THE Romanian economy is one of the world’s fastest developing markets outside Asia. Geographically placed at a crossroads of the major EU, CIS and Middle Eastern markets, Romania is at the centre of three important pan-European corridors. As the largest in south-eastern Europe and the second largest in CEE, Romania is characterised by a rising GDP, high growth and rapid investment.

Rich in land and energy resources, as well as having a strong manufacturing base with a low-cost workforce, Romania experienced a deep recession in 2009 and 2010, when business activity contracted by 9.1pc. The economy slumped again early in 2012.

Romania’s Statistics Institute revealed that GDP growth decelerated to 2.9pc last year from 3.4pc recorded a year earlier. The 2014 growth figure was slightly below earlier expectations of 3pc due to the drop in external demand, which affected industrial output. Growth is projected at 2.5pc in the 2015 budget plan. Recently, the European Commission predicted the Romanian economy to grow by 2.7pc this year.

Meanwhile, after declining sharply in 2014, inflation is forecast to average 1.2pc in 2015, mainly due to the significant decline in energy prices, subdued inflation in the EU and lower inflation expectations. Coface foresees inflation below 1pc in early 2015, which will turn to an uptrend towards the end of the year but still stay below 2pc.

However, in 2016, annual inflation could accelerate to the target of 2.5pc set by the National Bank of Romania as recovery in domestic demand continues.

Both private and public investment is expected to start recovering following two years of contraction. Public investment is expected to accelerate, driven by a pick-up of projects co-financed with EU funds. Domestic employment in the private sector is expected to improve slightly against a slowly declining working-age population, accompanied by a drop in the unemployment rate to 6.8pc in 2016.

However, Romania has the lowest tax-to-GDP ratio in EU — below 32pc, and the collection of budget revenues was rather modest last year. Under the new Tax and Tax Procedure Codes, the government plans to cut the VAT by 4pc in 2016 and lower the flat income and profit tax by 2pc in 2019.

The country’s finance minister is of the view that the benefits of the new fiscal package for the economy are major, spreading from a rise in middle class income and the creation of new jobs to a rise in budget revenues and an increase in the efficiency of Romania’s fiscal authority.

For 2016, the proposed changes would translate into a net fall in budget revenues by about $1.74bn but are expected to boost economic growth by 1.7pc and increase household consumption by 1.9pc.

Romania targets a consolidated budget gap of 1.83pc of GDP for this year. Last year, the fiscal shortfall shrank to 1.85pc of projected GDP, slightly below a target agreed with the IMF. The Fund expects the economy to grow 3pc this year and 3.3pc in 2016.

Private consumption is expected to remain robust. But weak public infrastructure is hindering higher growth.

According to the EC, improvement in investor confidence, together with recent changes in tax policies favourable to businesses and improving financing conditions, are likely to boost private investment.

Bulgaria

BULGARIA is one of the EU’s poorest countries. Its transition to democracy and a market economy after the collapse of communism has not been easy. Political crises, organised crime and corruption have deterred investors and hindered growth. Over 20pc of the population is living below the poverty line.

According to the National Statistical Institute, the country registered a growth of 1.2pc in 2014.

However, growth is expected to slow down to 0.8-1pc this year, according to latest estimates of the finance ministry. The World Bank has lowered its 2015 economic growth forecast and now expects GDP to expand by 1.1pc. It is more optimistic about 2016, with growth forecast of 2pc.

According to Prime Minister Boyko Borisov, Bulgaria is struggling to provide incentives for growth and to improve tax collection in a period when debts have significantly increased following a crisis at the Corporate Commercial Bank, which is undergoing insolvency proceedings.

The government has stepped up efforts to rein in the grey economy and smuggling activities and undertaken measures in the 2015 budget against VAT fraud and tax evasion.

The economy is likely to see a lack of investment and low consumption in 2015-16. Domestic demand is likely to weaken this year.

The unemployment rate, while decreasing, will remain above the EU average and is estimated to be 10.9pc in 2015 and 10.4pc in 2016. Inflation is projected to gradually pick up this year as well.

After the strongest consumer price decline in the EU in 2014, with the HICP at -1.6pc, lower fuel costs are set to keep HICP inflation largely at negative 0.5pc until late 2015, but will rise to 1pc in 2016 once the effect from oil prices fades. FocusEconomics Consensus Forecast participants see inflation rising to 1.6pc in 2016.

The general government deficit is projected to improve to 3pc of GDP. The deficit had deteriorated from 1.2pc in 2013 to 3.4pc in 2014, driven by expenditure overruns and weaker-than-expected revenues from VAT, excises and some non-tax categories. The general government gross debt is estimated to have increased rapidly from 18.3pc in 2013 to about 27pc last year, reflecting financing needs for the annual deficit through measures to stabilise the financial sector. Bulgaria needs to borrow up to $9.3bn in order to pay back its current debt.

Published in Dawn, Economic & Business, March 2nd , 2015

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