Trust in the Economic Environment Is Crucial for the Future Evolution of Businesses

Trust in the Economic Environment Is Crucial for the Future Evolution of Businesses

Businesses in the EU will soon have to adjust to a new trading reality, facing uncertainty, at least in the medium term, about the tax rules and regulations that apply to them.

Q: In 2016, we are witnessing a new economic cycle, in the expansion phase, as your own research show through the measure of the confidence indicator. What is the role of the entrepreneurs in this economic growth, compared to other expansions?

Bogdan Ion: In our business as advisors for the largest companies in Romania, we know that trust in the economic environment is crucial for the future evolution of businesses. For the first time this year, our Romanian Entrepreneurship Barometer has shown that Romanian entrepreneurs perceive positive evolutions on all 5 pillars that support the development of local entrepreneurship. And this is great news for the entire business environment.


Moreover, 66% of entrepreneurs think that Romania will make a friendly environment for business development in less than 10 years, while 38% believe this will happen in less than five years. As active supporters of the development of entrepreneurship in Romania, this inflection moment is what we have been expecting for some time.


Such signals enhance our trust in the future and the direction towards which Romanian entrepreneurship is heading. For sure, Romania is more entrepreneurial today than it was four years ago. Following the present local and global trends, I think Romania will be hard to recognize in 2020, regarding the dynamism with which Romanians will build their own businesses.


Q: What does the confidence of the business environment, as determined by EY Romania, tell about the future of the economy?


Bogdan Ion: According to our latest business sentiment survey, 93% of business leaders in Romania are confident in the growth of their companies this year, while only 5% expect a turnover decrease and 2% expect it to stagnate. Of those who bet on growth, 41% expect an important positive evolution (over 10% growth), marking however a slight decrease compared to 48% at the beginning of 2015.

Estimations regarding the profit growth are also positive – 32% of companies expect a profitability growth of over 10% in 2016. This trend will be supported largely by investment, considering that 81% of respondents say they will increase investments in 2016, compared to 76% that planned to do this at the beginning of 2015. Investments will focus on growing the efficiency, expanding on new market segments and expanding on new markets.




Q: 2016 is unique in many terms, but mostly regarding the cut in consumer taxes. In your opinion, has the extra disposable income gone towards more consuming or more investment? Please detail and provide pros and cons of the tendency.


Bogdan Ion: According to Oxford Economics, the Romanian economy expanded by a strong 1.6% in Q1, as fiscal easing continued to spur consumption. As a result, growth forecast have raised for 2016 to over 4%, driven by domestic demand. Prices continued to fall during the first moths of the year, primarily due to the effects of VAT cuts, which were expanded to all products on 1 January. However, a pickup in prices is expected in the second half of 2016, as demand pressures will pick up.


Investment will continue its strong rebound in 2016, growing by well over 6% again, but this will now be driven predominantly by the private sector as the latest EU funding cycle has expired. Retail sales expanded 4.2% in Q1, reflecting that consumption drove the strong GDP result seen in this period. Despite this, figures for industrial production remained modest in Q1, contracting 1.7% on the quarter. However we expect this will prove to be a blip, and industrial production will expand in Q2.


Q: As a sum of all factors described above, do you rather see a sustainable growth or a weak sustainability of the Romanian’s economy growth? What are the risks?


Bogdan Ion: The fiscal easing now being implemented will put pressure on government revenues, and may put Romania on an unsustainable fiscal path in the medium term. The IMF has already voiced concern, highlighted by its refusal to extend Romania’s precautionary standby program.


Prospects for the Romanian economy are highly dependent on the EU, which takes 70% of its exports. This is why we are all looking to see how the Brexit evolution unfolds and how it will impact EU as a whole and Romania in particular. What we know for sure is that inherent risks related to forex, tax or mobility will make agility key for businesses success in this volatile context. This means hitting the button on short-term contingency plans that companies have been working on during the recent months, as well as planning ahead to meet uncertainty in the long run.


Businesses in the EU will soon have to adjust to a new trading reality, facing uncertainty, at least in the medium term, about the tax rules and regulations that apply to them. This will depend on the outcome of the trade negotiations between the UK and the EU and whether the UK feels that it needs to impose tariffs on the goods imported from the EU in an attempt to encourage the EU to lower its own tariffs in return.


Q: From an executive point of view, taking into consideration ‘the new business equation’, what are the most important variables for EY Romania, for the economy as whole and for the consultancy sector? Please detail.

Bogdan Ion: The consulting business is volatile by nature, but may benefit to a larger extent from new FDI and from the development of the local entrepreneurial ecosystem. The modernization of the public sector is an area where Romania still lags behind and, in this space, the use of professional consultancy firms may allow for a fast transfer of knowledge and accelerated improvement of performance and governance.

Furthermore, the efficient implementation of the new public procurement law, by which state institutions would select consulting companies based on the value for money principle and not solely on the lowest price, is likely to boost the professional services market.