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Key Aspects of Investing in Romania

Key Aspects of Investing in Romania

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Romania is a European Union member state located in the south-eastern part of Europe, with a surface of 38,397 square kilometres and a population of 19.41 million. Romania is positioned in the vicinity of several large markets, including the European Union, the CIS states and the Middle East, and is crossed by three pan-European transport corridors: no. 4 linking Europe from West to East, no. 9 from North to South and no. 7 facilitating inland water transportation on the Danube.

Romania is also home to a third of the Danube as well as of the largest and deepest harbour at the Black Sea (Constanța), which is deemed to provide a competitive advantage with regard to the transportation of Asian goods by sea.

Bucharest (the capital and Romania’s largest city) has been the top FDI destination in the country for more than a decade. Nevertheless, there is interest for other regions, particularly the Western part of Romania, with cities such as Cluj-Napoca, Timișoara and Oradea attracting a substantial amount of investment.

Romania’s five largest cities (Bucharest, Cluj-Napoca, Timisoara, Brasov, Iași) represent the location of almost 70% of all FDI projects of 2021. This showcases the foreign investors’s preference for large, developed destinations, but also the massive room left for investments in other regions.

Alliances

Romania joined NATO on 29 March 2004, and the European Union on 1 January 2007. It is also a member of the Council of Europe, OSCE, WTO, BSEC, United Nations, etc. and has signed important international treaties, such as the ICSID Convention, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the Vienna Convention on Contracts for the International Sale of Goods, etc., along with multiple bilateral and multilateral investment treaties and double taxation treaties, amongst others.

Democracy

Since 1989, Romania has been a democratic, unitary State with executive powers shared between the elected president and the elected Government. The Romanian judiciary (appointed further to a thorough selection process consisting of competitions, background check and two-year intensive training) and the directly elected legislative branch are independent from the executive branch.

The Romanian Constitution strictly abides by the rule of law and human rights principles, with the European Convention of Human rights and judgments of the European Court of Human Rights taking precedence over national law. The Romanian Constitutional Court, likewise an independent institution, has the role of checking laws against the Constitution and its decisions are universally binding.

For over 10 years, the Romanian law enforcement agencies have been leading a vigorous fight against corruption. The EU Commission’s has lauded the National Anticorruption Directorate and various other agencies in improving the fight against corruption, which has resulted in many a high-profile conviction, ranging from a former prime minister and MPs to mayors and reputed businessmen. This has also culminated in the head of the Romanian national anti-corruption body being appointed as the first European Chief Prosecutor.

Safety

Romania is ranked amongst the least threatening countries to travel in. Although pickpocketing incidents are not scarce, violence is scarce and mostly predominant in rural areas, whereas gun related violence is exceptionally rare, with Romania ranking 21st in the European Union in terms of robbery.

Legal system

Romania is part of the continental law family, which means its legal system is mostly based on written legislation and that decision of the courts of law in individual matters are not technically binding for courts judging subsequent similar matters.

Nonetheless, this is moderated by binding practice directions from the Romania’s supreme court (the High Court for Cassation and Justice) and the binding decisions of the Constitutional Court on constitutionality matters, as well as the fact that the judgments of the Court of Justice of the European Union and of the European Court of Human Rights bind the Romanian courts.

Traditionally of French inspiration, the Romanian legal system is now a mix of EU, international law and continental law influences, as well as of certain common law influences, which have been introduced both directly via the new Civil Code dated 2011 and indirectly through the business law practice.

Alternative dispute resolution methods are flourishing, with Romania being an arbitration friendly institution and Romanian courts being in favour of the enforcement of foreign arbitral awards.

Currency

While RON is the national currency at present, transition to EUR is estimated to take place in 20249. Rough exchange rate at the date of writing: 1 EUR = 4.9471 RON, 1 USD = 4.2432 RON and 1 GBP = 5.7361 RON.

GDP and economic growth

The Gross Domestic Product (GDP) in Romania was worth 248.72 billion US dollars in 2020, according to official data from the World Bank. The GDP value of Romania represents 0.22 percent of the world economy. In 2020, in terms for GDP per capita at the level of the European Union, Romania ranked 23, before Greece, Croatia and Bulgaria.

In terms of economic growth, however, Romania is EU’s champion, with the European Commission projecting the highest growth in the first quarter of 2021, with the GDP forecasted to increase by 7.4% in 2021 and by 4.9% in 2022.

Work force

According to a report published by Adecco, in terms of workforce, Romania ranks well on social mobility and the small gap in gender pays. At the same time, a large portion of the Romanian workforce has proper vocational and technical skills. That proved helpful in the context of COVID-19 crisis and the switch to a digital employment environment. Romania is recognized as a ”global leader in cybersecurity” and this alongside the fact that the workforce in IT field is considered one of the best in Europe helped Romania to become the host of the new EU Cybersecurity Competence Centre.

Alongside its much smaller gap in gender pay than many other EU countries17 (in 2019 Romania had the second lowest gap in gender pay in Europe after Luxembourg and in 2020 it had the lowest gap in gender pay in Europe), in 2020, Romania had the highest share of female senior executives in the European Union. In addition, Romania ranks 3rd in the European Union by the number of women that work in the tech industry.

In the first quarter of 2021, the most job vacancies were registered in fields such as, amongst others: manufacturing, trade, IT and communications, construction, transport and storage.

Despite the turmoil in 2020, average wages in Romania went up and are expected to continue to grow. Nonetheless, at present the average net wage in Romania in 2021 remains around 3,545 RON per month, roughly 721 Euros. The average gross wage is thus 5,780 RON, roughly 1,170 Euros, which is substantially below the European Union average for 2020 of 2,000 Euros.

The minimum net wage in Romania in 2021 is 1,386 RON per month, roughly 280 Euros (the minimum gross wage is 2,300 RON, roughly 465 Euros). The Government has recently adopted an enactment whereby the minimum net wage will be increased in 2022 to 1,524 RON per month, roughly 308 Euros (the minimum gross wage will be 2,550 lei, roughly 516 Euros).

Tax incentives

Romania has one of the lowest flat corporate tax, VAT and income tax rates in the EU as well as tax exemption on reinvested profit. For instance, tax on profit is 16%, but it is only 3% or even 1% for companies with annual turnover below EUR 1 million. Income tax is 10% and tax on dividends is 5%.

Holding type companies benefit of several tax advantages (non-taxable dividend income and revenue from selling shares). Furthermore, Romania has conventions for the avoidance of double taxation with 87 countries.

Tech industry

Repeatedly touted as the European Union’s Silicon Valley, Romania has recently made the IT&C industry’s headlines with the incredible success story of its robotic process automation company UiPath, which has recently been valued at roughly 36 billion USD at the New York Stock Exchange.

UI Path is however not the only Romanian technology company to have acquired a global reach. Amongst others, the cybersecurity company Bitdefender is making what is deemed as „one of the best antiviruses on the market in 2021” and the Romanian founded digital engineering leader SoftVision was taken over by Cognizant Technology in 2018 in a deal valued at 0.55 billion USD.

Romania also hosts the new EU Cybersecurity Competence Centre and is home to an impressive number of international technology companies (including Amazon, HP, IBM, Microsoft and Oracle, to name but a few), with 50 of the largest tech companies present in Romania having quadrupled their businesses and teams throughout the past years.

The Romanian IT&C industry has also been recently credited with bringing Romania’s GDP “close to pre-crisis level” in Q1 of 2021.

Romania is the leader in Europe, and sixth in the world, in terms of the number of certified IT specialists, with density rates per 1,000 inhabitants, greater than in the US or Russia.33

Romania also scores high in terms of telecom networks and Internet speeds. Although the measures taken during the COVID-10 crisis significantly increased demand for Internet capacity, due to the significant infrastructure investments telecom operators succeeded to maintain and quite often to increase the quality of the electronic communication services provided. Thus, companies in Romania have transitioned to remote working without major disruptions.

This comes as no surprise since Romania ranks 6th place in the top of the fastest countries for fixed broadband and 43rd place in the top of the fastest countries for mobile internet35. With the introduction of the 5G services in Romania, the same scores a 2nd place in terms of downloading speed and a 1st place in terms of upload speed, proving once again the high quality of the Romanian mobile networks.

Due to the high quality of Internet connections, Bucharest has been awarded the title of

the best city in the world for working from home or remotely.

Green energy potential

Romania exceeds the European Union average concerning the share of renewable energy in the gross final energy consumption. Although the growth in wind energy in Romania was stagnant till 2019, with about 1000 MW of commissioned wind projects, wind energy is expected to contribute significantly to the total volume of power generated. Furthermore, with a significant potential in solar energy, Romania has about 1000 MW of installed capacity of solar energy, which is expected to grow. With its ambitious upcoming renewable projects, Romania is expected to achieve its target of generating 30% of electricity from renewables by 2030. It successfully achieved its previous target of renewable share before the deadline (2025).

At the same time, although the coal usage in Romania has declined over the years, there are power companies in Romania that are still heavily reliant on coal, putting Romania on the top of the EU countries when it comes to dependence on coal. However, Romania has plans to stop using coal and lignite power by 2032. Based on Romania’s resilience and recovery plan, recently endorsed by the European Commission, there is an allocation of 855 million Euros for phasing out the production of coal and lignite power as well as for the deployment and production of renewables and hydrogen projects.

Health & telemedicine

The Romanian healthcare system is predominantly public with several private healthcare providers. All insured Romanian citizens have access to free medical services through the national health insurance system. Private healthcare is equally available.

As Romania’s health system is in dire need of reform and investments (amongst others due to the fact that Romania allocates one of the lowest GDP percentages to its health system in the European Union, i.e., roughly 5%, as opposed to the average spend for health in the European Union, of roughly 10%), there have been opportunities for private healthcare providers to flourish in Romania during the past decade. At the same time, in the years immediately preceding the COVID-19 pandemic, Romania had registered one of the largest increases in the average healthcare expenditure per citizen in the European Union (around 86.5%).

Following the COVID-19 crisis, as with many other countries, the private healthcare sector in Romania has been negatively affected as a significant number of medical procedures were put on hold, with the vast majority of resources being redirected towards treating or testing COVID-19 cases. However, as a consequence of the COVID-19 crisis, telemedicine services were regulated in Romania. The growing popularity of such services is expected to contribute to recovery of the healthcare sector.

According to the Resilience and Recovery Plan , 470 million Euros will be allocated for the digitalisation of health (for the development of an integrated e-Health system) and 2 billion Euros to be allocated for modernizing the hospital infrastructure.

Real estate

With an increase of 34% in investments, 2020 has been a good year for the real estate market. Despite the challenges brought by the COVID-19 crisis, there have been important transactions in the market for offices and the industrial buildings. In 2021, investors managed to adapt their offers in order to meet the new demands in the market. Although the market for office buildings faced a decline in the value of transactions concluded this year as opposed to 2021, experts are optimistic that the demand for high quality office building will remain high in the future.

At the same time, the market for industrial and logistic buildings and other spaces is expected to continue the growth trend started in 2020, when the same registered the best year in Romania’s history. This was due to the COVID-19 crisis, which has accelerated the transition to e-commerce and thus created a need for warehouses which were fit to accommodate the new requirements in terms of stock.

Although the switch from traditional retail activities to e-commerce will put some pressure on rents and increase vacancies in traditional shopping centres and retail parks, it is forecasted that this sector will recover the latest in 2023.

According to a report from Colliers International, the land market is still attractive in terms of transactions, with 2020 and 2021 registering many transactions, with retail developers (big box operators and residential developer) playing the lead role.

The strong role played by retail developers in the land market is a consequence of the consistent demand in the residential market, which is now concentrated more on the cities outskirts, due to the new context of working from home as well as the overcrowded urban areas.

Infrastructure

In 2015, the Romanian Government adopted the General Transport Master Plan, according to which 2% of the GDP should have been allocated to the transport sector (1.078 billion Euros allocated by 2020 and another 1.937 billion Euros to be allocated between 2021 and 2030). Nevertheless, the amount required for the completion of all works is much higher (roughly 24.7 billion Euros).

Thus, the general state and reliability of both the road and railway infrastructure remains poor. In 2019, the motorways and national roads accounted for roughly 20% of the road network, with around 90 % of the national roads having only one traffic lane per each direction. In 2020, Romania had only 920 km of highways, only 6.2% (roughly 54 km) more than in 2019.

However, Romania continues to allocate funds for the transport sector, the most recent one being the amount allocated for the modernisation of the railway infrastructure through its Resilience and Recovery Plan (roughly 3.9 billion Euros). The modernization process includes the introduction of the electrified or zero-emission railways. A sum of 1.8 billion Euros will be allocated to ensuring a green and secure urban transport infrastructure.

This adds to the funds secured by Romania in 2020 for the modernization of its railway infrastructure (roughly 119 million Euros allocated by the European Commission for feasibility studies for the modernization of certain railways segments) and at the beginning of 2021 for the construction of an express road between the Craiova and Piteşti (roughly 726 million Euros allocated by the European Commission).

In addition, with a total number of 15 airports scattered throughout the country, Romania showed a strong growth in terms of passenger traffic between 2016 and 2019.

All in all, however, Romania continues to rank low in terms of quality of road infrastructure, railway efficiency, maritime and airport infrastructure, there being considerable room left for improvement and investments.

Tourism

Romania is a wonderful mix of unique and rich history, spectacular nature (flora and fauna), charming medieval cities and castles and surprising architecture (various styles, including authentic Romanian ones). It has the potential to offer a wide range of touristic experiences ranging from city breaks in Bucharest, Cluj and Constanta (for example, in order to attend the growing numbers of world-famous music festivals such as George Enescu, Untold, Electric Castle, Neversea, etc) to seaside beach resorts and winter sport destinations, as well as mountain sports, rural and eco-tourism experiences.

A frequent visitor to Romania for the past 20 years, HRH The Prince of Wales is credited to have saved the Transylvanian village of Viscri from destruction and has had properties there restored using only traditional methods and materials. His Royal Highness has frequently lauded the beauty of

the architectural, natural and human values of Transylvania, and more generally of Romania and has championed two foundations: Prince of Wales’s Foundation Romania, which is devoted to the preservation of the Romanian national heritage and sustainable development and the Mihai Eminescu Trust Foundation, which helps young people set up small businesses.

The National Tourism Development Strategy sets ambitious goals for Romania in terms of tourism. by 2030, Romania should become a well-known, year-round tourism destination, following its unique cultural and natural heritage, alongside a world-class customer service. In order for the ambitious goals set in the Strategy to become reality, it is important to improve the railway and airport infrastructure as part of improving the connectivity and quality of tourist infrastructure, to support innovation, to enhance the quality of experiences and services provided to tourists and to increase digitalisation and to provide for better marketing mechanisms and campaigns.

Things to improve

Construction of highways and other critical infrastructure, the overhaul of the public health system, the enhancement of the State education system and a greener economy are all major objectives for further development of Romania. On the long term, however, 41% of investors believe Romania’s attractiveness will improve during the next three years.

By MPR Partners

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