Romania’s Risk Assessment: A Mixed Bag of Strengths and Weaknesses

A recent report by Coface has assigned Romania a business climate rating of A3, indicating that the country’s environment is relatively good, with corporate financial information usually reliable [1]. However, debt collection and the institutional framework may have some shortcomings.

Strengths

Romania boasts several strengths, including:

• Large domestic market: A significant consumer base provides opportunities for businesses to grow.
• Significant agricultural potential: The country has vast arable land, making it an attractive destination for agricultural investments.
• Limited energy dependence: Romania is not heavily reliant on foreign energy sources, reducing its vulnerability to global price fluctuations.
• Diversified industry: The country’s economy is spread across various sectors, including manufacturing, services, and agriculture.

Weaknesses

Despite these strengths, Romania faces several weaknesses:

• Demographic downturn: A declining population poses challenges for the labor market and social security systems.
• Strong regional disparities: Economic development varies significantly across different regions of the country.
• Low participation of certain minority groups in the economy: These groups face barriers to entering the job market or starting their own businesses.
• Inefficient agricultural sector: The sector is plagued by low productivity, outdated technology, and inadequate infrastructure.
• Volatile tax legislation: Changes to tax laws can create uncertainty for businesses and investors.
• Slow administrative processes: Bureaucratic procedures can be time-consuming and inefficient, hindering business growth.
• Corruption: Widespread corruption remains a significant challenge for the country’s development.
• Poor workforce management: Skills shortages and brain drain are ongoing issues.

Impact of the War in Ukraine

The ongoing war in Ukraine is expected to have an impact on Romania’s economy, with inflationary pressures weighing on growth. Consumer price inflation has reached its highest level since 2003, eroding households’ and firms’ purchasing power [2]. The labor market is gradually recovering, but skill shortages and brain drain remain a challenge.

Fiscal Deficit

The country’s fiscal deficit is expected to slightly widen due to additional defense spending and temporary measures to cushion the fallout of the Russia-Ukraine war. However, public finances will benefit from loans and grants under the EU’s Multiannual Financial Framework and Next Generation Recovery Plan over 2022-2027.

International Relations

Romania has formed a coalition government with rival parties, ending almost two months of stalemate [3]. The country is expected to maintain political stability until the next parliamentary elections in late 2024.

References: [1] Coface (2022). Business Climate Rating. [2] National Institute of Statistics (2022). Consumer Price Index. [3] Romanian Government (2022). Coalition Agreement.