Life in Romania became better than in Hungary and attracted investors fleeing the war

18.01.2023

LIFE IN ROMANIA BECAME BETTER THAN IN HUNGARY AND ATTRACTED INVESTORS FLEEING THE WAR

Romania's economy is expected to outpace its stagnant neighbors this year, helped by funding from the European Union, currency stability and foreign investment, driven in part by business pulling away from Russia and Ukraine.

The International Monetary Fund expects GDP growth of 3.1% in Romania, but even if only the European Commission's forecast of 1.8% growth comes true, Bucharest would be well ahead of Poland, whose economy is expected to grow by 0.7%, or Hungary, which is struggling with economic slowdown and skyrocketing inflation.

Romania has put behind it a decade in which it had the glory of being one of the poorest countries in Europe, beset by high corruption, and is emerging as the second largest economy in Eastern Europe after Poland.

Romanians' incomes are already 74% of Europeans

According to the latest Eurostat data, GDP per capita expressed as purchasing power was 74% of the EU average in 2021, an increase of 21% since 2010.

The average Romanian would spend about 20 months of his net income to buy a new Dacia Jogger, as much as in the traditionally wealthier Hungary.

The transformation has been achieved despite Romania's history of political instability - the last government fall was in 2021.

Romania's prospects are supported by its EU membership and good relations with Brussels.

As Budapest and Warsaw haggle with the EU over the rule of law related to billions in pandemic recovery funds, Romania has already drawn down more than €6 billion in grants and cheap loans.

Prime Minister Nicolae Chuka said the government aims to use more than 10 billion euros a year, equivalent to about 4 percent of the country's GDP. Romania has around €90 billion in EU funding until 2027.

Progress on justice reforms led the European Commission to recommend in November the abolition of the special justice monitoring mechanism it has applied to Romania (and Bulgaria) since it joined the EU in 2007.

"Provided that all the anti-corruption measures in the (recovery funds) plan are properly implemented, Romania can become an example of good governance in the region," an EU official said.

S&P, which like other rating agencies has its lowest investment grade rating on Romania pending a reduction in the fiscal deficit, said Bucharest was firmly on track to make progress on reforms agreed to secure key recovery funds.

Wages in Romania have overtaken those in Hungary

The stability of the leu is another factor, especially compared to the Hungarian forint, which hit record lows last year. Higher wages across the border have already led some Hungarians to seek work in industrialized western Romania.

An investment magnet

Companies moving from Russia and Ukraine to nearby low-cost manufacturing centers partly helped boost foreign direct investment to 9.39 billion euros in January-October, a record for the years since Romania joined the EU.

A 2022 Ernst&Young survey showed that more than half of 101 foreign companies plan to set up or expand operations in Romania, mostly in supply chains and logistics, ranking it fourth in Europe in terms of investment intent.

The Ministry of Small Business and Entrepreneurship told Reuters it was monitoring five possible relocation projects from Russia, Belarus and Ukraine worth about 705 million euros.

Among them, Finland's Nokian Tires plans to invest 650 million euros by 2024 in a tire factory in Oradea in northwestern Romania, a wealthy region bordering impoverished parts of Hungary.

"It was clear that Oradea was the best choice for our new factory," Palvi Antola, who heads the investor relations department, told Reuters. She added that Nokian reviewed more than 40 relocation targets, looking at the availability of a skilled workforce, logistical advantages, green energy sources and rail access.

Obstacles to the economy remain Romania's large current account deficit, an aging population and a chronic bureaucracy that thwarts infrastructure development. Regional disparities are huge, with some rural areas still off the grid, while in bustling Bucharest living standards exceed those of the former East Germany.