Romania

Risk assessment

Weak recovery driven by public investment

After a modest recovery in 2011 driven by exports and exceptional harvests, activity slowed in 2012. Exports, 50% of which go to the eurozone in recession, contracted. The summer drought resulted in poor harvests (-20%) which cut GDP by 1.2 points. Consequently, inflation began to rise again in late 2012, due to rocketing agricultural prices. The effect is expected to continue until September 2013. A domestic demand recovery, though moderate, could take inflation above 5% in mid-2013.  But the stagnation of energy prices will prevent a price surge. The central bank will therefore have limited means for sustaining activity. Household consumption will drive growth in 2013 because of a rise in disposable income. Public sector wages rose 7.4% in December 2102, following a 8% increase in June.  Consumption will also be driven by a fall in unemployment to 7%, below the EU average. Credit activity is, however, expected to expand only gradually due to banks deleveraging because of the deterioration of their assets. The banking system is under pressure, due to a high proportion of non-performing loans (17%). Moreover, the eurozone banks, weakened by the sovereign debt crisis, hold 80% of Romanian bank assets. They could be compelled to significantly reduce their exposure to Central Europe countries in view of the new Basel III liquidity requirements. Romanian banks are dependent on loans from their parent companies because of the inadequacy of their deposits (loan to deposit ratio at 120%). Public investment will also act as a growth driver, in a context where   transport infrastructure needs remain very important. Co-financing by European structural funds will play a key role in this respect.

Uncertainties concerning funding of the current deficit

Moreover, improved use of European structural funds will continue in 2013 and make it possible to limit the increase in the current account deficit. In 2012 the absorption rate exceeded 50% (€9 billion) in the agricultural sector, which is enabling the sector to modernise further, increase its competitiveness and improve farmers’ working conditions. The trade deficit will widen slightly in 2013 due to weak European demand and the slight recovery in domestic demand, which will stimulate imports. The need for external financing (20% of GDP) remained high in 2012 due to the persistent current account deficit and the scale of external debt repayment, the outstanding balance of which amounts to over 70% of GDP. Direct investments, like bank financing could shrink, while the returns demanded by the markets have increased in the wake of the deepening eurozone crisis. So, though Romania regained access to the market in 2010-2011, continued multilateral financial support and European structural fund finance will remain essential for the country’s financial stability. In this context, the leu’s volatility needs watching.     

Ongoing fiscal adjustments

The country signed a 24-month Precautionary Stand-By Arrangement with the IMF for a modest amount (3.5 billion euros) in March 2011. This agreement expires in April 2013. However, a two-year extension is expected to be signed. This agreement will strengthen investor confidence in the country’s ability to continue applying the fiscal adjustment measures. This fiscal adjustment has been significant thanks to VAT increases and is continuing by means of privatisations, particularly in the energy and transport sectors, where state owned enterprises are in arrears and whose balance sheets are out of control. The flat-rate tax system could be made progressive. The effectiveness of this change will depend on the tax ceiling, which, unless reassessed relative to the flat rate, could result in less tax collection. Meanwhile, the wealth flight to an informal economy (around 25% of GDP) continues to affect public revenues.

Victor Ponta’s policy strengthened by results of the legislative elections

The December 2012 legislative elections have broadly confirmed (57% of the votes) Victor Ponta and the ruling centre-left coalition. However, this relative stability, stemming from the electoral strength of a coalition of centre-left and centre-right, could prove very fragile if Mr Basescu, the Romanian president, should stand down or be ousted. The major risk in Romania is linked to the fragility of the political stability.  A referendum was organised in July 2012 on the initiative of the Social Liberal Union coalition to begin a procedure to oust Mr Basescu. Due to an insufficient participation rate (47%), the result (86.5% in favour of ousting him) was not validated by the constitutional court. The country had three different governments in 2012. The World Bank’s governance indicators underline this political deterioration, as Romania has dropped ten places in terms of political freedom (87th), political stability (106th), and government efficiency (112th). Regulatory quality (54th) and corruption (96th) have improved slightly. 

MEANS OF PAYMENT AND COLLECTION METHODS

Bills of exchange and especially promissory notes are the payment methods most commonly used for domestic and sometimes international transactions.

In case of non-payment, duly protested bills of exchange constitute, once recognized as valid by the court, an enforcement order permitting the beneficiary to proceed with immediate forced execution (execuţie silită) against the debtor.

The use of cheques is also relatively commonplace, especially locally. Cheques allow creditors to exert substantial pressure on debtors since an unpaid cheque not only gives access to forced execution, but also constitutes a criminal offence with the offender liable to a proportional fine, or even a prison sentence of six months to a year. That is why articles of associate often stipulate that only company managers have the authority to write cheques.

Furthermore, a Registry of Payment Incidents (Centrala Incidentelor de Plăţi) maintained by the Romanian National Bank, comprises two computer files – updated by the interbank communications network – one on late payments involving bills of exchange and cheques and the other on major payment defaults involving legal entities or natural persons.

Finally, bank transfers are becoming the most common payment method with the main Romanian banks – after an initial privatisation phase and a subsequent concentration phase – now linked to the SWIFT electronic network, which provides low-cost, flexible, and rapid processing of domestic and international payments.

It is advisable, where possible, to avoid taking legal action locally due not only to the formalism and high cost of legal procedures but also to the slow pace of court proceedings: it takes almost three years to obtain an enforcement order because of a lack of judges with adequate training in market economy practices and proper equipment.

To improve the efficiency and transparency of the Romanian judicial system the Act of 19 July 2005 amended several legislative texts on judicial organisation and magistrates’ status.

Formal notice to pay served on the debtor, accompanied by documents supporting the claim, remind him of his payment obligations, increased by past-due interest.

Since the Ordinance no 9 of January 2000, revised in September 2011, in international legal framework – unless otherwise agreed by the parties and provided that Romanian law applied to the contract and the payment is specified in foreign currency – the annual past due interest rate is set at 6 %.

As stipulated in the civil procedure code, any legal action based on a cash commercial claim must be preceded by an attempt at conciliation between the parties within 30 days of the creditor’s summons.

In that regard, it is always wise to give preference to out-court-settlement, based on a rescheduling plan for the arrears prepared by the creditor’s legal counsel or established in preference as a notarial deed, which will make it possible to obtain an enforcement order against the debtor more quickly in case of failure to comply with the agreement.

Possessing clear proof of debt that is due for payment and undisputed (signed invoice, acknowledgement of debt, promissory note, unpaid cheque, for example), the creditor can have recourse, since mid-August 2001, to an injunction to pay (somaţie de plată), a summary procedure that allows the judge – if he considers the demand substantiated – to issue a writ ordering the debtor to pay the principal and legal costs within ten to thirty days of notification of the ruling.

Conversely, if the creditor‘s petition for an injunction is dismissed by the court, the judge’s decision is irrevocable and the only remaining recourse would then be to initiate an ordinary procedure.

Similarly, in case of objection (cererea în anulare) filed by the defendant within ten days, the case is treated as a dispute subject to an ordinary procedure.

Regarding certain, liquid, payable and uncontested claims between professionals, a new procedure is available to creditors since the Ordinance no 119 of November 2007, amended in September 2011 that enables them to obtain an enforceable judgement within 90 days with no obligation to make a prior attempt at conciliation. In this case, the types of evidence submitted to the court are more flexible, also including the assertions of the parties and the exchanged correspondence.

Ordinary proceedings are partly in writing with the parties or their lawyers, filing submissions accompanied necessarily by all supporting case documents (original or certified copies) and partly oral with the litigants and their witnesses heard on the main hearing date.

Courts fees are set annually by Government Ordinance and entail stamp duty proportional to the claim amount.

Commercial disputes are heard by either local courts (judecatoria) or regional courts (tribunalul), acting as a commercial section, depending on the size of the claim.

Specialised courts may be established at regional level or in Bucharest, and since September 2004, there are thus commercial courts in Cluj, in Argeş, and in Mureş.