Great expectations are a challenge for any leader, and many hopes are pinned on the new president of Romania, Klaus Iohannis, after a surprise victory in November 2014. So far his tenure has been purposeful, and his campaign against corruption is in overdrive. The country's economy is fairly stable with pleasing prospects of growth for 2015 and beyond. It is early days, however, and Romania is still vulnerable to both internal and external forces.
The most startling element of Mr Iohannis’s first months as president has been his fight against corruption. A European Commission (EC) report published in January noted there was an “impressive momentum” in Romania to tackle corruption. Within weeks of Mr Iohannis’s election victory, one of the country's top chief prosecutors, Alina Bica, who had been in charge of combating organised crime and terrorism, was herself arrested for corruption.
Although Romania had already seen the convictions of a former prime minister, Adrian Nastase, former ministers and members of parliament, more cases are being added all the time by the country's National Anticorruption Directorate crime bureau. The most recent instance involved the current finance minister, Darius Valcov, who resigned after being questioned by the authorities in relation to a €2m bribe for business contracts. Importantly, Mr Iohannis has lifted the immunity from prosecution of specific individuals and has overseen the rejection of the widely condemned amnesty law that would have protected many in power from prosecution. However, there are rumours that the law may yet re-emerge.
A historic issue
Corruption has historically been a problem in Romania. When it joined the EU, the tasks of cleaning up corruption and ensuring judicial reforms were monitored by the EC under its Cooperation and Verification Mechanism, an arrangement that continues to this day. But there is a real sense within the country that a cultural shift is happening.
“When we first arrived, in order to win contracts, you would be asked to pay this or that,” says Geoff Pearson, chief executive of the Romanian operations of UK packing company Neal Brothers. “We didn’t and we lost contracts that way. But it is just not like that now. It is changing a lot.”
In fact, one observer believes that the fight against corruption has become something of “a mania”. In a New York Times article, Patrick Basham, director of think tank the Democracy Institute, equates it to the 'reign of terror' in France that followed the revolution and during which there were many revenge arrests and executions against so-called enemies of the revolution. There is a concern that the good intention of eradicating corruption is creating paranoia and inhibiting legitimate government business, that public sector employees are too afraid to organise tenders and a kind of ‘freeze’ has set in.
However, there is broad support for Romania in this fight. Richard Reese, chief executive of the British Romanian Chamber of Commerce, says: “This is an important step for the development of Romania, but things won’t change overnight. If people are hoping that all corruption will be tackled immediately, this is not possible because the judiciary has limited resources and these kinds of practices take time to fall away.”
Mr Iohannis’s election victory comes at a time of relative economic stability in Romania; the World Bank’s Global Economic Prospects report from January this year estimated the country’s GDP growth for 2014 at 2.6%. The bank predicts this will rise to 2.9% in 2015 and up to 3.9% by 2017. Similarly, the EC says in a recent report: “Romania’s economic growth is forecast to remain robust in 2015 and 2016.”
The EC’s report also concludes that much of this growth is “driven by domestic demand”. This is key for foreign investors, many of whom cite the Romanian market as being the primary reason for investing there. This is in part because of its sheer size. Peter Stahl is chairman of the managing board at German cheese producer Hochland, which has been operating in Romania since 1998. He says: “Our main reason for starting our business in Romania was the domestic market, which has a high number of inhabitants, the highest in eastern Europe.”
Hochland and others investors in the country have, however, seen market demand fall as a result of recent austerity measures in Romania. “[We have seen] cuts in recent years and their purchasing power really suffered," says Mr Stahl. The market did not expand and though we could maintain our market share, the market itself was not growing. We hope that this will change with the new regime.” Continued GDP growth should ensure there is some progress for Hochland and other companies in this area.
GDP growth should also continue to contribute to the positive trend in FDI into Romania. Figures from the National Bank of Romania, the country's central bank, show a steady upward trajectory for GDP growth, with increases from 2011 to 2012 and again in 2013. It reports that total net inflow has increased from €1.7bn in 2011 to €2.7bn for 2013, though the numbers by no means match the pre-financial crisis figures when flows were 10 times what they are now.
Romania is still vulnerable to ongoing political instability, however. There are reports that there will be a leadership challenge to Victor Ponta, the current prime minister, who failed to win the presidency, at his Social Democratic Party’s congress, later in 2015. There are even concerns of a vote of no confidence in the government if present problems continue.
It is in this light that a new fiscal code in the country is vital. Its implications are significant, as tax expert Gabriel Sincu, an executive director at EY, says: “If [the new code is] introduced it will be a revolution.” The draft code includes cutting Romania’s flat rate of tax (on income whether personal or corporate) from the already low 16% to 14%, reducing VAT from 24% to 20%, and removing taxes on buildings. The secretary of state for foreign investment and public-private partnerships, Alexandru Nastase, says that the tax cuts are designed to “boost economic growth by 1.7% and to fuel household consumption by 1.9%” as well as “give confidence to investors”. But there are also concerns that the tax cuts are unsustainable and will throw Romania back on the road to deficit.
Apart from these immediate political problems, there is frustration at the lack of development in Romania’s internal infrastructure, particularly its road network and its underperforming railway network. The country does have a strategic asset in its port Constanta, which is located on the Black Sea, but its potential has yet to be fully realised. Mr Pearson calls Constanta “the jewel in the crown which the Romanians do not want to shine”.
Constanta is built on the site of an ancient Greek port and provides access to Asia and the Middle East. Though it is not in the top 20 European ports by capacity, it is growing. According to Eurostat, there was an increase of 10.3% in port activity between 2012 and 2013, although reports of figures for 2014 are less encouraging. A lot of work is being done to improve its capacity and to make it more effective by developing access to the port with new roads and bridges.
EU structural funds have been granted for a longer term strategy to 2040 to realise the potential of this maritime and river port. But progress is slow and there are inherent tensions between central and regional government in terms of what should be done and who should pay for it. In the meantime, investors may defer to northern European or Italian ports instead. Mr Pearson says: “If Constanta was fully developed, we could see significant reductions in transport costs.”
Constanta had some interesting visitors recently when six warships from the US, Canada, Turkey and Romania arrived for a NATO exercise in the Black Sea. This highlights just how near Romania is to the current biggest concern for NATO: Ukraine. Luckily for Romania, it is not dependent on energy or significant trade with the Ukraine or Russia, but such uncertainty and volatility so close to home is a rumbling threat.
The fact that Romania is not significantly impacted by problems to its east is a reminder of where Romania’s economy now relies upon: firmly within the EU. The country is still not, however, within the Schengen area, the EU’s ‘borderless’ zone, which would reduce costs and time for trade. Since Mr Iohannis’s victory, this issue has come back onto the agenda. The Romanian press recently reported that Germany's foreign minister had suggested he may be prepared to “support the discussion process” on Schengen's borders being extended.
The timing is not coincidental: Mr Iohannis has given Romania a boost, not least in the eyes of its most important customer, the EU.