Romania: World-Class Frontier

Romania has a troublesome reputation but robust growth, and is working to raise its game through the tech industry and improvements to the business environment.

Bucharest, Romania

Three prime ministers in one year. A governing party suspected of frustrating its own anticorruption directorate to protect its members. Changes to the judiciary that threaten reforms. Street protests against corruption that was recently described by a European Commission report as “persist[ing] at all levels and remain[ing] an obstacle for doing business.” Romania seems to have a lot of problems.

Yet GDP growth last year was some 7%, fueled by government spending, domestic consumption and investment. Bank profits recovered to 2008 (precrisis) levels reaching €1.2 billion ($1.4 billion). And a number of IPOs helped the Bucharest stock market to be one of the region’s more dynamic.“There’s a real disconnect between the headlines and the politics here, and what’s happening on the ground,” insists Arin Ion, a partner in BAC (Romania) a Balkan-wide investment firm.

Romania’s economic performance has been truly remarkable. Rising average wages—which Ion reckons have jumped 50% over the last three years, albeit from a low base—and strong domestic consumption have kept the economy moving along. Foreign direct investment has been healthy too, with companies attracted by the competitive environment—which includes Europe’s second-fastest broadband speeds—and increasingly diverse economy.

“Romania has long been a big IT hub, but companies are increasingly focusing on high-value-added products and proprietary solutions,” Ion says. “Serious world-class companies are emerging here.” He points to cybersecurity firm Bitdefender, whose recent equity float took its value to almost half a billion euros; and robotics software firm UiPath, which recently raised a further $120 million in funding to take its market value to over $1 billion. The auto industry is another strong sector, along with agribusiness and tourism.

Going forward, growth is expected to slow this year—which may be no bad thing, given fears of overheating. Labor shortages have emerged in some regions, notably Bucharest. Better-paid and higher-quality state employees are needed, alongside faster resolution of often-complex land-ownership issues, which have held up highway development. Observers say there needs to be a greater focus on exports and on better absorption of EU structural funds, particularly in neglected areas like infrastructure: Poor roads remain a particularly serious business constraint.

Roger Kelly, economist for Romania at the EBRD, says the country is at a crossroads, yet still confident. “Unlike the Visegrád Four, Romania realizes it is on Europe’s periphery and needs to be more closely integrated with the core EU economies,” he says.

Kelly believes one of Romania’s challenges is to improve administrative capacity so as to better absorb EU structural funding and boost the number of public-sector projects—including infrastructure—which has declined since the anticorruption campaigns started.

Another challenge: elevating the stock exchange from ‘frontier market’ to ‘emerging market.’ That requires much greater liquidity. Some planned IPOs and the sale of 10% to 15% of Hidroelectrica—postponed from later this year to 2019—might push the Bucharest market into the big league. Ion says there is already growing foreign interest, as the number and range of listed companies grow, with wine company Purcari and healthcare companies among the new listings drawing attention.

“Politics aside, the mood here right now is very good. We are seeing growing confidence from local investors to put money into business, and that is being echoed in the international sphere,” says Ion