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ROMANIA


 

 

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Key Economic Data 
 
  2003 2002 2001 Ranking(2003)
GDP
Millions of US $ 60,358 44,428 38,700 52
         
GNI per capita
 US $ 2,310 1,850 1,720 100
Ranking is given out of 208 nations - (data from the World Bank)

Books on Romania

REPUBLICAN REFERENCE

Area (sq.km)
237,500

Population
22,355,551 

Capital 
Bucharest 

Currency 
Leu

President 
Traian Basescu

Private sector 
% of GDP 
40%


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 inflation.
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.
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 last month.
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 for infrastructure 
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 tax. 
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 problems?
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 right way. 
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 involved in. 
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.

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AUTOMOBILES

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 Stuttgart recently.
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.

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CREDIT RATINGS

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 the state.

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 reported.
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.

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FOREIGN INVESTMENT

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 million.
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.

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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.

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TELECOMMUNICATIONS

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.

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