Books on Romania
% of GDP
Update No: 105 - (30/01/06)
The president is approved by the public
The presidency is not as important as the premiership in Romania. But the
president still has clout, especially in foreign affairs, which are very
important right now as Romania prepares its bid to enter the EU. 2006 will be
vital here, as accession is due in 2007, for Bulgaria as well as Romania. They
are both virtually certain to join.
But there are problems all the same, notably a degree of corruption that does
not accord with European practices and a proclivity to budget deficits and
One year has passed since Traian Basescu was elected president of Romania. On
December 12th, Basescu won the presidential runoff with 52.5 per cent of the
votes, defeating his rival, Social Democrat Adrian Nastase, who unfortunately
was tainted by allegations of corruption, although it should be said that they
have never been publicly substantiated.
Basescu's very first name, Traian, is a happy omen of European membership for
the Romanians. It is Romanian for Trajan, the Roman emperor who absorbed Dacia,
as it then was, in 117AD. What could be more appropriate than that another
Trajan should be the head of state that takes Romania, voluntarily this time,
into the European fold.
Basescu is doing well in the eyes of many people in Romania, making a better
fist of it than his predecessors. Several journalists and political analysts
agreed to give a short assessment of Basescu's activities, pointing out both his
accomplishments and failures.
According to journalist Robert Turcescu, Basescu is a president who deserves to
be praised first of all because he proved to be a truly dynamic political
figure. "Basescu managed to revive the political background. Basescu's
greatest merit is that he allowed the opposition's voice to be heard. And this
means democracy has started to function," Turcescu pointed out.
Another accomplishment of Basescu, from Turcescu's point of view, is that he
allowed every citizen to regain the right to "swear freely".
"When (Social Democratic Senator Ion) Iliescu was president, no one had the
right to have a different opinion. But with Basescu it is different. Not only is
he not afraid of controversies, but he also encourages freedom of
expression," said Turcescu.
Turcescu also said he appreciates Basescu for giving people hope. "Basescu
managed to convince Romanians that they will soon live a better life. People
trust him and his power to change the things that are not going well," said
Turcescu's opinion is supported by many, according to an INSOMAR survey, which
reported two days ago that 61 percent of Romanians are satisfied with the
president's activity, which is only one percent lower that the figure reported
In addition, the survey pointed out that Basescu is the most credible political
figure. In addition, he remains Romanians' favourite candidate for the
presidential chair, with 53% of Romanians saying they would vote for him if
presidential elections were now to take place, according to the Opinion
Barometer (BOP) survey completed in November by the Open Society Foundation.
Turcescu also considers that although the opposition has often accused Basescu
of lacking diplomatic skills, the President has proved to be an intelligent
president in relation to the most powerful countries of the world. "Basescu
clearly wants Romania to be an equal partner to the U.S. and the EU member
states. He doesn't want Romania to be a slave anymore. The way he handled the
U.S. military bases and the Trans-Dniester issues proves he wants Romania to
play an important role on the world map," added Turcescu.
Journalist Cornel Ivanciuc shares Turcescu's opinion over Basescu's attitude
towards the Black Sea region and the access agreement on the U.S. military bases
in Romania. "I think Basescu should be praised for the fact that he is
trying to mediate the Black Sea region conflicts. I also think the signing of
the agreement with the U.S. was a very smart move," said Ivanciuc.
Ivanciuc also pointed out that the recently created National Intelligence
Community (CNI) is another accomplishment of Basescu. "He has finally
managed to reform the intelligence services. He stood up for this reform,
although the Parliament was discontented with the idea of the CNI. It is a very
important step and we owe it to Basescu," added Ivanciuc.
Both journalists also mentioned the Iraq hostage episode, saying the president
had handled the crisis in a masterly way, thus saving the three Romanian
journalists who were kidnapped in Iraq in March, 2005.
On the other hand, both Turcescu and Ivanciuc criticized the president for
"his desire to control everything in this country." "He is a very
impulsive president and he has slammed the prime-minister and the government
many times, interfering with some issues which were not his concern" said
Turcescu. "He sometimes thinks he is a god who can solve everything by
himself. And this leads to another major failure: the quality of the people
surrounding him," added Ivanciuc.
Ivanciuc and Turcescu believe Basescu does not know how to select the people who
should help him perform his functions. "Two of his former aides, Elena
Udrea and Stana Anghelescu, proved to be a really bad idea," said Ivanciuc.
Both Udrea and Anghelescu resigned because of their husbands, who were accused
of corruption and several financial crimes. The two aides stirred huge scandals
around Basescu, determining several voices to criticize the president harshly.
Premier in charge of the home front; revenues from privatization to be used
Premier Calin Popescu-Tariceanu is the other big figure in Romanian politics. He
is also making a big impression one year on from his assumption of office. He
concentrates on domestic issues.
An important new policy was launched in December. All revenues generated from
privatisation will be collected within an Infrastructure Development Fund, said
the Public Finance Ministry (MFP) leadership, but carrying out the premier's
programme. "We agreed upon creation of an infrastructure development fund,
where all revenues resulted from privatisation are going to be collected. The
proceeds are to be used exclusively for the funding or co-funding of Romania's
infrastructure projects," he said.
The Executive' s head underlined that the infrastructure projects are not
focused solely on road infrastructure, but on the health system and schools
network, as well. Finance Minister Sebastian Vladescu added that it is possible
to use a part of the money resulting from privatisation for establishing Pillar
II of the pension system.
For an assessment of the economic situation by an insider we turn to an
interview with Victor Kevehazi, KPMG's Senior Partner in Romania and Moldova,
conducted by Adrian Hamzescu of the Bucharest Daily News:-
"We need the government to listen"
Looking over the main changes in the business environment which occurred in
2005, Kevehazi says that, looking ahead to 2006, ensuring transparency is one of
the most important steps still to be taken by the government, as some investors
could be confused by changes in legislation.
Kevehazi considers that the introduction of the flat tax was a good start to
2005, although the government should have involved the business community in
careful debates on its effects, as well as those of other laws. Kevehazi
considers that Romania has all the ingredients to boost its economy but the
authorities should focus next year on improving cooperation with the business
environment and society in an effort to ensure that the economy will evolve and
will be properly developed at the time of EU accession.
The main challenge for 2006, as Kevehazi sees it, is that Romanian producers and
manufacturers will have to prepare for the European market, to compete, not only
in their own country but in others as well.
This year appears to be favourable for the Romania economy, with significant
economic growth and a single digit inflation rate for the first time in 15
years. In your opinion what were the most important events of the year?
I think when we go from one New Year to another, from one Christmas to another,
last year started with a governmental change. A new government, coming out with
a flat rate tax and changes to corporate tax and to personal tax, was the
kick-off of this year. I think we can see the dynamics of both the governmental
change, pros and cons, but also the tax changes that occurred and what they
bring to Romania.
Romania is coming closer and closer to EU accession, fighting corruption,
getting things on board, getting things transparent as much as possible and the
flat tax idea for both personal tax and the corporate sector is one of the
methods to make business and personal life more tax transparent. So that was a
very good starting point.
We have had some hiccups along the way, as instead of having a clear tax
strategy with a clear tax and fiscal environment we've had ideas coming into
play, ideas put on the table and some of them being implemented by law. This
leads to some confusion for investors, as what they thought they had on 1
January and they come to now on 31 December is something else. And it had
changed during the year. There are a lot of things we could learn from this. How
can we put more stability into an environment in a transparent way, in a
professional way so the investors will feel comfortable that this is an
environment they can trust, where they can do business, make a profit and pay
People come here to make money and to earn a profit, to do business that
generates business, that generates work and that's another salary, another
person is employed, one less person on unemployment benefit. That is good.
So we need to find out as much as possible about what measures can be put into
place to assure an investor that they have a stable, constant environment, which
is reliable, trustworthy, transparent, that the rule of law works, and that you
can go through a tender in the most natural fashion without any degree of
influence. These are the items businesspersons look for.
Would you say the frequent modifications brought to the Fiscal Code over this
year were the government's biggest mistakes?
I wouldn't call them mistakes. I would rather say there is a need to involve the
business community in such topics. The business community has its hands on the
table, and feet on the ground, performing and applying what the legislative
environment is about. We know the problems. What is being done to solve these
When you come out with a new idea of a law - that scares; unless you plan it
efficiently and you can demonstrate what the impact is, why it is needed, where
the funds are going, how much it is going to cost. Without having balanced
information, it is very difficult to assess whether the country needs it.
The government introduced this year, for example, a modification of how people
will pay taxes on real estate transactions. There is nothing wrong in
introducing capital gains tax on individuals. But it has to be planned
efficiently, and be well calculated: what will the costs of implementation be?
What is the cost compared to what the income will be? There is s need to look
into what the implications will be on inflation, and the monetary, fiscal
environment, and then sell it to the public because some people bought assets
one year ago, ten years ago, and they didn't know they would have to pay tax.
We are actually paying tax on the past. Not from when the law came out but on a
period when the law didn't exist. That is not necessarily fair, but it was never
sold to the public: From this day forward, you will pay for any incremental
profit! Yes, that is logical. But to impose taxes on a previous period is quite
a sensitive matter because it convinces people that the officials do not
represent the public.
Is it good to tax people on a past event? I think not! To tax people on a future
event? To tell them: if you do this, you will pay tax for it? Perfect! Whatever
tax is relevant to the environment, that is correct. To make it more difficult,
the government is introducing a modification to the way it is calculated, from
January, to a more simple method of calculation. Why didn't we think about it
before? Well, we did. We said it before. But we need to have the possibility to
debate this. We need the government to listen to the arguments of the business
community about the concepts of the law.
If you take the flat tax, the whole concept behind it is to simplify tax. You
make it simple for people to calculate it, you don't have confusion. The idea
behind the flat tax regime is to simplify. And we haven't seen the
simplification yet, but the opposite: it's becoming more difficult.
What we have recommended to the government numerous times is that when an idea
comes into play a public committee should be put together, involving people from
all backgrounds: business, bankers, government, academics. After a public
debate, that committee would make recommendations to the ministry: This is what
we the people think should be done for the good of the community. Then the
ministry can apply or introduce it into practice.
There are several business associations in Romania, such as the Economic and
Social Council, the Foreign Investors' Council, the Association of
Businesspersons in Romania; there are a lot of people lobbying for the business
environment. Where does the communication fail?
You can't expect a serious debate when a council gets the law on Thursday and
the debate is on Friday and the law is 100 pages, nor could you expect that the
council will debate a law that has already passed. So it has to be done in the
The councils are representative of various organizations, not technical
specialists who could understand a fiscal aspect or concept. They are the body
that should see a professional report and then come with professional
conclusions, not a hundred pages of a draft law that you have to be a lawyer
just to understand what is written there. And you have only 24 hours! You have
to have a careful debate. And that debate is lacking because the government does
not have time. Laws are passed in a rapid format, by emergency ordinance.
Would you say that in the forthcoming year the government should improve its
transparency and the way it develops laws, by switching its policy from drafting
the law to debating it first?
Yes, and to cut down as much as possible the barriers and the frictions that
exist between the authorities and the business community by allowing the
community more control over its own environment, by using its own people. For
example, to require companies to provide their tax returns after being audited
by their independent external auditors. This will allow the authorities to rely
better on the information presented by the companies.
What do you expect the economy's evolution over the next year to be?
I think that we have all the ingredients to have growth. We have the people, we
have the environment, we have the technology, we have the interest, we have the
money. We all have to work together. This is not for one side, or for one
person, or for the government. This is for everybody onboard to be on the same
page, to work together to get a better environment, a better economy. We have a
long way to go. If we want to catch-up to our neighbours, we need to work
constantly together in the same team to get the economy into positive growth on
a constant basis.
During a recent meeting of the Employers' Unions from Industry and Trade,
businesspersons pointed out that companies should get involved seriously in the
development of the economy through viable business plans. The position was also
assumed by the chief economist of the National Bank of Romania, Valentin Lazea,
who stated that Romania does not lack funds but feasible business plans. How
would you comment on that?
A pity that I wasn't invited to that event! I have numerous examples, both
internally and from KPMG of where we are progressing and investing in the growth
of the economy. Just this year we took on 80 university graduates, to train them
and educate them, so that they will be ready to provide professional services to
the market in the coming years. That is a large number, and I know that my
colleagues from other organizations have taken similar steps. That is a huge
investment in the economy: to take on young people and train them. No government
is paying for that training, nobody is supporting it, no EU funds are paying for
it. It is all private money, internal investments. So I wonder what the unions
are talking about! Maybe they have a different view of the companies they are
Most of the businesses in Romania are concentrated around the large cities, such
as Bucharest, Iasi, and Timisoara, especially on the western side of the
country, close to the EU border, while other regions are underdeveloped. Why are
companies focused on these regions?
Well, companies are here to make money. I know very few companies that are not
here to make profit. If there is money to be made in a certain region, I am sure
someone will pick up the opportunity. The government's role is to support those
areas which require it to. In many countries that is done, either by means of
additional benefits for companies which invest there (underdeveloped regions),
to help them to set up their businesses, providing training. There are various
steps to encourage investors to locate in a specific area. However, I can also
say that in many countries the opposite is occurring. There is no governmental
support; that is life, there is no business there and people move on. The
government must decide: do they want to have a balanced environment of
businesses spread out all over the country in all towns or are they stepping
aside and letting business decide where to go in the most neutral fashion.
Romania's accession in the European structures will produce massive effects on
the economy - it should enhance competitiveness and present more opportunities.
Are Romanian companies prepared to cope with the shockwave? What should
companies do to succeed on the European market?
Unfortunately, not. The Romanian market will be flooded with products. Those
products could be at a lower price than the Romanian products. The quality of
the incoming products will be better. So the Romanian producers and
manufacturers need to compete, not only in their own country but in others as
well. Are they capable of selling outside Romania? Producing, transporting,
selling? Do they have the contacts, the people, the marketing, the warehouses,
the infrastructure set up, the labelling, the invoicing system, which is
completely different, the VAT (Value Added Tax) system, which is also going to
be completely different. Are they ready for that?
We have provided advice to numerous companies on how to modify the system to get
ready for the new VAT invoicing system. On January 1, 2007, if they are not
ready, they are in violation of the law. They cannot sell. You have to comply
with the EU legislation on how to sell to another EU company. It is difficult.
Czech, Hungarian, and Polish companies went through the same process and many
companies there were not ready and thus unable to do business. They also get
sued for not complying with the legislation, but that's another issue.
There are a lot of things that need to be done, without having investors
physically come to Romania.
Mercedes-Benz buses chosen for Romanian capital
The Romanian capital Bucharest has picked Mercedes-Benz buses for a major
upgrade of its road transport, the German-American automotive company said in
Bucharest bus operator Regia Autonoma de Transport Bucuresti (R.A.T.B) ordered
500 low-floor Citaro-model buses at the end of december 2005, with deliveries to
begin in summer this year. The deal costs some 94 million Euro, and it will be
financed with Mairy's money, said Gheorge Aron, general manager of RATB, quoted
by Averea daily.
Some 400 should be on the roads of Bucharest by the end of the year.
DaimlerChrysler's Evobus subsidiary did not say how much the buses would cost,
but sources said the sum was in the "high double digits of millions of
Euro." The buses will be built at a plant in Mannheim, Germany.
DaimlerChrysler said Bucharest would be the first eastern European city to
operate low-floor buses of western standard. The same model operates in Rome,
Paris, London and Madrid and many German cities.
Moody's improve CFR "Marfa" rating
Moody's financial rating company recently improved the rating granted to the
National Company for Freight Railway Transport (CFR "Marfa") from B2
to Ba2, with a negatve perspective, New Europe reported.
The positive rating is due to the finalising of new rating standards used by
Moody's in evaluating companies owned by the state. The new rating standards
refer to credit risks associated with country as well as the company under
examination. The other standards refer to the degree in which the company
depends on the state and the anticipated level of support a company gets from
Fitch upgrades Romanian Banca Tiriac to BBB-
Fitch Ratings said recently it upgraded Romania-based Banca Tiriac's ratings to
Long-term BBB- (BBB minus) from B+, to Short-term F3 from B and Support to 2
from 5. The Rating Watch Positive on these ratings has been removed, New Europe
A Stable Outlook has been assigned. The individual rating is affirmed at D. The
upgrades reflect the high probability of support Banca Tiriac can receive from
its new majority shareholder Bank Austria Creditanstalt ("BACA"). BACA
bought 50 per cent plus one share of Banca Tiriac, following the agreement to
merge it with its wholly owned HVB-Romania to form HVB-Tiriac. Although the
merger is still awaiting regulatory approval, Fitch considers it likely that
this will be granted.
Foreign investment hits 5bn Euro in 2005
The value of direct foreign investments may reach five billion Euro in 2005,
about 22 per cent higher than the previous year, when 4.1 billion Euro were
registered, said State Minister, George Copos. He added that 2006 will be a good
year for foreign investors to come and invest in Romania, New Europe reported.
"I come from the business environment and I know when is the appropriate
time to invest. We received 3.75 billion Euro for the Romanian Commercial Bank (BCR),
the EU budget was approved and I assure you that Romania will become an EU
member in 2007," explained Copos.
The state minister said that Romania is very attractive for foreign investors
because it has the 16 percent flat tax. The minister also mentioned the approval
of the insolvency law, considered by him as "important for companies who
want to enter the Romanian market."
Major investments pour in US$3.6bn in 2005
Last year the Agency for Regional Development registered 445 projects of
investment amounting to over one million Euro and receiving, therefore, the
status of "major impact investments," according to the Romanian Agency
for Foreign Investments (ARIS). By local laws, major impact investments are
granted fiscal facilities, New Europe reported.
The total value of the projects they are involved in is over US$5 billion with
foreign participation of US$3.618 billion, representing 70.23 per cent of the
total. In 2005, major impact investments reached over US$1.5 billion of which
US$907,956 million were Greenfield investments and US$909,584 million brownfield
investments. The main fields of activity in which these resources were invested
are telecommunications, wood processing and paper industry, services, trade,
energy, machinery industry, constructions, iron and steel and electronics.
Most investments were directed to the Bucharest-Ilfov development region,
followed by the Centre development region and the South-Muntenia development
region. The largest investor was the Netherlands with US$1.148 billion, followed
by Austria with US$668 million and France with total investments of US$404
The Austrian Ambassador, Christian Zeileissen, said recently that the interest
of Austrian investors in the Romanian market remains high and investments will
continue in 2006. According to ARIS data, the peak of investments was reached in
2004 with over US$1 billion.
That was also the year when the Austrian oil group OMV acquired the local group
Petrom for more than US$800 million. And 2005 was the year when most new
Austrian capital companies were incorporated (397 by November). Total Austrian
investment in Romania reached US$2.2 billion in November last year and
represents 15.19 per cent of total foreign direct investment (FDI).
According to ARIS, the largest investors are OMV, Siemens, Raiffeisen Bank, Brau
Union and Henkel Austria. ARIS data on Austrian investment in 2005 does not take
into account the largest Romanian privatisations ever, that of the Romanian
Commercial Bank (BCR), which was completed in 2005 but will be settled in 2006.
The Austrian bank, Erste Bank, won the tender for the takeover of BCR offering
3.75 billion Euro for 61.88 per cent of the social capital of the local bank.
MINERALS & METALS
Mittal Steel buys 94.4% of Romportmet
Mittal Steel Holdings bought almost half of the 10 per cent stake of the capital
of the harbour operator Romportmet, for which it paid 7.5 million lei (some two
million Euro), said the company in a statement recently, New Europe reported.
The above-mentioned company bought 1.1 million shares, that is, 4.5 per cent of
the capital of Romportmet. The owner of the iron-and-steel works based in Galati
(eastern Romania) intended to buy 2.5 million shares at a unitary price of 6.65
lei per share, but gave up the transaction. Currently, Mittal Steel Holdings
holds 21.05 million shares accounting for 82.9 per cent of the Romportmet
capital, but works in a concerted way with Sidex Trading company, which holds
11.5 per cent. Thus, Mittal Steel controls 94.4 per cent of the harbour operator
capital. In September 2005 Mittal Steel took over Romportmet from the investment
fund Broadhurst and paid for the majority stake the sum of US$47 million.
Orange Romania revenues to reach US$1bn in 2005
The revenues of Orange Romania mobile phone operator are expected to reach US$1
billion at end-2005, up almost 25 per cent from 2004, said Orange Romania
Executive Manager, Richard Moat, New Europe reported.
In terms of the customer base size, Orange Romania is a local market leader with
6.22 million customers. "In 2006, both the number of customers and the
revenues will record smaller rises because the penetration rate will be
high," said Moat. Orange has so far invested US$1.230 billion in Romania.
According to Moat, Orange investment in Romania will be channelled in 2006 in
expanding Orange Romania's EDGE network nationwide, releasing 3G services,
expanding the network of its own shops and launching new products and services.