The workforce crisis, the rise of inflation, the prospects for the national currency’s depreciation and the expansion of the financial gridlock are seen as the major challenges to the business environment in 2020, found the 9th “Barometer on the state of the economy” conducted by consulting company Frames.
Whereas in the previous opinion barometer, issued in July 2019, the inflation and the depreciation of the leu were the highest fears of investors, in 2020 the workforce shortage tends to return to the forefront, as most investors consider that next year real reform measures will be frozen, with direct consequences in the worsening of the macroeconomic framework.
Asked which would be the main challenges the business environment will have to face next year, over 60 percent of the interviewed companies pointed to the workforce issue, 53 percent of the respondents mentioned the worsening of the financial gridlock, 49 percent – the rise of inflation, and 36 percent expressed concerns about a possible adverse trend of the exchange rate.
“The workforce crisis has intensified in 2019, and the import of foreign workers wasn’t enough for covering even 10 percent of the necessary. Beyond stimulating consumption, wage increases in the public sector have deepened the imbalances in the labor market. In 2020 many companies will put their development plans in stand-by because of these personnel issues the state is dragging its feet in finding solutions for; the most requested solution by the investors is the much-needed cut of wage taxes. Moreover, a plan of measures is needed to entice the Romanians to return home, especially young people, as per the Polish model,” the Barometer concludes.
Apart from the labor crisis, the investors expect the economy to further face the same structural problems as in 2019.
“In a year with two rounds of elections, it’s highly unlikely that we will witness the restructuring measures required for balancing the macroeconomic framework, given the potential negative impact from an electoral point of view. Under these circumstances, the problems of 2019 such as the financial gridlock will worsen next year, the more so as business financing will continue to be a genuine ‘mission impossible’ for most investors,” the experts note.
A rise in taxation is among the top fears of the business people, a sign that they hope that in 2020 the Tax Code will steer clear of major changes, given the electoral context.
Investors’ fears about the slowdown of the economic evolution in H2 2019, presented in the July edition of the Frames Barometer, have been confirmed, as the economic growth was below the former government’s and the National Forecast Commission’s estimations.
In the new survey conducted this month, the businessmen estimate that in 2020 the economy will keep on braking as macro-economic imbalances will run deeper. 59 percent of the surveyed companies estimate that next year’s economic growth will be 3 – 3.5 percent, and 27 percent see it even lower, at less than 3 percent. Only 14 percent of the responding companies expect the GDP to advance by more than 3.5 percent.
The government’s budget blueprint for 2020 is based on an economic growth of 4.1 percent, a budget deficit of 3.59 percent and an average inflation rate of 3.1 percent.
“In 2020 consumption will further be the main driver of the economy, with all its up- and downsides, yet with a slightly more temperate growth rate. Next year will raise many questions in sectors such as agriculture – which is still in the weather-sensitive zone, construction – given the uncertainties about the ‘First Home’ program, and especially industrial production, which has seen a significant deceleration in the recent months. As Romania’s main trading partners are also facing economic problems, the challenges will be significant, with a direct impact on the economy,” says Frames manager Adrian Negrescu.
The fateful combination between the leu’s depreciation and the rising prices in the economy has significantly affected the real economy in 2019, and this phenomenon is expected to increase in 2020.
A majority of 68 percent of the business people anticipate an official exchange rate around 4.85 lei for one euro, 21 percent of the respondents expect the euro to hover around 4.85 – 4.9 lei, and 11 percent see the exchange rate below 4.85 lei per euro.
“Pressure on the exchange rate will continue to be significant, as the trade imbalance will worsen. Stimulating consumption will further increase imports, and inflationary pressure will continue. The National Bank will most likely allow the leu to evolve along a broader corridor, in an attempt to balance the deficits,” the Frames analysts say.
With a consumption-driven economy, 61 percent of the investors estimate that trade business will generate the highest interest. Other sectors seen as interesting for investments are the services (47 percent), building (37 percent), transport and storage (28 percent) and the professional, scientific and technical activities (23 percent).
A noteworthy development is the significant decrease from 27 to 12 percent in the appetite for agriculture, forestry and fishing compared to the previous edition of the Frames Barometer, a sign that the challenges in the area of production costs, pricing, distribution and sales have increased.
“Regrettably, food imports came to occupy the largest part of the market. In conjunction with other issues such as the drought, avian influenza, the swine fever, the agricultural business, mainly as small farms are concerned, has become extremely risky, and the investors’ appetite has decreased significantly,” the experts say.
This is also proven by Trade Register data which shows that in 2019 the number of new companies in this sector has decreased by more than 50 percent.
“Stimulated by wage increases, consumption will continue to generate the highest interest in 2020, with an increasingly stronger focus on online activities. The transport and warehousing sector, which is closely linked to this segment, will also bring optimal profitability, and the services dedicated to companies and the population will continue to be of major interest. The building sector will continue to grow, and the pressure on prices will increase in large cities, where the demand for residential and office space is significant. Investments in the IT (software) area will also draw interest, yet they will be burdened by the workforce crisis, which is extremely strong in this sector,” the barometer shows.
Beyond the economic challenges and investments with a strong potential in 2020, the business people have also been questioned about the measures they consider necessary for the development of a stable economic framework. Fiscal predictability topped the list, with 73 percent of the options expressed, as a Tax Code free of overnight changes has been a longtime request of the business milieu.
Other measures seen as priorities by the investors are the digitization of the public administration (56 percent), infrastructure investments (45 percent), the downsizing of the public apparatus (38 percent) and a national plan for professional reconversion (24 percent).
“The computerization of the National Tax Administration Agency, of the entire public sector, the simplifying of the administrative procedures in handling the public and private environment, the implementation of a real Digital Agenda, are some of the steps that can be taken as of 2020, provided that the political will exists. For instance, issuing all the invoices in the economy under the supervision of the tax authority will definitely do away a considerable chunk of the underground economy, and the online payment of taxes will make the collection of budget revenues easier, and will also increase Romania’s credibility on international markets,” Negrescu says.
Regarding the restructuring of the public apparatus, the analysis shows that there are little chances for the current government to take the necessary reform measures, the more so as it does not have a parliamentary majority. As 2020 is a year of transition to a new government with a virtual horizon of 4 years, the reform measures will most likely be postponed to 2021, when a rise in taxes is expected. In connection with this, the investors hope that all the measures taken by the new government will be based on impact analyzes and consultations with the business environment.
Frames conducted the half-yearly barometer on the state of the economy between December 1 and 15, 2019 via online, phone and email questionnaires, on a representative sample of 450 companies from various activity sectors such as commerce, financial services, agriculture, energy, ready-mades, IT.
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