Laying a red carpet over the cracks By Quentin Peel and Thomas Escritt
Published: March 6 2008 16:49 | Last updated: March 6 2008 16:49 The once fair but faded city of Bucharest, easternmost capital of the European Union, is bracing itself for an invasion of westerners in April. They are coming to attend the largest summit ever held for Nato, the organisation at the heart of the Atlantic alliance. For Romania, as the host, the occasion is intended as a great opportunity to celebrate its accession not only to Nato but also to the EU, and underscore its integration into the western world after decades as one of the most oppressed and impoverished communist countries. President George W. Bush is bringing a delegation of 1,500 from Washington, as part of the 5,000-odd politicians, officials and military personnel attending the summit. Vladimir Putin is also expected to attend a separate Nato-Russia meeting (his last major event as Russian president) with a more modest entourage of 250. Media and observers will add thousands more. Rumours abound in the city that the airport will be closed, shops and government offices emptied, and the streets blocked off for days around the vast Palace of Parliament – the gigantic super-Stalinist stone and marble edifice built by the late and unlamented President Nicolae Ceausescu – to accommodate the visitors. The Romanian government has assembled a 4,000-strong task force to plan the event, but it will put the creaking infrastructure of Bucharest under severe strain, not least because of a rush of foreign investment in recent years that has caused a boom in building – and property prices – in the capital. On the plus side, Romania has enjoyed eight years of remarkable economic growth, averaging more than 6 per cent a year, since late 1999, when the prospect of EU membership, as well as accession to Nato, started to look more than a distant dream. The recovery followed a decade of half-hearted reform and economic mismanagement after the 1989 revolution when Mr Ceausescu was overthrown. Economic liberalisation, privatisation of state assets, and spending to prepare for EU membership has underpinned the revival. Foreign direct investment has accelerated sharply in the past two years, combined with a steady inflow of remittances from at least 2m Romanians working abroad. As a full EU member since January 2007, Romania qualifies for some €30bn ($46bn) from the Brussels budget until 2013, to spend on infrastructure, social schemes and the environment, as well as on a large and backward farm sector. But huge uncertainty lingers over whether the Romanian bureaucracy is capable of drawing up and executing enough projects to qualify for the cash. The immediate challenge, however, is that the economy is overheating. A soaring current account deficit is estimated at more than 14 per cent of gross domestic product, and a credit-financed boom in consumption is sucking in imports from the rest of the EU. Wages are rising at 25 per cent a year, with skilled labour in short supply, aggravated by emigration, mainly to Italy and Spain. The National Bank of Romania, the central bank, has raised interest rates three times since October, by 200 basis points to 9 per cent, to head off inflation that reached 6.6 per cent by the end of 2007, against a target of 3.9 per cent. The bank still expects growth this year of some 6 per cent, in spite of the effects of the international credit crisis. But it has been urging fiscal restraint on the government, which drafted a budget with a deficit of 2.7 per cent of GDP, including substantial pay rises in the public sector. "With Romania now a full EU member, people think prosperity is here to stay, but ensuring sustainability of macro balances is key," says Cristian Popa, deputy governor of the NBR. "We have urged the government to be extremely prudent. Increases in incomes should not be larger than the catch-up in productivity." The trouble is that the government has been semi-paralysed for the past year. Just three months after EU accession, the ruling centre-right coalition collapsed in March 2007. Personal relations between Traian Basescu, the president, and Calin Popescu Tariceanu, the prime minister, never recovered. The present government of the Liberal party (PNL) and a Hungarian minority party has no majority, and relies on the left-wing Social Democrats (PSD) for support in parliament. Pressure for increased spending on wages, health and education is reinforced by the prospect of local and parliamentary elections in the coming months. Political paralysis is one bottleneck slowing down reform and development. The rivalry is focused on the fight against corruption, which the European Commission has also made a touchstone of Romania's integration into the EU. Mr Basescu accuses the government of dragging its feet. Mr Tariceanu says the president is merely playing politics. Lack of political decision-making compounds the other problems holding up the Romanian economy. The most fundamental is the lack of decent communications. "The real structural barrier is infrastructure," says Dorel Sandor, director of the Centre for Political Studies and Comparative Analysis. "In the last 15 years, different governments have been able to build no more than 500km of new highways. This is nothing. Try to drive west from Bucharest to Hungary. It is a nightmare." Part of the problem is a lack of experience in project design and management, compounded by an aversion in the bureaucracy to taking initiatives, partly for fear of being charged with corruption. There is also no tradition of forward planning: the EU works with three-year programmes, but there is no capacity for multi-annual budgeting in the Romanian ministry of finance. On the Black Sea frontier of the EU and Nato, and coming at the end of the line as a member state, Romania has a different perspective, too. It is deeply suspicious of Russian influence, and Gazprom's domination of energy supply routes. But it has also refused to support the independence of Kosovo – an attitude shared with Moscow – arguing that such a move could destabilise Serbia and the Balkan region. "We are unhappy about Kosovo because it is departing from a clearly established pattern," says Teodor Melescanu, defence minister. "Changes of borders should be through negotiation. Foreign investors are nervous going into a region where things are not very clear." Yet for a country emerging from decades of both Communist and fascist dictatorship in the 20th century, the positive effects of European integration far outweigh the negative. "The most important change is in the mentality of the population," says Varujan Vosganian, the finance and economy minister. "They understand what it means to have free movement of people, and free movement of commodities. Our people feel themselves more free. They are more aware of their personal interests. They make comparisons. "It is very important to make comparisons – of your house, yourself, your society – with others. Then you are aware of the advantages." Of course, that was something Mr Ceausescu would never have allowed. *** Politics: Deadlock thwarts progress By Quentin Peel Published: March 6 2008 16:49 | Last updated: March 6 2008 16:49 One word probably best describes the political process in Romania, little more than a year after the country joined the European Union. It is dysfunctional. A minority government is forced to scrape together a spendthrift budget with the erratic support of its sworn opponents. A venal parliament votes to protect its members from any investigation for corruption. Political parties baulk at obeying the orders of their elected leaders. A populist president blocks the prime minister's decisions and appointments, but lacks the power to sack him. The bureaucracy itself is paralysed by fear of taking any initiative, lest it be accused of the very corruption its political masters refuse to acknowledge. All seem to conspire to undermine any hope of coherent decision-making. "Who rules Romania?" is a perfectly valid question to ask. No one can give a clear answer. The government has been effectively hamstrung for the past year, ever since the ruling coalition fell apart bitterly in March last year just 90 days after the heady celebrations that marked EU accession. President Traian Basescu, the mercurial head of state, abruptly withdrew his Democratic Party from the government after Calin Popescu Tariceanu, the National Liberal party (PNL) prime minister, had demanded the dismissal of three ministers. They included Monica Macovei, the non-party Justice Minister whose anti-corruption crusade had spread anger and alarm amongst parliamentarians. Mr Tariceanu, with only the minority Hungarian Democratic Union left in his coalition, has no parliamentary majority. He persuaded the parliament to impeach the president, but it was a futile gesture. Mr Basescu won a subsequent referendum handsomely. The president demanded that parliament and government should themselves resign, but they declined to do so. It is unclear whether the real problem lies with the personalities, or the ambiguous constitution they inherited as part of the erratic post-Communist transition that Romania has pursued since the violent overthrow and execution of Nicolae Ceausescu, the country's dictator, in 1989. Mr Basescu, a former captain of the merchant marine and erstwhile mayor of Bucharest, is the most powerful personality involved, a tireless political campaigner hamstrung by a political office that lacks the executive authority of the prime minister. "Romanians like people who talk a lot, aggressively and in a populist manner," says a leading Romanian banker. "France's president Sarkozy would be popular here. But Basescu is too destructive." Mr Tariceanu, on the other hand, lacks both the charisma and the parliamentary power to oppose the president. Once the senior partner in the coalition, he has seen his PNL slip in opinion polls to just 14 per cent, unloved for its liberal views on privatisation and flat taxes. Mr Basescu's Democrats have moved to the right, joining forces with dissident Liberals to ride high at 36 per cent, on an anti-corruption crusade. In the middle are the Social Democrats (PSD), the former Communists who see themselves as the natural party of power, but who lost office mired in bribery scandals in 2004. They are stuck at around 25 per cent popular support, although they are still the largest group in parliament. No fewer than four elections loom ahead in 2008 and 2009 – municipal, parliamentary, presidential and European – but currently all the speculation is on whether the present deadlock can be broken by bringing the parliamentary poll forward to June from November. Even that apparently straightforward decision looks too complicated to accomplish. Mircea Geoana, leader of the PSD, says that he is determined to precipitate an early election, to be held on the same day as the local polls. It would mean passing a vote of no confidence in the government in March. "We must allow the country to start again," he says. "It is blocked. The president and prime minister are fighting. They have no majority in parliament." Yet his own Social Democrats are split on the idea of an early election, fearful that they might lose seats. As for Mr Basescu, in spite of repeatedly calling for a poll, he now wants to delay any move until after the Nato summit in Bucharest in April. He wants a proper government in office to greet his guests. For his part, Mr Tariceanu has no interest in resigning for an election he seems bound to lose. Officially, all the main parties agree that there should be a new election law before they hold another poll. They want to replace the present system of proportional representation with a "uni-nominal" one that ties each individual parliamentarian to a personal constituency. That way they would get rid of the party list system, too often exploited by rich businessmen as a way of buying a seat and parliamentary immunity from prosecution. Yet plenty of parliamentarians owe their positions to the list system, and are unwilling to abandon it. On the face of it, Romania's parties do offer voters an ideological choice: the PDS as the flag-bearers of the left and centre-left, the PNL on the centre-right, with the Greater Romania Party, a xenophobic group, on the far right. Mr Basescu's PDL, once allied to the PDS, has neatly occupied the centre ground between the other main contenders. In reality, however, ideology plays little role. "The fight against corruption is the key to everything that is going on now in Romania," says an adviser to the president. It is certainly a popular issue, and a good reason why Mr Basescu has picked up so much support. It is also a cause of paralysis. "There is a poisonous fear of corruption," says one European observer. "Civil servants are personally liable for any spending decision they approve. That may be a sound anti-corruption measure, but it means no one takes a decision. Everything goes up to the politicians, who are deadlocked. The only hope is that new elections will produce a parliament that supports the president. It may not make for a better government, but it might at least be one capable of acting." *** Judicial reform: Prosecutors caught in tangle of intrigue By Thomas Escritt Published: March 6 2008 16:49 | Last updated: March 6 2008 16:49 Last week, Calin Popescu Tariceanu, the prime minister, appointed his third justice minister in four years after a four-month hiatus during which the ministry was wholly unhelmed. The difficulty in finding an acceptable candidate underlines the sensitivity of a post responsible for reforming an ailing justice system and confronting widespread corruption. The explanation lies in a vicious personal rivalry between the president and prime minister, who used to be political allies. The facts are reasonably clear. Following the resignation of the previous justice minister in October last year, Traian Basescu, Romania's popular president, used his power to veto government decisions to reject two nominees before finally agreeing last week to the appointment of Catalin Marian Predoiu, a commercial lawyer. Mr Tariceanu first proposed Norica Nicolae, a senator for his own National Liberal party. Mr Basescu rejected her nomination, citing evidence of impropriety in her earlier career. The prime minister then nominated Teodor Melescanu, the defence minister. The president rejected him too, saying it was impossible for the post of defence minister to be vacant during the Nato summit, to be held in Bucharest next month. In January, the European Commission entered the fray, saying that progress on judicial reform had been too slow, while stopping short of threatening sanctions. Some blame the impasse on the collapse of the centrist Democrat-Liberal party coalition on April 1, 2007, just three months after the country joined the European Union. But one prominent reforming lawyer goes as far as to suggest that EU membership itself is to blame. "I think we made a mistake when we became members of the EU. We needed the threat of being refused entry to make us do anything." Mr Tariceanu's government got off to a good start. Monica Macovei, who was appointed justice minister in 2005, rapidly earned plaudits for her tough stance on corruption. A human rights lawyer, she gave fresh impetus to the work of the country's anti-corruption department, causing Daniel Morar, the chief prosecutor, to open investigations into Adrian Nastase, a former prime minister, and members of the government, including the deputy prime minister. But her popularity both nationally and in Brussels did nothing to endear her to her colleagues, and the prime minister sacked her from the cabinet last March, saying she had failed to recognise the "basic principle of government solidarity". Solidarity was much in evidence in parliament when it voted unanimously at the end of last year for amendments to the criminal procedure code that critics said made the anti-corruption campaign practically impossible. Measures proposed would have limited the duration of investigations to six months and would, under certain circumstances, have obliged prosecutors to inform the subjects of an investigation that their phone lines were about to be tapped, or their houses searched. Ms Macovei is in no doubt about the motivation behind these amendments, which were subsequently rejected by the president. "When the prosecutors wanted to search Adrian Nastase's home in 2005, the constitutional court ruled they needed approval to do so from parliament," she says. Sorin Ionita, who researches legal issues at the Romanian Academic Society, a reformist think tank, speaks of "interlocking circles of influence" with groups spanning the corporate, governmental and parliamentary worlds that have a common interest in preventing suspicions of corruption from being investigated too zealously. His colleague Laura Stefan, who works on anti-corruption issues at the same institute, speaks of a lack of will: "There should be someone other than the president standing in the way of this kind of amendment," she says. She points out that the judiciary, though technically self-regulating, has shown little appetite for tackling corruption cases. The Supreme Council of the Magistracy, the body that is elected by and represents the country's magistrates, for example, spoke in favour of parliament having a say in authorising investigations against deputies. "In effect they were saying: 'The politicians should be protected from us'," she says. Mr Morar, at the anti-corruption department, tells of having to negotiate a constantly shifting legal landscape. Instead of contesting the allegations against them, politicians rely on exploiting legal loopholes. The department's investigations into former government ministers stalled when the constitutional court ruled that the president's authorisation was needed to investigate former ministers, he says. "We restarted the investigation, applying for the necessary authorisation – and then the government dissolved the presidential commission appointed to decide." Tudor Chiuariu, Ms Macovei's successor, resigned after the anti-corruption department opened an investigation into an allegedly illegal public property transaction that he had authorised as minister. He now serves as the prime minister's adviser on legal affairs. He argues that the amendments were slipped through by parliamentary deputies with an interest. "As soon as the law had been voted on, I said that the amendments could not be allowed to stand," he says. Following the president's decision to refer the amendments back to the senate, even the Romanian Academic Society acknowledges that the new proposals are an improvement. Last month, the government responded to the European Commission's criticism by issuing a new draft code of criminal procedure. The debate drags on. All acknowledge that corruption is a problem, and that the Commission is right to pursue it. But some feel that it is, as one senior politician put it, "an oriental, Balkan thing" – more a matter of culture than of a crime that prosecutors can successfully pursue through the courts. *** Who's who: Returnees emerge to lead renaissance By Thomas Escritt Published: March 6 2008 16:49 | Last updated: March 6 2008 16:49 Mariana Gheorghe Chief Executive, Petrom Romania is still recovering from a catastrophic brain drain. In the 1990s many of the country's brightest opted to leave to pursue careers in academia and finance in Europe and America. Few have returned, though Ms Gheorghe, chief executive of Petrom, Romania's largest company, is part of the trickle. Ms Gheorghe graduated in law from Bucharest University in the 1989. After a stint working at a state chemicals company and the finance ministry in the early 1990s,she rose to become a senior banker at the European Bank for Reconstruction and Development. She was appointed chief executive of Petrom, a subsidiary of Austria's OMV, in 2006, and is a rare female chief executive in a country with one of the lowest levels of female participation in the workforce. Cristian Mungiu Film Director Mr Mungiu won the Palme d'Or for his film 4 Months, 3 Weeks and 2 Days, a harrowing portrayal of a woman seeking an abortion in the last years of the Ceausescu regime. He was just two years out of film college during the Romanian film industry's 2000 annus horribilis, when "not a single Romanian film was made all year". Things have improved since then, even if the country's film industry is highly dependent on work for US and German productions. Mobra Films, the company he owns with two director partners, got its start doing service production for a big-budget German feature film. The aim has always been to rely less on contract work – documentaries and adverts – and survive as an independent creative production company, though Mr Mungiu acknowledges that Romania's film industry would never survive without government subsidies. Gabriel Marin IT Entrepreneur Mr Marin quit a steady job with Control Data Corporation in 1992, and, with just $500 in cash, founded Omnilogic, today one of the largest systems integrators in south-east Europe. "It was quite a hectic and wild time," he remembers. The biggest challenge for an importer was obtaining hard currency. "It's hard to do financial planning when the currency is depreciating by 300 per cent a year and inflation is running in three digits." At first, the company focused on importing PCs and networking gear. Today, the company helps some of the largest telecommunications companies and banks in the region to roll out infrastructure. With clients in Bulgaria, Albania and Moldova as well as Romania, Omnilogic earned €200m last year, and is targeting €1bn in revenues within five years. Irina Schrotter Fashion Designer Ms Schrotter took a huge gamble in the uncertain environment of Romania in 1990 when she chose to give up a career as a doctor just one year after qualifying and set up as an independent fashion designer. Eighteen years later, she employs 1,000 people and her company produces clothing both for her own six boutiques and for major clothing retailers on four continents. "It was hard starting out in the 1990s. In 1993, banks were charging interest rates of 175 per cent, so I was dependent on my textiles suppliers, who had faith in me, for loans." The company cleared its debts after 10 years and today Ms Schrotter is as often to be found in Paris or Milan as at her headquarters in the eastern city of Iasi. While much of Romania's once-strong textiles industry has decamped to cheaper labour markets such as Ukraine or Moldova, Ms Schrotter still manufactures in Romania. Monica Macovei Anti-corruption Campaigner Abrasive but popular, Ms Macovei served as Romania's minister of justice until 2007, when she was dismissed by the prime minister. To her fans, she was the staunch independent who led a determined campaign to clean up Romanian public life. While she was justice minister, investigations were launched into corruption allegations levelled at many senior political figures. "The political class is still in shock," says one close ally. Another, describes her as "the leader of a movement that is new in Romania, advocating justice reform and integrity." This reformist fervour leads the same ally to describe her as being "almost like a nun" in her rigid approach to transparency. Since leaving the government, she has been serving as an adviser on anti-corruption in Macedonia . Dan Pascariu Banker When he is not running Unicredit Tiriac, the Italian bank's Romanian subsidiary, Mr Pascariu turns his mind to the pig farm he runs in his spare time. Mr Pascariu, who began his career as an academic economist in the 1970s, earned his spurs negotiating with Romania's creditors following the country's debt crisis in the early 1980s. He headed the Romanian Bank for Foreign Trade following the 1989 revolution, and has managed a variety of finance houses since. "By nature I'm an optimist," he says, explaining that his pig-farming sideline is just one more business opportunity. "Romania imports 4m pigs a year," he points out – despite pork being a Romanian staple. *** Economy: Debt fuels overheating By Quentin Peel Published: March 6 2008 16:49 | Last updated: March 6 2008 16:49 The European Union has been good for the Romanian economy. Ever since the prospect of EU membership started to look plausible – back in 1999 – the growth rate of gross domestic product has averaged around 6 per cent a year. "Investors believed the European Union convergence story, and bought into it in a substantial way," says Cristian Popa, deputy governor of the National Bank of Romania, the central bank. "Romania is growing fast also because it is catching up with the other new EU member states." Rapid growth from a low base – in 2006 Romania's income per capita was still less than half that of Hungary – has seen a rising inflow of foreign direct investment. It hit a high point of €8.7bn ($13.3bn) in 2006, including €2.2bn from the sale of Banca Comerciala Romana to Austria's Erste Bank, before slipping back to €7bn last year. "In the past two years we attracted more foreign investment than in the past decade," says Varujan Vosganian, the minister of economy and finance. "The increase in FDI has been directly related to our integration into the EU." Yet the traditional picture of Romania as a low-wage economy has changed. Wages and incomes have increased rapidly, at an average annual rate of 25 per cent in recent years. Squeezed by the twin pressures of economic growth and continuing labour migration to the rest of the EU – especially Italy and Spain – unemployment has dropped to 5 per cent, and skilled labour is in short supply in many sectors. "The time when Romania was chosen because of low wages belongs to the past," Mr Vosganian admits. "Now it is chosen because the market is quite large, there is fiscal stability, low taxation on incomes, and because competition is not quite so tough as in other countries. Compared with other countries, however, Romania is not so cheap." Indeed, today the danger is quite different: little more than a year after joining the EU, the Romanian economy is in serious danger of over-heating. The inflow of capital, both long and short-term, has fuelled a boom in consumption, a very rapid rise in household indebtedness – especially in foreign currency – and property prices, and a soaring current account deficit on the balance of payments. The question is whether an inevitable slowdown in 2008, as the international financial crisis starts to squeeze sources of foreign borrowing, will result in a hard or soft landing for an economy that has only just begun to enjoy the fruits of EU membership. The central bank increased interest rates by a full percentage point to 9 per cent in early February, the third increase in four months, in a bid to curb inflation running at 6.6 per cent at the end of 2007, compared with a target for the year of 3.9 per cent. Yet the bank faces a real dilemma between fighting inflation, controlling credit expansion, and seeking to cap the rise in the current account deficit, up by €7bn to €17bn. If a higher interest rate stabilises the leu, which fell 16 per cent against the euro last year, it would put further pressure on the trade deficit. "Domestic demand – and especially consumption – is rising unsustainably fast," says Mr Popa, based on income growth, increasing bank credit, and remittances from abroad (more than €6bn according to official statistics). "This mirrors a large current account deficit (our estimate for 2007 is 14.3 per cent of GDP) that is too high to be sustained year-in, year-out. This deficit needs to be contained and then gradually reduced." The government has come in for criticism from the International Monetary Fund and the European Commission for running a lax fiscal policy, with a forecast budget deficit for 2008 of 2.7 per cent of GDP. Although he is defensive, Mr Vosganian has agreed to try to cut the deficit to 2.2 per cent in an emergency budget revision, trimming public spending on equipment and cars. That does not tackle the real concerns of the critics, who are worried that in an election year the government is pumping too much money into public wage rises, as well as social spending. Romania is particularly vulnerable to wage-led inflation because public sector workers have repeatedly succeeded in winning inflation-busting wage rises. "I do not see the difficulty regarding public spending," Mr Vosganian says. "Since 2001 we have kept the deficit under 3 per cent. There is no other solution to diminish the gap between Romania and other EU countries than overheating the economy. How is it possible to be a member of the EU with an average wage of €300? It is essential to increase wages." He is likely to hear a very different story at the annual consultation with the IMF in April. "We are still betting on a soft landing," says Juan José Fernandez-Ansola, the resident representative of the Fund. "But that depends on policies becoming more realistic. If wages are driven by the private sector, it would be rational. But the public sector has been taking the lead, crowding out the private sector." Productivity growth is increasing by around 10 per cent or less per year, against wage increases above 20 per cent, he says. "That cannot end in a good place." The slow process of economic reform in Romania during the 1990s has left over-manning throughout the public sector. More than 40 per cent of the workforce is still on the state payroll. In a tight labour market, many could be absorbed by the private sector. The other critical bottleneck is infrastructure, where spending on communications such as roads and railways tends always to be squeezed by current spending towards the end of the budget year. Poor project design and management capacity is one factor. Another is the lack of any tradition of multi-annual budget planning. A third is a lack of co-ordination between central and local government. Too often they are at loggerheads. All those problems are high on the list to be tackled with training and assistance from Brussels, and from the European Bank for Reconstruction and Development. Romania must improve its administrative capacity – not least in the finance ministry – to qualify for all the funds on offer from the EU budget. *** Banking: European lenders scent golden opportunity By Thomas Escritt Published: March 6 2008 16:49 | Last updated: March 6 2008 16:49 When Austria's Erste Bank bought Banca Comerciala Romana, the country's largest institution by assets, for €4.25bn ($6.5bn) two years ago, it not only paid a full price but it also committed itself to a dramatic shift in its centre of gravity. Already the largest part of the parent group by headcount, even after slimming down the former Romanian state savings bank from 11,500 to 8,200 staff, Erste expects BCR to be the dominant contributor of its profit and revenues in the medium term – such is the optimism about growth in Romania's banking market that. "Unless something goes dramatically wrong, BCR will be the largest single unit within Erste in five years' time," says Manfred Wimmer, BCR's chief executive. "It already has implications for our share price, because the outside world has developed a negative perception of Romania, and they think we paid a lot for BCR," says Mr Wimmer. Even if the markets have reservations about Romania's macroeconomic outlook, there is no shortage of contenders eager to tap an expanding market. Forty-one banks already operate in the country. Portugal's Millennium Bank, the most recent entrant, is sufficiently bullish to plan a €300m branch network – intended to reach 100 branches by 2009 – from scratch, rather than taking the more traditional route of buying out an existing market participant. GE Money, another recent entrant, has opted to buy three non-bank financial institutions and develop them into a full-service banking operation. More may come. The banking regulation department at the National Bank of Romania, the central bank, has a backlog of 20 applications for banking licences from other EU institutions. The expansion in retail banking is most evident: together, the country's banks opened 1,100 branches last year, with a similar number expected to open this year. The attractions of the market are not hard to identify. Beyond Romania's well-known long-term growth story, its financial intermediation ratio – banking assets as a percentage of nominal GDP – remains low, even by regional standards. According to the International Monetary Fund, penetration stands at about 30 per cent in Romania, compared with 70 per cent in Poland, which itself pales beside the UK's 120 per cent. Even a slow convergence towards EU levels presents enticing growth opportunities. Still, with so many foreign companies anxious to maintain a toehold in a growing market, there is a risk of a profit squeeze at the bottom end of the market. Dan Pascariu, chairman of the board at Unicredit Tiriac Bank, says that out of the 40 or so banks, the top 10 probably have 80 per cent of the market. "Some consolidation is necessary, though some of the smaller banks will look for niches," he says. "It can only happen in two ways: either there's consolidation among the international players, or the remaining independent banks could be bought out." Cristian Popa, the long-serving deputy governor of the central bank, echoes this thought: "The five largest credit institutions together have about 60 per cent of the market while some of the smaller banks appear to be successfully exploiting niches. There is still a dearth of no-frills low-cost banking services," he says. That banking services still have a long way to develop in Romania is confirmed by loan growth. Valentin Lazea, chief economist at the central bank, said in January, that despite tightening global liquidity, loans were still growing compared with all previous months. "Credit volumes might expand for a while to come," he said. Much of the lending growth has been in mortgages, most denominated in euros, which has driven a real estate boom – although remittances have also contributed to surging property prices. Liviu Voinea, executive director at the Group of Applied Economics, a consultancy, is less bullish, but argues that, with household debt having started at such low levels, there is still room for growth. According to Mr Voinea, non-governmental credit has risen from 7 per cent to 25 per cent of GDP over the past four years. He expects loan growth to slow markedly in 2008. "One reason for this is the depreciation of the currency, which has made many aware of the foreign exchange risk," he says. The extent of foreign currency lending is causing some jitters. Patrick Gelin, president and chief executive of BRD, Société Générale's subsidiary and the second-largest bank by assets, says that some irresponsible lending has taken place. "BRD represents 40 per cent of the market, and our foreign currency lending is at about the average level. But banks who have been making Swiss franc and yen loans are crazy." The bank is cautious about foreign currency lending even to small and medium businesses, and will only lend in more exotic currencies to large corporates. Euro lending in itself is less risky, Mr Gelin argues, given the euro's extensive penetration of the economy. "The mortgage market is completely denominated in euros," he says. *** Personal view: Sense of direction still lacking after EU accession By Liviu Voinea Published: March 6 2008 16:49 | Last updated: March 6 2008 16:49 Romania has made marked progress in the past five to six years from an economy based on agriculture and cheap labour to one driven by investment. High rates of growth in gross domestic product, an increasing share of fixed capital formation, and large inflows of foreign direct investment point to an economy catching up European norms. Romania already fulfils three of five Maastricht criteria and has set 2014 as an indicative target date to join the euro-zone. However, development is uneven, real convergence is still a long way ahead, and vulnerabilities have appeared. Economic growth is fuelled by household consumption, based on a combination of rising wages (which are outstripping productivity gains) and a credit boom. This in turn has stimulated imports. The current account deficit has widened from 5 per cent of GDP in 2002 to 14.2 per cent in 2007. It would have been around 20 per cent had it not been for foreign remittances. The current account deficit is increasingly being financed by private debt, which has tripled over the past three years. About 40 per cent of the recent inflows of foreign investment are in fact intra-company loans – which are more likely to be debt-creating. Most foreign investment in recent years has come in to retail, real estate and banking – sectors that stimulate consumption. Manufacturing industry is also dominated by foreign capital, but the share of high-tech exports in total exports has not changed significantly in the past decade. Similarly, pockets of unemployment co-exist with areas of labour shortage, poverty is to be found alongside islands of wealth, and public money is wasted while public services are under-financed. The macroeconomic policy mix, in which revenue policy is out of kilter with expenditure, is a mess. A flat tax has failed in that the budget deficit has more than doubled since it was introduced in 2005. It has also added fuel to the fire, stimulating consumption in an over-heating economy. On the expenditure side, state pensions have increased substantially (and are set to increase further in 2009), while contributions are set to decrease as some employees are transferred to a new mandatory private pensions scheme. Persistent inflation – despite a sharp decline in 2006 and first half of 2007 – has its roots in unresolved structural imbalances. The country, despite having one of the largest areas under cultivation of any EU member, is a large net importer of food; energy intensity is six times the EU average; and competition enforcement is weak, leading to high prices for most products and services. The first year of EU membership did not help to solve these problems. Romania was a net contributor to the EU's budget in 2007 if pre-accession funds are excluded. Most worrying, Romania lost the sense of direction it had during the accession process. Local ownership of reforms is limited, and a clear post-accession strategy is still missing. Nor, as an open economy, can Romania escape the effects of the current international financial turmoil. The latter acted as a trigger for currency depreciation of 22.4 per cent between July 2007 and January 2008. On the brighter side, this led the leu exchange rate to become more closely aligned with economic fundamentals. The depreciation may contribute to an adjustment in the balance of payments – an option not open to Bulgaria, for example – although sluggish aggregate demand in the eurozone will probably limit the extent of this adjustment. On the other hand, the rising cost of credit, together with the negative effect of a currency depreciation on incomes, may constrain household consumption and slow down economic growth. In the short term, the possibility of a downgrade in the sovereign rating cannot be ruled out. However, there is still potential for strong and sustainable growth, as long as fiscal and budgetary policies are reformed. Multiannual budget planning is a must to improve the allocation of resources, particularly for large infrastructure projects. The budget deficit, forecast by the European Commission to exceed 3 per cent of GDP in 2008, must be reduced. On the revenue side, a return to a progressive income tax, combined with large tax allowances for services such as education and health, would redirect consumption. VAT should also be increased. On the expenditure side, administrative costs must be cut. Structural reforms should also be enforced in sensitive sectors such as energy and agriculture, while research and development should be promoted. Most importantly, speculative bubbles in the currency and, arguably, real estate markets need to burst. Only then will the economy start to catch up again – this time based on fundamentals. Liviu Voinea is Executive Director, Group of Applied Economics (GEA) *** Cluj: Buzz grips university town By Thomas Escritt Published: March 6 2008 16:49 | Last updated: March 6 2008 16:49 Visitors arriving in Cluj from Romania's capital are often puzzled by the disapproving looks they get as they hurry about their business. It takes a local informant to enlighten them. "We wait for a green light before crossing [the road] in Cluj," admonishes Codruta Simina, a local journalist. Cluj, a city of 400,000 in north west Romania, is more staid than Bucharest, and its citizens have traditionally looked down on the wilder, more carefree ways of the rest of the country. Locals take care to tell visitors that theirs is a central European city, once part of the Austro-Hungarian empire, and distinct in style and culture from the rest of the country. But a bullish optimism has replaced some of the reticence more recently, with the news of Nokia's decision to establish a €200m ($305m) telephone handset-manufacturing plant in the city sparking a celebratory mood. Well before Nokia's arrival, growth was in the air. "Cluj is turning into a little El Dorado of construction," says Dan Turcea, an estate agent. Foreign investors over the past few years have included Missouri-based Emerson Electric, which has based a research facility employing 400 in the city. After the news of the Nokia deal at the beginning of the year, it emerged that Daimler was considering Cluj alongside a location in Poland as a site for manufacturing its new A- and B-class vehicles. There is a widely-felt sense in the city that after a decade during which Cluj lost out on foreign investment to rivals such as Brasov and Timisoara, the city now heads the list of destinations for foreign investors looking to capitalise on eastern Europe's relatively cheap, but rising, labour and ready access to the markets of the European Union. With labour costs standing at around €4 an hour in Romania compared with more than €30 in Germany, cities such as Cluj, with their relative proximity to the markets both of the region and of the richer countries of western Europe, are still tempting for companies such as Daimler or Nokia. "The wave has moved eastwards from Hungary, and now it's reached us here," says Sandor Kerekes, vice-president of Cluj County council. He underlines the importance of market access with a joke: "Vienna's the capital for this region, not Bucharest." Cluj lost out in the 1990s to Timisoara, its regional rival, its international reputation suffering from the policies of its mayor of the time, Gheorghe Funar. Cluj is an ethnically mixed city, with a Hungarian-speaking minority that makes up almost 20 per cent of the city's population. As mayor, he was notorious for acts of ethnic provocation, bedecking the city's streets in the colours of the Romanian flag and arranging pickets outside the city's Hungarian consulate. It did much to deter investors. "You can't have problems with neighbours in Europe," says Mr Tucea, the estate agent. "You can't be like Bosnia. People took one look at us and then ran away." Things have changed since. Sorin Vasilescu, chairman of the foreign investment promotion agency, says: "Cluj has been leading recently, but before Cluj it was Timisoara and Arad." Rapid growth is bringing problems. Cluj has more than 100,000 students spread over nine universities, and while this attracts employers tempted by the pool of skilled labour, population growth is projected to lead to the city's population more than doubling in the next 10 years. This is a source of pride to city fathers. Sorin Apostu, a manager at City Hall, says: "We are the only growing city developing between Bucharest and Budapest." The city lies in a valley, meaning the acreage of land that can be developed is scarce. There are few empty plots within the existing city limits, so development is moving west and east along the banks of the river valley. Nicolae Beuran of the city's chamber of commerce, says: "It's certainly difficult finding land here in the city, but head down the river and there is enough space for investments." Nonetheless, there are challenges. The city and the surrounding county of the same name were dependent on government financing to upgrade road links with the neighbouring district of Jucu, where Nokia has opened its plant, for example, and work is already underway on securing water and power supplies for a city that could soon grow to more than twice its current size. And, for all the allure of cheap labour, the city is facing increasingly acute labour shortages. Local entrepreneurs complain their expansion plans are being curtailed by an inability to hire. "I'm looking for more staff, but I just can't find them," says Florina Murtish, another property dealer, who says she could easily do more business as investors rush into the city. Unemployment is virtually non-existent in the city, even as floods of students arrive to swell the population and as internal migrants arrive from around Transylvania and from less developed Romanian regions such as Moldavia. Mr Beuran concedes that the buzz around the city may start to crowd out some of the cost advantages that have made Cluj the focus of attention it has become. "The average salary in Cluj is a full €60 per month higher than in the surrounding areas." He argues that this is not yet a problem, since Cluj's role as a centre of higher education – it has more students than any other city in Romania – means the jobs on offer tend to be more skilled. "This region is becoming an information technology cluster," he says. "This results in a higher average wage." Average salaries remain lower than in Bucharest, however. The challenge for Cluj, according to Sandor Kerekes, of the county council, is to ensure the investment wave does not move on from Cluj shortly after it has arrived. Infrastructure is improving. After years of delay, work has finally started on a motorway to the Hungarian border, that will bring Vienna within five hours' drive of the city. Still, increasing competition for land and labour could choke off the city's boom. *** Foreign investment: Pioneers find a gateway to new eastern markets By Thomas Escritt Published: March 6 2008 16:49 | Last updated: March 6 2008 16:49 Radauti, in Bukovina, on Romania's north-eastern border with Ukraine, has a harder time attracting investment than the strategically-located cities of Transylvania. A look at the map gives part of the explanation: where cities such as Cluj or Brasov are on the main routes heading west, guaranteeing easy access both to Romania's large domestic market and to the markets of the wider European Union, Suceava county looks to the non-EU markets of Ukraine, the post-Soviet Commonwealth of Independent States, and Moldova. Traditionally, timber was the region's dominant industry, and even today the area around Radauti contains 30 per cent of the soft-wood timber in Romania, though the small-scale furniture manufacturers that once made up the bulk of the region's economy employ very few today. Last year, two private Austrian companies arrived in Radauti with the aim of turning the region's drawbacks to their advantage. Schweighofer, which operates sawmills, and Egger, which manufactures chipboard, decided together to open neighbouring facilities in the town. For the two companies, proximity to eastern neighbours was a definite advantage. Nichifor Tofan, director of Schweighofer's plant in Radauti, explains: "The decision for the location of Radauti derived from the availability of raw material in the Suceava area and the direct connection with the Ukrainian railway system and the possibility of importing logs more easily." The neighbouring plants have a private railway siding with parallel tracks in both European and Russian gauges. Schweighofer imports logs from Ukraine, while Egger sells its chipboard – used for making furniture – to neighbouring markets, including those of the CIS. For them, the local traditions in forestry, and access to the east, are strong attractions. Nor was the remoteness necessarily a barrier, for Schweighofer, at least. "About one quarter of the production will supply the Romanian market, and the rest is for export – especially to Asian countries. Japan is the most important market for us, taking about 50 per cent of our production," Mr Tofan says. Meanwhile, Egger's sales office is taking orders from throughout the region, selling to Ukraine, Russia, Azerbaijan, Turkey and Greece, as well as the domestic market. Schweighofer's primary output is lumber for construction. Waste wood that is a residue of the cut timber is then passed to Egger's neighbouring plant where chipboard is manufactured. Both investments are substantial – Schweighofer's plant in Radauti will cost €120m, when complete, and will employ some 500 people. Egger's factory is a €200m investment and will be staffed by 700 workers. While the companies were to some extent obliged to set up shop near their raw materials, a remote location poses challenges. The logistics of getting products to market are proving a headache. Mr Tofan is particularly dissatisfied with the performance of the state railway, which has forced Schweighofer to turn to more expensive solutions for its other Romanian plant, which sells to EU markets. "The national railway is not competitive enough. Three years ago we transported 90 per cent of our goods to Europe by rail, but today it is all transported by trucks." Amenities can also be lacking in a provincial town. In particular, the lack of adequate accommodation for visiting staff and customers led the company to build a four-star hotel to house them, costing a further €6m. It has proved a blessing in disguise: the venture is already turning a profit, by providing lodgings for tourists visiting a region famous for its natural beauty and ancient monasteries. Staffing is another challenge. Employment prospects are not as bright in Bukovina as in faster-growing parts of the country as it has attracted relatively little investment. But Suceava county has contributed many of the migrant workers who have swelled the Romanian diaspora in Italy and Spain. Some villages have lost half their population to the exodus. Even if employees can easily be found, the kind of highly automated industry that the two companies are bringing to the area demands very different skills from the smaller-scale workshops they are replacing. "It is not difficult to hire enough people," Mr Tofan says. "But it is difficult to hire qualified personnel. Regardless of educational background, only a few local people have had the chance to work with high technology machinery before." Egger's investment was partially funded by the European Bank for Reconstruction and Development, which loaned the company €110m and spent a further €17m acquiring an equity stake in the Egger subsidiary that operates the plant. The investment fits well with the bank's new strategy of focusing on private investments in less-developed parts of Romania. Peter Southie, the bank's principal economist for Romania, says: "Part of our new strategy will be to bring more investment to the regions. There's less scope now for us to do things around Bucharest." Copyright The Financial Times Limited 2008 *** sustineti [romania_eu_list] prin 2% din impozitul pe 2006 - detalii la http://www.doilasuta.ro *** Yahoo! 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