A SWOT analysis for Romania’s business environment in 2023

Even though we’re continuously being warned of an impending economic downturn, companies in Romania can still find the means to grow and overcome the crisis in 2023 thanks to the stability of the financial system and the inflows of foreign capital. But there are indeed growing threats, including at the international level, and they may overlap with economic weaknesses, which we’ll highlight by conducting a SWOT (strengths, weaknesses, opportunities, and threats) analysis of the Romanian business environment.

By Claudiu Vrinceanu

STRENGTHS: BANKING SYSTEM STABILITY & NEW FDIS

The fact that the banking system has a relatively low exposure to risk and the steady growth in foreign investment are two strengths of the country’s business environment. The Romanian banking system is less sensitive to threats than the average European system, while its hazard indicators, including the own funds, non-performing loans, and provisioning ratios, are much better than those of EU peers, according to the National Bank of Romania.

One fact that strengthens Romania's position further is that no public funds were used to bail out banks. The resolution of the country's non-performing loan issues has been positive. Moreover, the banking system has recently returned to a liquidity surplus (over EUR 1 billion) after almost a year of large deficits.

Foreign direct investments (FDIs) have potential to grow in 2023 after last year's record performance. Net FDI inflows passed the EUR 11 billion threshold in 2022, making it the best year in this respect. Previously, the best year for FDI had been 2008, with a total net inflow of EUR 9.2 billion. FDI has a 40 percent share of total investments. Foreign firms also have a higher stake in high-tech industrial sectors compared to the economy’s average. These companies account for about one third of the loans granted by domestic banks in the real economy.

WEAKNESSES: FIRMS STILL EXPERIENCING CAPITAL SHORTAGES AND FISCAL CHANGES

There are two key weaknesses for the business environment in 2023: Romanian firms are still dealing with capital shortages, and tax system changes will undoubtedly continue to impact them this year. Companies with significant capital deficits continue to account for a large share of non-financial businesses (31.6 percent in 2021), but their number has decreased compared to the previous year (-5 percent). According to the central bank, these firms’ recapitalisation needs has declined by 7 percent. 2023 began with a series of significant tax changes for companies and labour. Increased VAT rates, changes to the tax regimen for micro-enterprises, and higher income taxation are just some of the changes that came into effect earlier this year.

OPPORTUNITIES: EU FUNDS

In terms of business opportunities, we’ve been working on the implementation of new reforms and increased absorption of European funds, mainly through the Recovery and Resilience Facility, the key instrument at the heart of NextGenerationEU. Fifty-one milestones were achieved in the first half of last year, with a further 79 milestones and targets to be "ticked off" by the end of 2022, according to the Investment and European Projects Ministry. The country’s Recovery and Resilience Program involves 292 investments and 215 reforms. Of these, 155 investments and 32 reforms are aimed at transitioning the economy to an environmentally friendly growth model.

THREATS: GLOBAL UNCERTAINTIES AND FLOATING-RATE LOANS

Global uncertainties, in the context of the energy crisis and the war in Ukraine, represent a severe and, unfortunately, growing systemic risk to financial stability. Another extreme systemic risk has to do with the deterioration of domestic macroeconomic balances resulting from regional and international geopolitical developments. At the same time, the large share of floating-rate loans implies considerable interest rate risk and remains a concern for the period ahead, especially for mortgages.