Romania is truly a diamond in the rough

Business America, August, 1997 by William Crawford, Laurie Curry

For the adventurous, creative, and innovative business executive who has experience in emerging markets and is looking for a rewarding challenge, Romania is truly a diamond in the rough. During the system of central planning and in the seven years of confusion after the overthrow of communism, Romania's rich natural resources remained "hidden." The Romanian government has recently finally embarked on comprehensive economic reforms and is now aggressively seeking investors and liberalizing the investment environment. Romania's new reforms, its natural resources, and its market size -- 22.6 million, second only to Poland in the region -- combine to create new opportunities for U.S. companies.

Although Romania was slow to begin its transition to a market economy, the new coalition government, headed by President Emil Constantinescu and Prime Minister Victor Ciorbea, has initiated a number of important economic changes. In the first months of 1997, the new government inaugurated an economic reform package drawn up in cooperation with the International Monetary Fund and the World Bank which tackles Romania's structural and systemic problems. As part of these reforms, the government has eliminated price controls and subsidies, freed the exchange rate, accelerated privatization and restructuring, and encouraged foreign investment.

The reforms will have some short-term costs. As a result of eliminating price controls early in 1997, the rate of inflation has increased but it is expected to fall again by the end of the year. Under the austerity program, Romania's GDP has fallen to negative 1.5 percent in 1997. However, positive, sustainable growth (unlike the soaring 6.9 percent GDP growth rate in 1995, fueled by consumption and foreign debt) should be in the offing in 1998. Importantly, Romania's private sector is now the chief engine of economic growth and accounts for 52 percent of the country's GDP.

President Clinton's recent visit has reinforced U.S. support for Romania's political stability and economic reform measures. In his speech to the Romanian people, President Clinton made it clear that the United States not only supports but encourages Romania in its efforts to develop into a market economy.

The new government views foreign investment as the most important impetus for privatizing and restructuring Romanian firms. Foreign investors will help Romania meet the challenge of creating a market economy as they take advantage of Romania's natural resources and provide much-needed capital, technology, and management expertise. The Romanian government has privatized 900 companies in the last six months and will soon open up the lucrative telecommunications and energy sectors to international investors. The U.S. presently holds sixth place in terms of foreign direct investment in Romania, with investments totaling $182.2 million from January 1990 to May 1997.

This year, the Romanian parliament has enacted a substantial body of new legislation, including a new foreign investment law, that creates a favorable investment climate and removes the remaining structural barriers to foreign investment. The new legislation ensures that foreign investors are granted national treatment and permits foreign persons and entities to participate in the privatization process and to own land. Romania has also put in place a series of attractive investment incentives and tax holidays. Finally, the newly created Romanian Stock Exchange and Over the Counter Markets (RASDAQ) provide investors an excellent entry into Romanian industry and new legislation allows portfolio investors to repatriate profits.

The best prospects for U.S. companies are in electrical power, aircraft parts, computer hardware and software, services and consumer goods.

Romania's oil and gas fields have great prospects for enhanced oil recovery. Romania also has significant refining capacity and coal reserves. With 9.4 million hectares of agricultural land, the potential for agricultural equipment sales and for developing Romania's food packaging and processing industries is great.

Romania could also become one of the busiest transportation hubs in Central and Southern Europe due to its strategic location between western Europe, the Middle East, and the New Independent States. Yet, Romania's infrastructure and transportation equipment are inadequate and outdated. Future projects could include the rehabilitation and modernization of major national roads, extending the Bucharest metro, and restructuring of the port of Constanta.

Romania also plans to expand and modernize its telecommunications system. Opportunities will arise for U.S. companies to implement the GSM cellular system, expand rural telephony and the pay-phone network, create local distribution networks, and install international exchanges. Competition for U.S. companies in the sector comes mainly from France, Germany, Sweden, and South Korea. Nonetheless, U.S. firms, generally reputed in Romania for their technological know-how, stand a good chance of securing contracts, especially to implement GSM, develop fixed cellular services for rural areas, and to modernize spectrum management systems.