, FOB exports amounted to EUR 29,116.3 million and CIF imports to EUR 38,896.9 million. Exports decreased by 13.7%, and imports by 32.0% compared to the year 2008. At the same time, the trade deficit FOB-CIF was of EUR 9,780.6 million, i.e. EUR 13,735.1 million less than the previous year.   
Trade in goods among EU Member States (intra-EU 27) amounted to of EUR 21,642.0 million for dispatches and to EUR 28,526.4 million for arrivals, representing 74.3% of total exports and 73.3% of total imports.
Important weights in the structure of exports and imports were represented by the following groups of goods: machinery, mechanical electric devices and equipment (26.4% for exports and 26.9% for imports), vehicles and transport means (16.8% for exports and 7.4% for imports), textiles, ready-made clothes and footwear (14.2% for exports and 9.7% for imports), metallurgical products (10.0% for exports and 9.7% for imports), chemical products and plastics (8.6% for exports and 17.6% for imports), agro-food products (7.7% for exports and 9.8% for imports), mineral products (6.1% for exports and 10.0% for imports), and other manufactured goods, including furniture and construction materials (10.2% for exports and 8.9% for imports, respectively).
The main markets for the Romanian goods (representing 67.4% of total exports in 2009) were as follows: Germany (18.8% of total exports), Italy (15.3%), France (8.2%), Turkey (5.0%), Hungary (4.3%), Bulgaria (3.8%), United Kingdom of Great Britain and Northern Ireland (3.3%), the Netherlands (3.3%), Spain (3.0%), and Austria (2.4%). In the same time, the greatest part of the foreign deliveries into Romania (representing 68.5% of total imports) was covered by: Germany (17.3% of total imports), Italy (11.7%), Hungary (8.4%), France (6.2%), China (4.9%), Austria (4.8%), Russian Federation (3.9%), the Netherlands (3.9%), Turkey (3.8%), and Kazakhstan (3.6%).
The recovery in the economies of major trade partners had a positive impact on external demand: (i) the exports volume saw renewed growth quarter on quarter, taking the annual dynamics back into positive trend.

Foreign Investments
In 2009, non-residents’ direct investment in Romania was of EUR 4,899 million (as compared with EUR 9,496 million in 2008) covered 96.9 % of the current account deficit in 2009, according to the National Bank of Romania (provisional data). During 2009, out of the above-mentioned amount, equity stakes (including reinvested earnings) stood at EUR 3,065 million (as compared with EUR 4,873 million in 2008) and intra-group loans (loans between the foreign investor and the resident company) at EUR 1,834 million (compared with EUR 4,623 million in 2008).
The FDI stock at end-2009 reached EUR 51,692 million, 6% higher than the 2008 FDI final stock. Equity stakes (reinvested earnings included) of direct investment enterprises at end-2008 increased 3% versus the same year-ago period, standing at EUR 35,953 million (69.6% of net FDI final stock). Total net credit received by direct investment enterprises from foreign direct investors, intra-group included, reached EUR 15,739 million, up 13% year on year (30.4% of net FDI final stock). Net credit includes both the medium- and long-term loans and the short-term loans granted by foreign investors to their direct investment enterprises in Romania, either directly or through other non-resident members of the group.
By economic activity, the bulk of FDI stock went to manufacturing (over 30% of total), out of which the largest recipients were: metallurgy, food, beverages and tobacco industry, oil processing sector, chemicals, rubber and plastic products industry, vehicles and transport equipment industry, and cement, glassware and ceramic industry. Despite their large potential, certain sectors – such as textiles, wearing apparel and leather goods – still hold a rather small share, i.e. up to 2% of total FDI. Other activities that have attracted significant foreign direct investment are financial intermediation and insurance, accounting for more than 20% of total FDI stock, construction and real estate, trade, and IT and communications.
Top five countries by the share of total FDI stock as at 31 December 2008 were: Austria (18.8% of total stock at the end of 2008, down from 21.4% a year earlier), the Netherlands (17.2%, up from 16.3% in 2007), Germany (15.4%, up from 11.7%), France (8.8%, the same as in 2007), and Italy (7.2% versus 6.1%, thereby replacing Greece in top 5 countries of FDI origin a year ago). The analysis of the FDI stock distribution by country of origin took into account the country of origin of the direct holder of at least 10% in the resident direct investment enterprises’ share capital on an “immediate country basis”.
The overall activity of foreign direct investment enterprises had a positive impact on Romania's trade flow, contributing more than 70% to total exports and over 60% to total imports.

Investment Incentives
The main incentives supporting investment and businesses in Romania are as follows:

• Tax incentives for companies: accelerated depreciation, tax exemption for reinvested profit, special incentives for expenses related to research and development activities, dividend tax exemption for reinvestments, reduced VAT rate for sale of buildings, local tax exemptions for business located in industrial parks/science and technology parks;
• Employment incentives for special categories, such as recent graduates;
• State aids schemes supporting large investments (over EUR 50 million, and over EUR 100 million respectively) and investments mainly designed to ensure sustainable economic development; support regional development; enhance the activity in industrial and technological parks, and free trade zones; develop renewable energy resources; and consolidate the manufacturing sector.