National risk assessments provide detailed insights into the economic, political, and business context on an international scale. Evaluating these risks is crucial for firms and investors as they influence strategic and operational decisions.
Market resilience in 2023
The year 2023 showcased significant signs of resilience across various global markets. Amid an economic landscape marked by uncertainties and challenges, 21 countries recorded notable improvements, accounting for approximately 19% of the global GDP. Improvements were observed in emerging markets such as China, South Africa, Qatar, Algeria, Morocco, Oman, Bulgaria, Tanzania, and Uruguay. These economies demonstrated remarkable capacity to handle global shocks and maintain economic stability.
Additionally, the economic outlook for several developed countries improved in 2023. Croatia, Cyprus, Greece, Iceland, and Slovenia saw notable increases in their economic ratings. These improvements reflect effective economic policies and the adaptability of these economies in the face of global challenges.
On the other hand, four countries experienced economic slowdowns, including Egypt, due to a bleaker outlook on available liquidity, and Israel, affected by rising political risk. Regionally, Africa saw the highest number of economic improvements (10 countries), followed by Europe (6 countries).
Global corporate default risk
The global corporate default risk remains at a medium level, close to that recorded in 2019. The average risk rating for Africa is above three (Sensitive), while the Middle East, Latin America, and Eastern Europe (including Russia) have ratings slightly below three (Sensitive). Asia has a rating just above two (Medium), and Western Europe and North America are close to one (Low).
Analysts predict that several factors will continue to influence these ratings in the future. An economic environment characterized by high public and private debts and high interest rates will create liquidity constraints for companies. Additionally, pricing power will lead to a more pronounced decline in revenues. Business insolvencies are expected to rise by 8% globally in 2024, with Europe and the US leading the list. Global supply chains will impact economies with twin deficits, and polarized geopolitics will increase uncertainty in a year filled with elections.
Romania’s economic situation
Romania stands out with various strengths contributing to its economic stability and competitiveness. EU membership and positive international relations have bolstered the country’s global position. A competitive industrial sector and low unemployment rate reflect a solid economy and provide a conducive environment for development and investment.
However, Romania also faces significant challenges. Government instability and the lack of structural reforms in key economic sectors represent major obstacles.
Weak public finances, large current account deficits, and modest coverage through Foreign Direct Investment (FDI) are weaknesses that add complexity to the economic environment. Despite these challenges, Romania has shown strong performance among emerging economies, with an average annual real GDP growth of 3.7% over the past 20 years.
Recent economic developments in Romania
Romania was significantly affected by the global Covid-19 crisis in 2020, recording an economic contraction of -3.7%. However, the economy rebounded strongly in 2021, with a production growth of 5.7%. Economic prospects deteriorated significantly with the onset of the war in Ukraine, due to reliance on energy imports from Russia and the impact of EU sanctions on the domestic economy.
In 2022, Romania’s economic activity continued to trend upward due to robust consumer spending, investments, and external demand. However, the impact of rising inflation and increasing interest rates significantly affected the economy in 2023, with an estimated real GDP growth of just over 2%.
By the end of 2024, economic growth is expected to be around 3%, supported by public spending and investment, as well as the strengthening of consumer expenditures due to increased real disposable income and monetary easing.
Monetary policy and inflation
The monetary policy of the National Bank of Romania (BNR) is focused on targeting inflation at a level of 2.5% ± 1pp. The real interest rate has been negative from 2017 until October 2023, remaining below the inflation rate. This led to a significant increase in consumer price inflation starting from 2022 until the first half of 2023. BNR has moderately raised the policy rate from 1.25% in September 2021 to 7.00% in January 2023. At the same time, inflation is expected to remain persistent, with an average value of around 5.6% in 2024 and 4% in 2025.
Public and external finances of Romania
Romania’s public finances continue to be a concern. A pro-cyclical fiscal stimulus increased the annual fiscal deficit to -4.3% of GDP in 2019, and during the pandemic, it surged to -9.3% in 2020 and -7.2% in 2021.
In 2022-2023, annual fiscal deficits remained high, at approximately -6% of GDP, due to lower fiscal revenues and higher spending caused by the war in Ukraine. It is estimated that annual deficits will remain high, around -5% in 2024-2025.
The public debt-to-GDP ratio increased from 35% in 2019 to 47% in 2022 and is expected to reach approximately 50% by 2025. Although this level is modest compared to other EU countries, the upward trend is concerning.
Romania’s current account deficit has steadily increased, reaching -9.3% of GDP in 2022, before slightly decreasing to an estimated -6.5% in 2023.
Coverage of deficits through Foreign Direct Investment is likely to remain below 50%, given reduced capital flows to emerging markets. The external debt-to-GDP ratio increased from 47% in 2019 to 57% in 2020 and is expected to remain above 50% in the coming years. Although Romania’s foreign reserves have increased, interventions in the foreign exchange markets generate volatility.
Legal framework and environmental sustainability
Despite vulnerabilities, Romania has a favorable legal framework for business. Worldwide Governance Indicators surveys show a business-friendly environment, and the Heritage Foundation’s Index of Economic Freedom ranks Romania 53rd out of 180 economies, with high scores for property rights, tax burden, trade freedom, and investment freedom.
In the Environmental Sustainability Index, Romania ranks 40th out of 210 economies, reflecting high scores for energy consumption and CO2 emissions per GDP. However, there are vulnerabilities in renewable energy production and recycling rates.
Conclusion
Country risk analysis highlights the economic and political prospects of various economies globally. In 2023, many markets demonstrated resilience in the face of global challenges, with significant improvements in 21 countries. Romania stands out for its strengths but also faces significant challenges related to government instability, public finances, and external factors.
Despite these challenges, Romania has the potential to consolidate and enhance its economic state through structural reforms and appropriate economic policies.
