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Allianz Trade: Country Risk Analysis 2024

February 27, 2024

Made by Allianz Trade, the global leader in commercial credit insurance and credit management, Country Risk Analysis provides comprehensive insights into the economic, political and business environment as well as the sustainability factors that influence default risk for companies in 84 countries. The analysis is based on the risk assessment model, updated quarterly with the latest economic developments and based on Allianz Trade’s global insolvency and business environment data. Romania is characterised by diverse forte points which contribute to stability and competitiveness. Accession to the EU and positive international relations have consolidated the position of the country in the global landscape. Similarly, the competitive industrial sector and the low level of unemployment reflect the solid economic position of Romania and offers a business environment adequate for development and investments.   Even so, there are vulnerable aspects which need attention. The instability of the government and the lack of structural reforms in key sectors of the economy represent significant challenges. Weak public finances, big annual deficits in current account and a modest coverage by net Foreign Direct Investment inflows, together with a significant external debt burden, are weaknesses that reinforce the complexity of the economic environment. Despite these challenges, macroeconomic imbalances remain a continuing concern highlighting the need for a careful and coherent approach to strengthen and improve Romania’s economic condition. Romania had a strong performance among the emerging economies, although periods of economic overheating have been rather worrying.The average annual growth of GDP was +3.7% over the last twenty years, much over the average of the EU member states in Central and Eastern Europe. Although the global crisis of Covid-19 affected significantly the Romanian economy in 2020 (contraction -3.7%) it registered a serious comeback with production growth of +5.7% in 2021.   However, the economic perspective of Romania has worsened significantly with the war in Ukraine. This was due to the dependence on energy import (from before the war) from Russia and the impact of the EU sanctions against Russia on the domestic economy (for example, the increase of inflation and the potential energy deficit). In 2022, the economic activity of Romania continued to keep an upwards trend, due to the robust expenses of the consumers, investments and foreign demand.   The statistical basic effects contributed to growth of +4.7% annually. Even so, the impact of inflation growing, the increase of interest rates, and the diminution of the foreign demand and the deterioration of the trust of enterprises had a full effect in 2023. As both domestic and external demand have slowed significantly, real GDP growth is estimated at just over +2%. By the end of 2024, analysts project growth of around +3% and +3.5% in 2025, respectively, supported by public and investment spending, as well as strengthening consumer spending amid rising real disposable income, the diminished impact of past interest rate hikes and monetary easing.   The monetary policy of the National Bank of Romania (BNR, the central bank) is officially based on inflation targeting (2.5% +/-1pp). The real interest rate was negative since the end of 2017 to October 2023, being situated under the inflation rate, even when it surpassed the maximum interval in 2018 – 2019, in the context of quick growth, a double-digit one of salaries and mid-2021, with the increase in energy prices.   This led to inflation of consumption prices starting with 2022 until half- 2023. BNR increased moderately his monetary policy rate from 1.25% in September 2021 to 7.00% in January 2023. Similarly, the bank frequently intervened on the foreign exchange markets to stop the excessive volatility of the currency – a predictable aspect taking into consideration the official regime of the exchange rate. In the meantime, the analysts expect that inflation stays persistent due to the increase of food prices and strong salary increase. Thus, it is expected that general inflation reach an average value of approximately 5.6% in 2024 and 4% in 2025.   Public finances of Romania will continue to deteriorate becoming a cause for concern. A strong pro-cyclical fiscal stimulus has already increased the annual fiscal deficit to -4.3% of GDP in 2019. This ratio rose sharply to -9.3% in 2020 and -7.2% in 2021 due to the Covid-19 related fiscal stimulus and SME loan and grant guarantees, as well as lower nominal GDP.   Another large annual fiscal deficits of around -6% of GDP have been recorded in 2022 – 2023, this time due to both lower tax revenues and higher spending needs caused by the war in Ukraine.   Despite, planned fiscal consolidations, it is estimated that annual deficits will stay high, at approximately -5% in 2024 – 2025. In the meantime, the rate between public debt and GDP has increased from 35% from GDP in 2019 to 47% in 2022 and it is estimated it will reach approximately 50% in 2025. Although this might seem modest by comparison to other countries in the EU, the dynamics of tendencies is a cause for concern. Foreign finances of Romania are another cause for concern, the deficit of current account having a constant increase from -0.3% of GDP in 2014 to 9.3% in 2022, before having a slight drop to the estimated value of -6.5% in 2023.   Foreign Direct Investment deficit coverage is likely to remain below 50% as capital flows to (more vulnerable) emerging markets will continue to be low in the context of the persistent global economy. Moreover, the downward trend in the ratio of external debt to GDP, from 77% of GDP in 2011 to 47% in 2019, has reversed. In 2020, this ratio was 57% and is expected to remain above 50% in the coming years. Meanwhile, the NBR's foreign exchange reserves have risen again from temporary lows in 2022, although the said interventions in foreign exchange are generating some volatility in the level.   Although areas of vulnerability remain, the World Bank Institute's annual Global Governance Indicators surveys show a business-friendly legal framework. The Heritage Foundation's 2023 Economic Freedom Index survey ranks Romania 53rd out of more than 180 economies and reflects high scores on property rights, tax burden, trade freedom and investment freedom. However, vulnerabilities remain in areas such as judicial effectiveness, government integrity and financial freedom.   In the Environmental Sustainability Index made by Allianz Trade, Romania is 40th out of 210 economies, reflecting high scores for energy consumption and CO2 emissions on GDP, stress and general vulnerability to climatic changes. However, there are still vulnerabilities in the production of renewable energy and recycling rate.  

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