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Tuning into the EU
March 2007
Paul Melly, International Trade Today
Growth projected at six per cent or more for this year, steadily rising exports and inflation in single figures – Bulgaria and Romania appear set for a prosperous first year of European Union membership. The International Monetary Fund has lauded their recent progress in consolidating the economic gains of recent years and the efforts that the governments of both countries are making in pursuit of reform.
Yet these upbeat indications must be reconciled with reports of continued poverty, migratory pressures as citizens look for jobs in the West, and EU concern over the persistence of corruption in these two new member states. What these contrasts highlight are the complexities of modernising emerging economies such as the Balkan states.
Change happens unevenly. For example, a multinational investor may establish an ultra-modern and internationally competitive car factory in a country and find itself facing a system of business regulation that is still patchy and hamstrung by bureaucracy.
Such paradoxes can apply to the finance sector as well, and both Bulgaria and Romania offer illustrations of this.
In Romania, 2006 saw banks expand their branch networks and produce a host of new financial products. Bancpost started offering Swiss franc loans, while Transylvania Bank produced a range of new services for small business customers; and the local offshoot of Austria’s Raffeisen banking group – which now has more than 200 branches in Romania – launched nine new financial instruments, mostly targeted at the top end of the market.
Personal finance is a major growth area in an economy where banking was severely under-developed in the communist era. The domestic bank BCR actually introduced 14 new products last year, most of which cater for retail customers; it also opened an astonishing 224 new offices.
But BCR’s development was not confined solely to the personal finance sector. It also set up a factoring company and introduced a new business account. However, British companies trading with Romania need to remember that, alongside this picture of lively innovation and choice in the banking arena, is a debt collection regime that can still prove desperately slow.
On paper, the rules are strong. Bills of exchange, provided they are recognised as valid by a court, in themselves constitute legal documents requiring the settlement of a debt, while a creditor has the legal right to enforce the collection of a debt that has bounced. Indeed, the issue of a cheque that subsequently bounces can be punished with up to a year’s imprisonment; as a result, the corporate statutes of many businesses do not allow anyone other than the directors to issue company cheques.
However, actually securing collection of debts under this supposedly tough legal regime is a lengthy business. The practical implementation of the regulations does not live up to their theoretical promise.
The credit insurer Coface points out that, because of a shortage of judges and information technology in the court system, it can take up to three years to secure the issue of a debt enforcement order; it advises creditors to settle payment disputes through rescheduling and negotiation if at all possible.
In Bulgaria, inadequate insolvency rules hamper the recovery of payment from companies that run into trouble. However, there are grounds to hope that, in most cases, British exporters and importers will be spared the complications of debt enforcement and recovery. Both the Bulgarian and Romanian economies are expanding strongly and business conditions are favourable.
Strong private consumption and high levels of foreign investment are helping to bolster the strength of many Bulgarian companies, while the government’s budget strategy is prudent. This year the authorities are hoping for a fiscal surplus equal to a healthy two per cent of GDP, after a similarly strong performance in 2006; such discipline is helping to keep inflation under control.
In such an environment, business payment performance is moderate but should improve. Meanwhile, the growing demand for business banking services led Deutsche Bank to open an office in Sofia last July.
There are some grounds for caution, though, as Bulgarian companies adjust to the realities of competition within the EU. Moreover, the private sector has rapidly growing foreign debts.
As countries in south-east Asia found out to their cost in the 1990s, this can pose problems if the national currency sharply loses value against the major international currencies.
Romania presents a similar picture, with strongly rising internal demand; here, the government has felt able to relax the purse strings, further stimulating the flow of orders and income to business.
However, Romanian companies could see their cost-competitiveness undermined as wages rise and the national currency, the leu (the plural is ‘lei’), appreciates in value. In higher tech industrial sectors, such an increase in costs may not matter much, but it could pose serious problems in older industries such as textiles, which depend on their low costs to maintain their sales.
A rising public deficit and a weakening trade balance could put pressure on the leu. A sharp downward correction in the currency’s value would have painful consequences for businesses with exchange rate exposure. A UK supplier that had sold on the basis of a sterling, euro or dollar price would still be at risk of suffering collateral damage in such a situation, if the Romanian customer was a company that earned its own sales revenue in lei.
Already, last year, the IMF was expressing concern over the levels of borrowing and pressing the authorities to use high interest rates to rein in the growth of credit.
As the governments in Bucharest and Sofia seek to maintain economic and financial stability and contain such risks without suffocating growth, they will at least be helped by the injections of structural development funding from the EU institutions – while business in both countries should benefit from increased trade integration and inflows of Western investment.
These two Balkan states are starting off from a weaker economic base than the first batch of ex-communist EU member states. However, it is worth remembering that Slovakia, one of the weakest of those, subsequently proved itself to be one of the most committed economic reformers.
Romania and Bulgaria will be hoping to learn from such encouraging examples. Moreover, the over-arching framework of EU membership – with the distant prospect of entry to the euro-zone itself as an incentive target – will help to reinforce the reform of institutions and regulation needed to further reinforce the business sector and reduce payment risks.
