EY Attractiveness Survey Romania 2021 | How can we seize opportunity in times of uncertainty?

The business sector proved resilient and innovative, accelerating digital transformation and adapting their operations to the new reality. Nevertheless, due to the uncertainty surrounding the evolution of the crisis, the drop in FDI was inevitable. 

The inevitable drop in Foreign Direct Investment projects forecasted last year across European markets due to the pandemic is confirmed by our latest analysis of FDI projects announced in 2020. 5,413 projects were announced, compared to 6,412 projects in 2019. Foreign investment fell in eight of Europe’s ten largest FDI destinations. 

Despite the pandemic, there were several countries that showed stability and succeeded in attracting FDI, with significant growth in terms of FDI project numbers: Switzerland witnessed a 25% increase, followed by Sweden (19% increase), Turkey (+13%) and Austria (+10%). Hungary, Russia and Serbia were among the countries with the most dramatic declines in terms of FDI projects. Geopolitical dynamics, together with the evolution of the pandemic, could have played a role in the number of FDI projects announced in 2020, an overwhelming, complex and challenging year for all European countries.  

In Romania, the health crisis has been managed relatively well, if we take into consideration the overall number of cases. Additionally, the crisis management put in place by authorities, which also included financial aid for various economic sectors, played an important role in minimizing the effects of a possible recession

Impact of the pandemic on FDI in Europe: lighter than expected?

The inevitable drop in Foreign Direct Investment projects forecasted last year across European markets due to the pandemic is confirmed by our latest analysis of FDI projects announced in 2020. 5,413 projects were announced, compared to 6,412 projects in 2019. Foreign investment fell in eight of Europe’s ten largest FDI destinations. As per last year’s survey, many projects have been delayed and some have been cancelled. Nevertheless, the 13% overall decrease in FDI projects in Europe shows that the effects of the pandemic have not been as damaging to investing plans and that economic recovery. FDI restauration within the European markets should be steady and fast after the pandemic ends. Some countries proved more resilient than others. In a year dominated by COVID-19, the countries that best weathered the pandemic and minimized economic losses also suffered the smallest declines in foreign investment. 

The pandemic has made business leaders reconsider their companies supply chains, since lockdowns have generated halts across operations. Among the most disrupted were manufacturing and supply chain & logistics companies. Interestingly, they are among the top choices for investors already planning to establish or expand their operations in Romania before the emergence of the pandemic. Even though foreign business leaders believe Romania should invest more in infrastructure projects, they see potential in Romania as an European advanced manufacturing and mobility hub. 

The pandemic has made business leaders reconsider their companies supply chains, since lockdowns have generated halts across operations. Among the most disrupted were manufacturing and supply chain & logistics companies. Interestingly, they are among the top choices for investors already planning to establish or expand their operations in Romania before the emergence of the pandemic. Even though foreign business leaders believe Romania should invest more in infrastructure projects, they see potential in Romania as an European advanced manufacturing and mobility hub. 

Infrastructure. Safety & Security. Technology adoption.

At European level, the stability of the political and regulatory regime was the number one factor in investment decision-making. For Romania, this factor, ranked the 1st in last year, is now considered relevant by 24% of investors (compared to 66% in 2020). The attention has shifted towards more pressing topics: the reliability and coverage of infrastructure, safety and security measures and the level of technology adoption are cited as the top factors considered by foreign companies when thinking about investing in Romania. 

In 2020, investors considered the top 3 priorities that Romania should focus its efforts to be: education and skill development, support for high technology and innovation industries and infrastructure investments. A year after the pandemic emerged, foreign investors see things differently. In order to maintain its competitive position in the global economy, most of investors believe Romania should support small and medium sized enterprises, encourage environmental policies and attitudes and improve the quality of its products and services. 

The need for stronger environmental policies and attitudes represents an alignment with sustainability global trends, which Romania should follow in order remain attractive. Access to credit, relaxion of competition rules are also some of the measure ranked high by investors, who are looking for strong fiscal systems to support their investments.

Stop. Reset. Rebound

The "Spectacular growth" of the Romanian economy, reported these days by the local and international media, generated all the good news coming from the economy which "exceeded all expectations": 2.8% for the first quarter of 2021, a serious advance over the last quarter of 2020, in which the budget recorded the best revenues in the pandemic year. Moreover, the European Commission spring forecasts anticipates an increase of 5.1% in 2021 and 4.9% in 2022. So here we are, a year after the freezing of all investments, engaged in a much faster recovery of the economy than we would have anticipated, much more optimistic than we could have hoped.

What about the experience until here? A difficult road, if you look at the figures - budgetary deficit of almost 10% by the end of 2020, decrease in tax revenues by 3.3% - minus 7% of VAT only (mainly due to the early repayments), 2.4% of excise duties, 9, 8% of the profit tax. The only increase in the area of tax revenues came from the collection of income taxes - 0.2%. It is obvious how much the business environment expected the Government's reaction of support, but the authorities acted quickly, providing fiscal facilities - staggering obligations or canceling interest and penalties, or by other incentives. 

Thus, the state has given an important signal to investors, to the business environment in general, that they have a partner in the Government. An important message, especially in times of hardship. And the companies responded in return - payments to the state budget were sustained even in the midst of the pandemic.

Turning attractiveness into real figures

Current FDI optimism within the Romanian economy is not viewed as a direct generator of investment expansion. After a severe downfall in 2020, 62% of investors believe there will be no change in FDI in our country after a period of recovery from the pandemic. Only 7% of business leaders believe Romania will actually attract more FDI after the pandemic.