Not long ago, Romania was synonymous with sluggish growth, underperformance and corruption. Analysts acknowledged its huge potential but said it wasn’t being realized.
That was then. This is now. Romania today is the biggest success story of the Balkans, thanks to far-reaching economic reforms initiated in 2010—2011 that are now bearing fruit, but also to a population that grew tired off being ripped off by its bureaucrats and politicians, as well as investors who have woken up to the reality of that long-unrealized potential. President Klaus Iohannis must take some of the credit for the new mood: He has been a strong supporter of the National Anti-Corruption Directorate, which last year indicted more than 1,250 mid- and high-ranking officials, with a former prime minister (Victor Ponta, who was Iohannis’s rival in the December 2014 presidential election) among those sent to trial, in his case for forgery and money laundering.
Red tape and other bureaucratic constraints to investment have also been eased. As a result, Romania’s business environment has improved dramatically, with the country rising to 58th place in Transparency International’s Corruption Perceptions Index, 11 places ahead of Bulgaria and two ahead of Italy.
Romania’s already low debt levels fell further last year, when external debt fell 4.2% to €89.7 billion ($101 billion), or 56% of GDP. GDP growth, meanwhile, has been one of the highest in the EU, fueled by strong domestic demand but also by strong FDI inflows that include a new €200 million investment by Ford and further investments in Automobile Dacia by France’s Renault, which has now invested €2.2 billion in Romania.
Bulgaria has distinguished itself as well. Its financial sector has recovered from the shocking collapse in June 2014 of the fourth-largest bank, KTB. Swift action by the central bank averted a systemwide crisis, and although high corporate sector indebtedness, at over 100% of GDP, is a concern, the financial sector itself is considered well capitalized.
What’s the attraction? Economists point to low wages, a strong education base, productivity improvements, the emergence of new innovative industries and the fact that in trade and investment terms, these countries have long been punching below their weight class, despite being part of the EU.
Bulgaria and Romania are also benefiting from a major upsurge of interest in their large agribusiness industries, which had been constrained by outstanding restitution issues and because of this, under-investment, which had left them unable to compete with their EU counterparts. Both countries are experiencing a revival in their wine industries. Investors from the EU and beyond have been investing in new technology to enable winemakers to create wines that are gaining international credibility. An exciting use of international but also indigenous grapes (like Mavrud and Melnik in Bulgaria, Tamaioasa Romanesca, Feteasca Alba and Feteasca Neagra in Romania) has further boosted their appeal. After slumping for years, exports are rising.
“The fact both countries have a long way to go in converging to the rest of the EU can be a strong source of dynamic growth, but they need to continue improving their business environment to use this potential and sustain foreign investor interest,” says Bojan Markovi, the EBRD’s lead economist for Southeastern Europe.