Hi As readers will know I am a strong supporter of Romania - Cluj Napoca especially. To date much of foreign investment into the country has been in banking, insurance, financial services and real estate...which does not produce foreign currency from exports. Cluj of course will have Nokia, General Motors and possibly Airbus (to be confirmed) but these companies will need time to develop. One of the things I have been aware of is that so far as construction is concerned Romania can produce the concrete, bricks and mortar but when it comes to the finish just about everything - paint,heating, bathroom and kitchen units etc - is imported. I've pasted below an article that appeared in today's FT (which a Romanian friend sent to me). I'm not trying to undermine the country in which I choose tolive but I o believe in a balanced and informed debate. Those of you who know about fiscal policies and economic analysis are invited to comment. regards Charles Romanian boom rings economic alarm bells By Stefan Wagstyl and Thomas Escritt Published: November 22 2007 02:00 | Last updated: November 22 2007 02:00 Five years ago Raiffeisen International, the Austrian-based bank with the largest reach into eastern Europe, bought Banca Agricola, a struggling state-owned Romanian bank, for $45m and invested about $250m in its modernisation. Today analysts estimate the bank could be sold for $2.5bn (€1.68bn, £1.22bn). The rise in value is attributed to Raiffeisen's success in overhauling Banca Agricola and to Romania's soaring economic growth, rapid credit expansion and spiralling asset appreciation. Many business people in Bucharest see many similar success stories developing. The country is now safely inside the European Union, and many investors feel there are profits to be made from banking, real estate and other sectors. "We have only just begun," says Diwaker Singh, managing director of Copper Beech, a UK-owned property developer, which has recently embarked on a €2.5bn five-year plan to build 16,500 homes. The International Monetary Fund sees things differently. Concerned about the global credit market turmoil, the fund is warning about the dangers of economic overheating in Romania, citing a yawning currentaccount deficit. Juan Fernandez-Ansola, the IMF representative in Bucharest, says: "In this over-optimistic environment we are trying to keep people alert to risks - not an easy task." Stephen van Groningen, Raiffeisen Romania's Dutch chief executive, treads carefully between enthusiasm and caution: "The long-term prospects are good. But in the short term, something has to give in the next year or two to get the economy to a better balance." Achieving a better balance is important for Romania and for the EU. Since 2000, gross domestic product has grown at an average rate of more than 6 per cent, the fastest rate in the Union outside the small Baltic states. EU investors have piled into Romania, attracted by a market of 20m (eastern Europe's second largest after Poland) and opportunities to establish low-cost export bases. Fuelled by privatisation, foreign direct investment last year exceeded €10bn, the region's highest. But now the economic warning signs are mounting. Inflation, which had been falling steadily in recent years, jumped to 6 per cent last month from a low of 4 per cent in July. Rising world energy and food prices, compounded by drought in Romania, are playing their part. But so is soaring local pay, which is set to rise by about 25 per cent a year, or about 20 per cent in real terms. The IMF calculates that while Romanian pay (averaging €7,000 a year) remains among the lowest in the EU, it has risen faster than anywhere else. Mr Fernandez-Ansola says that, with productivity rising at less than 10 per cent annually, the increases are "unsustainable". Moreover, whereas in other ex-communist states pay increases are generally driven by private companies, in Romania the public sector is in the lead, thanks to strong trade unions, which have just forced a 28 per cent rise in the minimum wage. Pensions are also soaring, with a 43 per cent increase now being implemented, and a further 30 per cent rise approved for early 2009. Rising pay is helping to fuel a credit boom, particularly in home loans. Credit is set to grow 50-60 per cent this year, following 53 per cent in 2006. The IMF warns that borrowers might be assuming too much risk, especially as about half the loans are in foreign currency, mainly euros. But bankers argue that overall debt levels are low at 30 per cent of GDP and that they are acting prudently, for example in requiring 25 per cent deposits for mortgages. Manfred Wimmer, a senior executive at Banca Comerciala Romana, a subsidiary of Austria's Erste Bank, says: "We are not worried about the speed of growth because it is from a very low base." But there is no doubt credit is financing soaring increases in imports, boosting this year's likely current account deficit to 14-15 per cent of GDP - a level the IMF considers dangerous. Last year the €10bn deficit was largely financed by privatisation-boosted FDI of €9bn. But this year's forecast FDI of €7bn will fall far short of the likely €17bn deficit - leaving banks to finance the gap with credit, much of it short-term. For the IMF this is unsustainable, particularly with global conditions worsening. But Bucharest-based bankers argue much of the credit is quasi-investment as it is provided in-house by multinational banks to their Romanian subsidiaries. The IMF is urging the authorities to cool the economy. While it welcomes recent interest rates increases it remains worried about fiscal policy. The budget deficits - 1.5 per cent of GDP forecast for this year and 2.7 per cent planned for 2008 - are not huge in themselves. But the IMF says that in current circumstances they are too big. Government officials say the IMF is exaggerating. Dorin Mantescu, director of macro-economic analysis at the finance ministry, says: "The current-account deficit is pretty high, but overall the economy is still performing pretty well." The minority National Liberal government of Calin Tarinceanu, prime minister, is too weak to take decisive action, following the collapse of its alliance with President Traian Basescu's Democrats. With parliamentary elections due next year, politicians are already focused on the polls. Liviu Voinea, director of the GEA think-tank, says: "What is needed is decisive fiscal reform. But the government can get through next year without it. Then we will have the election - and the politicians don't care what happens after the election."

Hi Charles Yes, I read this piece in the FT and also the IMF report, which we've mentioned before. This situation does apply to several other CEE countries - most obviously, Latvia. In a way they are victims of their own success. To me, though, this comment sums up the macro picture: "The long-term prospects are good. But in the short term, something has to give in the next year or two to get the economy to a better balance." In other words, growth does need to slow. And, actually, circumstances - not least the credit crunch - are conspiring to see that this slowdown will happen and the economy will be in, as Stephen van Groningen, Raiffeisen Romania's chief executive says, 'a better balance.' cheers

Which is why Slovakia remains such a good bet as its had (and still has) the growth, but without these issues. Huw

Hi all, I think everyone is really talking Romania up at present and there´s no reason we can´t expect unforeseen scenarios here from credit crunch etc and global issues. I like romania and visited the country and have friends there. So fair enough.., Romania has started from a very low base, which is now a higher base cos prices have moved fast in last 12 months. All sounds so rosy for Romania but who really knows what will unfold..? Quite frankly, I think a lot of the profit has already been taken from places like Cluj-Napoca already. Calling a spade a spade, 100,000€ panelaks in Cluj are quite a lot. Land prices are getting too high too. Not meaning to be pessimistic, but rather focusing on due diligence, an investor I met in Madrid recently told me and quite shocked me when he said that he considers certain countries like Romania as ´high risk´ simply beacause the governement or politicians could turn around in 1 or 2 years time and decide to nationalise property or even pull out of EU if they feel like it, once all investment has already been poured in there!!! Is Romania totally free from its communist past? Does this make any sense..? The fact that someone would even mention that made me think a little, which is why i have included it in this forum. I´m tired of all this bull**** about big growth here and 20% growth there, at the end of the day you need to be lucky. I certainly hope prices continue booming in Cluj-Napoca but lets not get carried away either. its easy to get brainwashed everyday in forums like PS, which are really good and informative but everyone is focusing on positive factors but who really knows the downside to all of this, Regards, Liam

liam, my view is that once a country joins the EU it pretty much renounces large-scale expropriation of private property. however, my twin concerns are (1) that inflation is going to force up interest rates and that will put a dampener on the property market (same in poland), and (2) serbia-kosovo may kick off again, which will do no good for investor confidence in romania, bulgaria, macedonia, etc. i do agree that i would feel much more reassured about PS if they also highlighted negative points about the countries where they are selling developments. would you trust a newspaper that only ever reported good news? regards, dan

Hi Dan


How about our recommendations on Berlin, the Bulgarian coast, Riga, Cape Verde, the Spanish costas, and Ukraine, to name just six?

How about our assessment of the changes taking place in the Warsaw market and the price peak in Krakow.
We're not just saying 'buy, buy' by any means.

We also, I hoped, looked at one of the starker issues facing many markets - the issue of foreign currency mortgages, which is probably the most sensitive barometer during this period in http: / /www .propertysecrets .net /blogs /financewatch /post -38 .html

We have also consistently pointed out that financing for investors in Romania is far less developed than in , say, Czech.

But, in this case, for example, there is little point - just for the sake of appearing to be impartial - in not also pointing out that the mortgage market there is changing fast..because it's true!

hi robin, thanks for responding. i was referring to the places where you are selling units, so those six wouldn't count. you have acknowledged that prices have slowed in some parts of poland (rednet claim they are actually falling in some cities), but it would be most helpful if the warning signs could be flagged up ahead of time (e.g. indications interest rates are likely to rise, or of the scale of new build supply growth in some cities). even if these are just temporary downturns, forewarned is forearmed! regards, dan

Hi Dan, Thanks for your bit of reassurance about EU entry and that as far as we know, Romania´s quite politically stable. The inflation and high interest rates don´t really scare me being honest, cos not too many people have mortgages in Romania so far anyway, and it has been predominantly a cash buyers market til now. That would probably just be a cyclical problem anyway and should sort itself out in long run. Like in Poland the prices should catch up with neighbouring countries as times goes by, not to mention average EU prices. I mean I can see a lot more people retiring to Romania in the future as opposed to countries like Spain cos it just makes sound financial sense to do that. The affect of high interest rates is having more of a bad affect in Ireland, Spain and Britain where so many peoples´ mortgages are linked to Euribor and Bank of England base rates etc. I feel that there should be good long-term growth in Romania, the same as in Poland, which is what its all about at the end of the day. It is true, however, that the major gains have already been made for now in Poland especially and some parts of Romania are being done as we speak. You will have to cashflow most Romanian properties in first few years so lets hope we have nice capital growth to make up for that. Another thing is that the tourist market in Romania is really underdeveloped. I went to 3 big bookstores in Madrid today to buy a Romanian guidebook in Spanish. None of the stores had any while the shelves were stacked high with books for Czech Republic, Hungary, Croatia, Russia etc!! Its interesting that Romania doesn´t seem to be on the mainstream tourist trail yet. L.

I would just love to visit Romania one day. In fact I really wanted to go there 25 years ago in the early 80s, my early 20s. I got to Czechoslovakia, and Hungary during 1983 and 1984, met a lovely fair maiden from Krakow in the late 80s (now my wife Ruta!) but never reached Romania (and also never invested in PL!) I perceive real similarities between PL and RO too, and I think RO will surprise on the upside in the next 2-3 years, although I probably will keep to the Czech Rep

Oops that was my psot as Romania I am sorry, not Charles Bell's either !