Romania impressions

The buzz surrounding Romania’s prospects is palpable in the other countries of Central and Eastern Europe (CEE). I have been pestering my editors to send me to Bucharest for several months now, but I was met with little interest from editors in London or New York. To them it seems like a parochial backwater and to be frank, for the moment, it is.

As a reporter you have to wait until something has already happened before you can report it, but Romania is clearly at the start of what should be at least two-years of rapid growth.

I finally convinced my editors it was worth doing the story now and I arrived for a three-day look-see in Bucharest two weeks ago. A complete novice to the country, I was surprised at how familiar my conversations with business leaders were. My suspicions were confirmed: Romania fits the general pattern set by the other EU aspirants, but is clearly at the very start of the process.

At issue is not whether the boom will happen, but how long it will last and if the government will squander the initial catch up phase as many of the other CEE countries have done.

The stock market is flying. Foreign direct investment is flooding in. The fast moving consumer goods are battling for market share. Hedge funds have dodged currency controls to invest an estimated 1bn euros into the local market through various “grey” schemes and maybe another 3bn is waiting on the border. And the consumer credit boom sweeping the region is already visible in Romania.

Romania is off to a good start, but progress has been patchy while the government has only just begun on the meat of necessary judicial and legislative reforms that will give the current explosive growth some legs.

Three days was not enough to get any deep understanding, but I was impressed by the strength of the banking sector where reform has almost finished.

Strong banks have fuelled the ballooning small- and medium-sized enterprises in other CEE countries and spawned a financial sector that has been a major boon for governments trying to reform things like the pension systems.

Moreover, Dr. Nicolae Danila, chairman of BCR, told me he was confident that both BCR and CEC would be sold off by the middle of next year, bringing the privatisation of the banking sector to an end. How this will be achieved remains to be seen; the government stake could be floated on the local stock exchange (following the highly successful examples of OPT in Hungary and more recently PKO in Poland) or sold to an international bank. Both would work.

The government has lots of choices to make, but there should be little doubt about its political will: the EBRD concluded in its last transition report that EU accession had proven to be an extremely effective goad in forcing market-orientated reform on transition countries.

Maybe more importantly, the mere prospect of accession has acted as a magnate for investors; doubly so in Romania’s case now the form has been established by the success of the 10 countries that joined last May.

Top of the list of things to do is fix Romania’s appalling image. Last week President Traian Basescu lambasted a German MP for once again tarring Romania “most corrupt country in Europe.”

Corruption is a problem (transparency international rates Romania as worst in the region) but it is not so much a sickness as a symptom of weak institutions. And a recent study by the European Central Bank said Romania has the weakest institutions in the region.

Yet Basescu is right to complain about the basting Romania receives. The flag waving involved in launching anti-corruption investigations, reviewing privatisation and passing anti-graft laws may all come to nothing, but the optimism it inspires elsewhere can kick start a virtuous circle of investment and growth.

The experience of other countries is that once businessmen see there is more money to be made from doing “normal” business than stealing they start lobbying for laws to protect property rights and want to move into the white economy – slashing taxes and simplifying the rules are key incentives here as Romania plans to follow this model pioneered in the Baltics.

During the first spurt of growth, which is now underway, incomes will rise rapidly, a flood of foreign direct investment will arrive (mainly low wage-seeking light industry) and growth will be fast. In this rosy atmosphere the government will be tempted to sit on its laurels.

However, in the next phase – where much of Central Europe is now – wage rises mean the economy has to shift from labour- to capital-intensive industry at the same time as macroeconomic constraints tighten. Hungary is a good example, and is now battling with a strong currency, rising state debt and a huge budget deficit just as the government faces general elections.

Budapest squandered much of the rapid growth of the mid ’90s and tellingly the ECB found it has the second weakest state institutions in the region after Romania.

The next two years should be a happy time for Romania, but with four years in hand President Basescu would be well advised to take advantage of this honeymoon period and push the most painful reforms first as the longer you leave them the harder they are to sell.

* Ben Aris is the contributing editor for the British magazines The Banker and Euromoney. He is also the Berlin-based correspondent for the Guardian, covering Central and Eastern Europe. Prior to moving to Berlin he spent ten years in Russia covering Eastern Europe ending up as Russia bureau chief for the Daily Telegraph.