DW’s Lavinia Pitu spoke with Doru Lionachescu, one of Romania’s most reputed bankers, about the country’s economic challenges. Lionachescu is the founding partner and CEO of Capital Partners, Romania’s leading independent investment bank. He was also deputy CEO of Bancpost and vicepresident of Citibank.

DW: IMF’s latest 4-billion-euro aid agreement with Romania is set to expire next year. Can the country do without further loans at this point?

Doru Lionachescu: A snapshot of today’s Romania shows a country in a fragile macroeconomic equilibrium: low inflation, small budget deficits, stable currency exchange rate. But, on the other hand, re-entry into technical recession this year, resilient unemployment rate, plummeting FDI and deep contraction of public and private investments. Almost six years into the crisis, the Romanian economy is still far from take off velocity and therefore captive to the dynamics of its main market, the EU, and particularly Germany, and exposed to a far worse geopolitical situation in the region. In this context, recent IMF warnings should be taken seriously the more so as we do not know yet how next year's budget will look like and how massive the funding gap will be. In any case, extrapolating the current social spending trends it is reasonable to put funding gap for next year anywhere between 3 and 5 billion euro, which will have to be additionally financed either from the IMF or from private markets. Extending the IMF agreement with all its attached strings will simply be a political decision, which, in the current prevalent populist, nationalistic, „we know our job better” atmosphere will be a hard sell.

The European Commission has estimated Romania’s economic growth at 2.4 percent in 2015, compared to an earlier forecast of 2.6 percent. Also, in the second half of the year, imports are expected to grow faster than exports. Despite significant economic progress over the last decade, Romania is still considered to be one of the poorest EU countries. What are Romania’s main economic challenges?

Following the country's surprising re-entry into a technical recession this year, everybody is constantly recalibrating downwards the growth estimates for next year. I personally believe that they are still too optimistic and that a better forecast for 2015 should be capped at maximum 2% GDP growth. A chronic lack of infrastructure investment (roads, energy and communication, but also education, public health and environment) agressively corrodes the country’s competitiveness. Secondly, Romania will have to face its massive problem of an unrestructured, inefficient public sector. On top of these, the most recent challenge has become the new geopolitical reality configured at our Eastern border, which will force hard choices on Romania in terms of military spending, NATO commitments and the ability to continue to attarct quality, long term foreign investors to a country which desperatly needs them.

Lionachescu thinks doing business in Romania is more challenging than typical for an EU member state.

Romania has been attractive for foreign investors, due to its comparatively cheap but skilled labour force. Nevertheless, investors are complaining about a lack of predictability in what concerns the fiscal and legal framework. Foreign direct investments fell by 13.8 percent in the first seven months of 2014, compared to the same period last year. How tricky is it to do business in Romania?

I do not know if doing business in Romania is tricky, I would rather put it as „more challenging than for a typical EU member”. The incapacity of the Romanian public administration to ensure a minimum consistency and predictability particulalrly in terms of fiscal policies is already notorius and a subject of mockery. We indeed set what is probably a world record by changing the fiscal code on average every couple of months for the last ten years. The same goes for education legislation. These are of course major detrimental facts in terms of encouraging FDI and there is a lot of improvement needed. As long as these chaotic public policies, terrible infrastructure and the almost absent predictability can be properly priced in by potential investors, they will continue to commit funds to the country. The major disruption would be if Romania’s EU, NATO and generally speaking Western credentials become questionable or debatable – we would then be in a very different, inferior and much more expensive league for investors.

On the other side, the phenomenon of brain drain has concerned Romania. There are about 2 million Romanian citizens living abroad. More and more highly skilled people leave the country. To what extent does this trend impact the economy? Can we simultaneously speak about brain gain in Romania – highly skilled immigrants from Asia and the Middle East?

The massive emigration Romania faced over the last two decades, at a scale unprecedented in its history, massively impacts the local economy in various ways. It of course starves the country of some of its best talents and most hard working people whith immediate effect to its potential GDP growth. But on the other hand the remittances have balanced the state finances for the last years and they are sometimes larger than the FDI stock. Moreover, we have to admit that the fact that such a massive cohort of people left Romania explains most of the country’s rather low unemployment rate and it eased the pressure on an already extremely stretched social security budget. In terms of compensating imigration, I do not believe this will happen at a sizeable scale in the near future for cultural reasons but also because of Romania’s low attractivity as a poor, slow growth country in the EU.

Romania imports about 20 percent of its energy from Russia, being one of the most energy self-sufficient states in the EU. Still, the country has done efforts to find new sources of shale-gas on its territory. Surprisingly, Prime Minister Ponta recently declared that there were actually no significant resources of shale-gas in the country. What’s Romania’s energy strategy at the moment? Does environmental protection play a significant role in this debate?

There is no energy strategy at the moment. All decision and curent functionality of the national energy system is done on an ad-doc, day to day basis. None of the major energy issues are currently approached in a policy framework, except maybe the Black Sea deep drilling. The renewable energy sub-sector has been abruptly put on hold after the government machine gunned succesive legislation that basically wiped out the green subsidies; there are conflicting messages regarding shale gas; the energy pricing policy is a mess and suffocates the traditional producers; the nuclear reactors 3 and 4 are back to feasibility study, but this time with solely the Chinese interested; energy transport, storage and most of the producing infrastructure is technologically outdated. By all measures, the Romanian energy sector needs huge immediate investments amounting to more than 25 billion Euro. This money can only come from foreign strategic investors through a courageous policy of price liberalization, increased real competition and accelerated privatization.

Speaking of Russia - during this election campaign there has been an internal debate in Romania on the importance of the economic relations between Bucharest and Moscow. But also between Bucharest and Beijing. What should Romania’s strategy look like at the moment, taking into account the current diplomatic tensions between the East and the West?

I have been an early supporter of recalibrating the economic relationships with the former Soviet Union states and especially with China. It is a question of pragmatism and a vital necessity for Romania to hedge itself economically against its current overdependence on a stagnating EU market. However, economic pragmatism should not become an ideological capitulation in the face of aggresive, non or iliberal political systems promoting totally different values than the ones we share with our EU and NATO partners. Once again in our history, the crevasse separating the free world from other social experiments lays at our borders. Romania faces difficult years ahead and I hope our politicians will be able and willing to balance without compromise between our Western affiliation and the raw use of power in the East.

Romanian presidential elections will go into a runoff on Sunday. The two candidates, social-democrat Victor Ponta and Liberal Party leader, ethnic German Klaus Johannis have both promised significant economic reforms. Could we shortly imagine Romania’s future in, say 5 years from now with each of the two in the position of President?

I was never good at predicting tactical economic developments but I dare to make a prediction based on two basic scenarios: one with a left wing socialist President and the other with a right wing head of state. A Romania with a socialist President, much as France today, will be condamned to secular stagnation: a marginal GDP growth of 1-2%, barely enough to cover the interest costs of an endemically higher public debt. Therefore, there will technically be no money left for better public services or infrastructure, and the socialist reflex will be to pump up government debt and increase taxes. The structural reforms that Romania needs will be shelved and most available money will be redistributed to political supporters and inefficeint state companies. In a second scenario I hope a genuine right wing head of state will kick start a comprehensive reform of the economy and the society, will push for free competition and price liberalization, and will make sure that all available funds are channeled to priority programs in education, infrastructure, public health and national security. The two diverging scenarios actually paint two very different Romanias: a surviving country or a winning country.