Investment in Romania and the EU Debora Revoltella Director Economics Department Bucharest June 21, 217 2/6/217 European Investment Bank Group 2
Investment dynamics in RO 12 Investment Index 28=1 45 Gross Fixed Capital Formation as % of GDP 1 4 8 35 3 6 4 25 2 15 2 1 5 26 27 28 29 21 211 212 213 214 215 216 European Union (28 countries) Romania Source: Eurostat Romania Private Investment EU average (total GFCF) Source: Ameco Romania Public Investment 2/6/217 European Investment Bank Group 3
Investment by sector 2 Annual percentage changes; contributions in percentage points, constant prices (21) 15 1 5 213Q1 213Q2 213Q3 213Q4 214Q1 214Q2 214Q3 214Q4 215Q1 215Q2 215Q3 215Q4 216Q1 216Q2 216Q3 216Q4-5 -1-15 -2 Non-financial corporations General government Total economy Financial corporations Households; non-profit institutions serving households Source: Eurostat 2/6/217 European Investment Bank Group 4
Public investment: Quantity and quality counts Higher public spending than peers with low quality of infrastructure Quality of transport infrastructure Quality of air transport infrastructure Quality of port infrastructure Quality of roads Quality of railroad infrastructure Source: IMF (217) 1 2 3 4 5 6 7 2/6/217 European Investment Bank Group 5 EU Rating based on survey by the WEF using a scale from 1 (extremely underdeveloped) to 7 (extensive and efficient). EU value is calculated as simple average RO
Better EU funds absorption could benefit public investment recovery 8 7 6 5 4 3 2 1 GFCF - public sector as % of GDP Better Fund absorption could improve potential growth 26 28 21 212 214 216 218 22 Source: Eurostat / Ameco, European Commission Raising EU funds absorption rate to 95% for the current program period could add one percentage point to potential growth EU-funded investment can raise quality Additional public investment in infrastructure could help to crowd in private investment 2/6/217 European Investment Bank Group 6
Billions Potential to (better) use EU funds remains 4 3 2 1 Slow implementation so far under current MFF (214-22) Implementation by fund for Romania (total costs) % of planned) Youth Employment Initiative 4 3 2 1-1 -2 Planned Decided Paid Planned Decided Paid Planned: Total budget of the programme Decided: Financial resources allocated to selected projects (project pipeline) Paid: Expenditure reported by the selected projects The financial data reporting is expressed in total costs only (i.e. not broken down by the EU or national share). Balance of Member State vis-à-vis the EU budget (net receiver+/payer-) (as % of GDP) 23 25 27 29 211 213 215 European Social Fund European Regional Development Fund European Maritime and Fisheries Fund European Agricultural Fund for Rural Development Cohesion Fund % 5% 1% Planned Decided Paid Source: EU Cohesiondata and ECB 2/6/217 European Investment Bank Group 7
EIB Investment Survey (EIBIS) Annual survey commenced Q2 216 Some 12,5 firms surveyed across EU28 (of which 476 in Romania) Includes NFCs with 5+ employees operating in manufacturing, services, construction & infrastructure Representative of the economy (firms weighted by added-value) Provides qualitative and quantitative information on Firm characteristics and performance Investment needs and constraints Past investment activities and future focus Sources of finance 2/6/217 European Investment Bank Group 8
Firms expecting to increase/decrease investment in current financial year (net balance,%) The share of Romanian firms investing is rather low but, on balance, these expect to slightly expand 25% Low investment expanding High investment expanding 2% CY ES 15% HR 1% 5% % -5% Man Large RO Serv GR SME BG Infr LV HU PT MT PL IT CZ FR UK EU AT DE SK BE LU NL IE EE SI SE DK FI -1% -15% Constr LT Low investment contracting High investment contracting -2% 55% 6% 65% 7% 75% 8% 85% 9% 95% 1% Share of firms investing 2/6/217 European Investment Bank Group 9
EU Romania Manufacturing Construction Services Infrastructure SME Large Firms investment: Mostly tangibles Organisation/business processes Training of employees Software, data, IT, website R&D Machinery and equipment Land, business buildings and infrastructure Large Capacity expansion New products Replacement No investment planned 1% SME 8% Infrastructure 6% Services 4% Construction 2% Manufacturing % Romania EU % 2% 4% 6% 8% 1% Base: All firms who have invested in the last financial year (excluding don t know and refused response) Q. In the last financial year, how much did your business invest in each of the following with the intention of maintaining or increasing your company s future earnings? Base: All firms (excluding don t know/refused responses) Q. Looking ahead to the next 3 years, which of the following is your investment priority (a) replacing existing buildings, machinery, equipment, IT (b) expanding capacity for existing products/services (c) developing or introducing new products, processes, services? 2/6/217 European Investment Bank Group 1
Low innovation activity firms mostly adopt Investment in new products, process or services that are new to the company, new to the country or new to the global market? 2/6/217 European Investment Bank Group 11
Romania: Larger investment gap than EU average EU Romania 15% 19% Net balance -12 pp -15.5 pp In percent 5 Lower quality capital stock for firms that invested too little Manufacturing 19% -15.5 pp 4 Construction Services 19% 14% -15 pp -13.7 pp 3 Infrastructure 24% -17.8 pp 2 SME Large 22% 17% % 2% 4% 6% 8% 1% Invested too much Invested too little About the right amount Don't Know/refused -17.3 pp -13.8 pp Base: All firms (excluding Company didn t exist three years ago responses) Q. Looking back at your investment over the last 3 years, was it too much, too little, or about the right amount to ensure the success of your business going forward? 1 State of the art equipment Firms that invested too little Energy efficient buildings Firms that invested enough Base: All firms (excl. don t know and refused answers) Q. Looking back at your investment over the last 3 years, was it too much, too little, or about the right amount to ensure the success of your business going forward? Q. What proportion, if any, of your machinery and equipment, including ICT, would you say is state-of-the-art? Q. What proportion, if any, of your commercial building stock satisfies high or highest energy efficiency standards? 2/6/217 European Investment Bank Group 12
5 4 3 2 1 Differences in (perceived) quality of capital stock Overall quality of capital stock ranked lower In percent State of the Art equipment EU average Highly energy efficient buildings Romania Base: All firms Q. What proportion, if any, of your machinery and equipment, including ICT, would you say is state-of-the-art? Q. What proportion, if any, of your commercial building stock satisfies high or highest energy efficiency standards? 5 4 3 2 1 5 4 3 2 1 Quality of capital stock less of an issue for foreign-owned firms State of the Art equipment Highly energy efficient buildings Domestic firm Foreign owned firm but notably for state-owned companies State of the Art equipment Highly energy efficient buildings Romania privately owned Romania State Owned 2/6/217 European Investment Bank Group 13
What are investment impediments? 1 st bar: Romanian firms: Red=Major obstacle, orange=minor obstacle 2 nd bar: EU average for comparison: Dark gray: Major obstacle, light gray: Minor obstacle Long term barriers Uncertainty about the future Availability of finance Adequate transport infrastructure Business regulations Labour market regulations Access to digital infrastructure Energy costs Availability of staff with right skills Demand for products or services % 2% 4% 6% 8% 1% Base: All firms (data not shown for those who said not an obstacle at all/don t know/refused) Q. Thinking about your investment activities in Romania, to what extent is each of the following an obstacle? (Major/minor/not at all) 2/6/217 European Investment Bank Group 14
Increasing risks to investment from labour market? Low birthrates & external migration Unemployment (-), wages (++) Moving up the value chain find (and keep) qualified staff Romania Poland Greece Cyprus Basic Digital skills and web use A major or minor investment obstacle SME Large All Accommodation and food service activities Wholesale and retail trade; vehicle repairs Transporting and storage Manufacturing Construction Water supply; sewerage; waste mgmt.; Lithuania Hungary Latvia Slovakia European Union 28 France Belgium Estonia Sweden Labour market regulations % 2% 4% 6% 8% 1% Availability of staff with the right skills Netherlands Luxembourg 2 4 6 8 1 Base: All firms who have planned to invest in the current financial year. Q. How do each of the following affect your ability to carry out planned investment? (Positively/negatively/no difference) 2a1 Internet Users 2a2 Basic Digital Skills DESI Basic Skills and Usage sub-dimension calculated as the weighted average of the normalised indicators: 2a1 Internet Users (5%), 2a2 Basic Digital Skills (5%) Source: European Commission 2/6/217 European Investment Bank Group 15
Problems with financing 2% 15% 1% 5% % Received less Rejected Too expensive Discouraged Base: All firms Finance constrained firms include: those dissatisfied with the amount of finance obtained (received less), firms that sought external finance but did not get it (rejected) and those who did not seek external finance because they thought borrowing costs would be too high (too expensive) or they would be turned down (discouraged). 2/6/217 European Investment Bank Group 16
Share of investing firms that are happy to rely excl. on internal funds Access to finance is an issue for some firms 3% 25% 2% 15% 1% Access to Finance among Investing Firms high availability of internal sources; low external barriers LU SE CZ FI EE FR DK BE PL DE AT UK ES SK NL IT LV 2/6/217 European Investment Bank Group 17 SL RO LT IR MT CY BG HR HU High availability of internal sources; high external barriers 5% little availability of little availability of internal sources; low internal sources; high % external barriers external barriers % 2% 4% 6% 8% 1% 12% 14% 16% 18% Share of investing firms that are external finance constrained Base: All investing firms Finance constrained firms include: those that invested which dissatisfied with the amount of finance obtained (received less), firms that sought external finance but did not receive it (rejected) and those who did not seek external finance because they thought borrowing costs would be too high (too expensive) or they would be turned down (discouraged) Firms happy to use internal funds are those that invested using exclusively internal funds and who stated that they did not seek any external finance because they were satisfied with their internal funds. EL PT
Financing (constraints) Romanian firms strongly rely on internal sources of financing (71%) Bank loans dominate external financing Firms want more of the same Satisfaction with external Sources of external financing finance 1% 9% 8% 7% 6% 5% Bank loan Other bank finance Bonds Equity Amount obtained Cost of finance Maturity 4% Leasing Collateral 3% 2% 1% % EU RO CESEE Factoring Loans from Family/friends Grants Type of finance % 2% 4% 6% 8% 1% Very satisfied Fairly satisfied Neither Fairly dissatisfied Very dissatisfied Base: All firms who used external finance in the last financial year (excl. don t know/refused responses). Q. Approximately what proportion of your external finance does each of the following represent? Base: All firms who used external finance in the last financial year (excl. don t know/refused responses). Q. How satisfied or dissatisfied are you with? 2/6/217 European Investment Bank Group 18
(Weighted) Share of firms Summary findings for Romania Still strong investment need Public sector GFCF EU funds Project preparation and absorption of structural funds Corporate investment outlook remains moderate Issues with quality of capital and differences between foreign and domestic firms Business environment with constraints Transport infrastructure Skills Access to finance an issue for some firms 1 9 8 7 6 5 4 3 2 1 Very small fraction of Romanian firms compare to EU best performers Distribution of firms by productivity class 1st EU Quintile 2nd EU Quintile 3rd EU Quintile 4th EU Quintile 5th EU Quintile 2/6/217 European Investment Bank Group 19
Thank you! 2/6/217 European Investment Bank Group 2
EIB Investment Research 2/6/217 European Investment Bank Group 21