Capping gas and power prices and the new charging regime may jeopardize Romania’s energy independence

Romania’s economy is now heading for an uncertain future, warns Johan Meyer, CEO Franklin Templeton Investments Bucharest. Unexpected tax changes in key sectors of the economy, adopted in December 2018, are likely to seriously affect the country’s growth potential.

Our projections for the energy sector have changed following the adoption of GEO 114/2018, Johan Meyer continues. “Although we were initially optimistic about its potential to create jobs and contribute to long-term state revenues, capping gas and energy prices and the new fiscal regime could seriously jeopardize the country’s energy independence.”

On the whole, 2019 will be marked by the slowdown in private consumption growth, moderate inflation, low unemployment, and increased interest rate pressures. A set of imbalances also emerges this year – the deepening of current and budget deficits, as well as rising inflation, which should be managed in a transparent and consistent manner. While macroeconomic indicators will most likely be robust, “much of their evolution will depend on the state’s ability to attract, facilitate and manage investment, as the need for investment flows – including by absorbing EU funds – will become more pronounced”.

Romania was one of the best performing economies in the European Union in 2018, with an estimated 4% GDP growth y-o-y. Romania’s economic growth was on a downward trend for 2019 compared to 2018, “even before the adoption of GEO 114/2018 at the end of December, which has forced us to rethink our expectations”, Johan Meyer points out. “On the one hand, we believe that the economic downturn could become more pronounced, but, on the other hand, the lack of impact studies for the measures introduced hinders more accurate forecasts. However, we believe that the measures introduced may have serious and wide-ranging effects, including on the capital market.”

Trends in 2019

Franklin Templeton official believes that 2019 will mark a downward trend in the consumer sector and rising interest rates to keep inflation under control. His forecast on inflation is 3-4%.

BANKING SECTOR Recently introduced, the tax on banks assets may have negative domino effects for the entire economy, especially as macroeconomic imbalances grow, which must be addressed through prudent and market-friendly policies, Meyer considers. “In fact, with such a measure, Romania, inexplicably, is hurting itself, but also its own citizens, those who will eventually have to ‚pay the bill’”.

INFRASTRUCTURE On the other hand, infrastructure remains an area with permanent potential – although never fulfilled – while the labor market remains anchored in good numbers. The unemployment rate is likely to remain low, below 5%, but more and more companies are complaining of a shortage of qualified staff. We encourage the authorities to take steps to make the labor market more accessible to foreign workers in sectors where there is a critical need for labor. Other sectors worth monitoring are real estate, agriculture and IT.

CAPITAL MARKET The Romanian capital market remains attractive, generating high returns, as we saw at the end of 2018. However, foreign investors face options limited to only two sectors – energy and financial services. Thus, the list of wishes of the capital market in 2019 should include the listing of large state-owned companies in various fields as an instrument to encourage capital market investments. The increase in the resulting liquidity is, in fact, a criterion for Romania to acquire the status of Emerging Market.

Good forecasts, but …

In conclusion, Meyer believes that Romania remains an attractive investment destination in 2019, with a still fertile economic landscape, though significantly more volatile than last year. “There is a lot of potential to be utilized, but it is essential that the Government and other institutions that legislate and regulate to develop a predictable, stable environment that encourages and facilitates investment and strive to implement sound economic policies developed for a longer timeframe”, said Johan Meyer, CEO of Franklin Templeton Investments Bucharest Branch and Portfolio Manager of Fondul Proprietatea, in an opinion delivered to the press.

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