The FDI trend reveals how foreigners view Romania and how attractive its business environment really is. Even though the economy returned to growth this year after two years of recession, foreign investors were in no hurry to arrive.
The meager FDI numbers prove that insufficient infrastructure and delays in restructuring and improving efficiency of the public sector have taken their toll.
The worsening foreign direct investment numbers in Romania also have to do with the risk aversion worldwide.
Foreign direct investment fell by 43.8% in the first ten months compared with the same period of 2010, to EUR1.3 billion, according to the latest data published by the central bank (BNR).
The financial sector attracted most of the investment, which was mostly used to offset losses, and there was hardly any money left for new investments in manufacturing.
Equity stakes consolidated with the estimated net loss amounted to EUR905 million and intra-group loans totaled EUR403 million. FDI went down 36.6% to EUR2.2 billion last year compared with 2009, and companies had to come up with EUR2.24 billion to offset their losses.
Making Romania more attractive as a destination for foreign direct investment is very important considering its reliance on foreign capital, while domestic savings level is low. In the absence of foreign capital inflows, chances of economic growth are quite slim.
Vlad Muscalu, ING Bank analyst, described this year’s foreign investment trend as disappointing. He says he does not expect any significant changes next year, either, because of the uncertainties surrounding an election year and because of the turmoil on international markets that will probably continue.
The failure of attracting new foreign investors is compounded by some other investors’ decision to leave. The departure of Nokia, the relocation of the ING service center from Cluj (NW Romania) to Hungary, the relocation of the plants of Coca-Cola in Iasi to the Republic of Moldova and of Nestle and Kraft to Bulgaria are but some of the bad news of the year.
Melania Hancila, chief economist of Volksbank, says that the FDI trend this year was alarming, as it only covered 32% of the current account deficit. Investment flows were even lower than last year and may not exceed EUR1.5 billion by the end of the year, she said.
Dan Bucsa, chief economist of UniCredit Tiriac Bank, expects net foreign direct investment for the whole of 2011 to amount to EUR1 billion. Next year’s level should reach EUR1.5 billion.
A government document intended for use by foreign investors says that Romania’s goal is to attract foreign investment in infrastructure, agriculture, energy and healthcare sectors.
The wave of foreign investors that arrived before the crisis had been drawn to Romania by its flat tax and its EU convergence process. The country’s strong suits also included the large market and the cheap labor. Romania remains attractive for those investors that seek cheap labor, but needs to improve competitiveness of products and services to cope with international competition over the coming years.
(English version by Loredana Fratila-Cristescu)