Factors driving emerging market investment activity


Financier Worldwide Magazine

March 2017 Issue

March 2017 Issue

Romania is now the largest market in Eastern Europe and the second largest in Central Europe. The country has also improved its economic and business environment, registering a 4.2 percent increase in GDP. Furthermore, the Compagnie Française d’Assurance pour le Commerce Extérieur (COFACE) agency recently raised the country’s ranking from B to A4 in terms of risks in the business environment.

Economic growth is based mainly on consumption. The increase in consumption of 6 percent in the second quarter of 2016, according to Eurostat, is fed by a slight increase in wages – the minimum wage being raised to approximately €320, as well as by tax cuts, such as the VAT cut from 20 to 19 percent. However, if the increasing consumption is not matched by investment, economic growth may eventually drop.

Romania’s strong points are its business climate, favourable politics, the relatively large size of its domestic market, and a skilled and flexible workforce, such as IT and outsourcing. Additionally, industrial, river and marine infrastructures have been constantly developed, including 16 airports and 10 river and sea ports. More than 40 industrial parks have been built and there is a significant monetary reserve, as well as a level of public debt below the European average. A fast internet infrastructure and a low level of dependence on foreign energy sources also help. Moreover, the capital market of Romania has been put on the list of countries that may be upgraded to the status of emerging market in the short or medium term.

In the last few years there has been an increase in the number of start-ups, particularly in IT and the development of software, as well as in foreign investment by local companies. The export of profits was discouraged by an amendment to the Fiscal Code decreasing the tax on dividends from 16 to 5 percent. The increasing number of start-ups is supported by a range of financing facilities, including the Start Up Nation and Start Up Plus programmes.

Start Up Nation is a financing programme which offers non-refundable financing to small and medium sized enterprises (SMEs). The funds are allocated under the state budget. The maximum amount financed under this programme is €44,000 per project. The number of business projects which can be financed under Start Up Nation is 10,000. The businesses financed under Start Up Nation must hire at least two employees for a minimum period of three years. As a result, it is estimated that 20,000 jobs will be created. The start of financing for this programme is scheduled for 1 May 2017 and will continue until 2020. Projects that are eligible include those from fields such as transportation, IT, services, production and the acquisition of equipment.

The Start Up Plus programme is financed from EU non-refundable funds and applicants can obtain between €25,000 and €200,000 with a minimum contribution from their own funds of 10 percent. The number of projects expected to be financed under this programme is around 1500 and 2000 jobs could be created. In addition, agro-tourism projects could benefit from financing of €70,000 with zero contributions required from applicants’ own funds.

The IT sector is the VIP of the Romanian services sector and Romania is the only country in the region that has granted a tax facility for IT employees, who are exempt from paying income tax. In force since 2001 for software developers and other IT staff, the tax facility has a positive impact on the corporate tax burden, employee retention, job creation and unemployment rates. Apart from the tax facilities, the IT sector is supported by financing from EU funds, such as the Competitiveness Operational Programme. This finances companies, both start-ups and established entities, toward developing innovative software products.

The real estate and construction market has also picked up, starting in the second half of 2015 in almost all sectors, industrial, office and residential. The growing IT sector has pushed up the demand for office space in Bucharest, together with the outsourcing sector, which has also expanded in Romania and generated additional demand for the office market. Additionally, construction work volume increased for residential buildings by 78.2 percent and for non-residential buildings by 17.9 percent.

In 2016, industrial production in Romania went up by 1.6 percent compared with the same period of 2015. The auto parts industry is the leader in the production market, with 60 percent of total private industrial investment. This has led to an increase in demand for industrial space, which currently exceeds what the market has available.

In response to the increase in consumption, positive economic environment and available and qualified workforce, there is effervescence in the industrial real estate sector brought about by retailers and logisticians. In this context, the developers of industrial premises strive to accelerate construction works to meet demand.

According to the decision published by FTSE Russell on 29 September 2016, the capital market in Romania has been included on the list of countries with the potential to move to emerging market status in the short to medium term. In Romania, the upgrade will be dependent on achieving the liquidity thresholds required for large companies with significant individual transaction values.

Besides FTSE Russell, three major institutions which are internationally recognised – MCSI (US), S&P Dow Jones (US) and STOXX (Switzerland) – are looking at the capital market in Romania. The upgrading criteria are relatively similar and relate mainly to the value of transactions and size of listed companies, quick access of investors to the capital market and how easily they can buy and sell shares. According to Lucian Anghel, president of the Bucharest Stock Exchange, the Romanian capital market has to fulfil only one criteria, i.e., improving liquidity, in order to be upgraded to the new market status.

Moreover, as far as Romania’s National Bank representatives are concerned, promoting the Romanian capital market will contribute to market development and diversify financing companies, which is necessary for companies and for the banking system.

Modernising the stock market would contribute to the economy and could multiply the sources of financing. There are numerous advantages to developing the Romanian capital market, including: (i) the stock market is often a cheaper alternative to bank financing, especially when it comes to a company’s needs; (ii) from a foreign investor’s perspective, the capital market offers a combination of risk and return higher than a bank deposit or government bonds; and (iii) the labour market in Romania is becoming more dynamic and flexible.

Since the Romanian government adopted measures to stimulate the geographical mobility of employment, the lack of a workforce is less likely to be a problem for businesses in search of workers in areas where there has been a decline in the active population. Moreover, potential employees that are willing to relocate more than 50km will receive numerous bonuses, paid out of the Romanian state budget.


Christian Bogaru is a managing partner, Ana-Maria Ionescu is a senior associate and Andrei Pavel is an associate at Bogaru, Braun Noviello & Associates. Mr Bogaru can be contacted on +40 (21) 326 6053 or by email: cbogaru@bbnalaw.com. Ms Ionescu can be contacted on +40 (21) 326 6053 or by email: amionescu@bbnalaw.com. Mr Pavel can be contacted on +40 (21) 326 6053 or by email: apavel@bbnalaw.com.

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