Brexit impact on the business environment in Romania
According to the final results of the referendum, 51.9% of the Britons who have come to vote opted for exiting the European Union, their number is higher by about 1.3 million compared to the number of voters who opted for staying in the EU. Although this decision creates many uncertainties and the indirect impact on the medium and long term is very hard to predict, however, we can say that the direct impact, in the short term, regarding Romania is limited.
First and foremost, from a macroeconomic point of view, direct bilateral relations between Romania and the UK are limited:
- Directly limited commercial transactions: exports towards the UK during 2015 amounted to EUR 2.4 billion, representing 4.4% of total exports and only 1.5% of the GDP, while the share of imports from the UK was 2.5% out of total imports, reaching EUR 1.6 billion in the year of 2015;
- Limited direct financial transactions, given that FDI from the UK represented 2.5% out of the FDI total in 2014, while the financial sector is less exposed to direct capital holdings from the UK. Indeed, by cutting the UK contribution to the EU budget, sources of financing through European funds become more limited. However, considering the situation of the EU countries, Romania has not effectively exploited these resources, given that the absorption rate was moderate anyway.
- Low social exposure, taking account of the number of Romanians who are working in the UK is around 180,000, according to Eurostat estimates, which represents only 7% of all Romanian citizens who are working abroad.
Direct bilateral and commercial relations between Romania and the UK are, therefore, limited, and this can be seen in the low share of local companies with shareholders registered in the UK. To delineate these companies, the following criteria were taken into consideration:
- Those companies submitted their financial statements for the activity performed in 2015
- They have at least one legal entity or individual as a shareholder who is registered with head office/ home address in the UK;
- The companies that register in their capital structure institutional investors with operational office in the UK which are not owned 100% by capital from the UK were eliminated (i.e.: European Bank for Reconstruction and Development);
- Membership relations of the British business environment through management links were not considered. In other words, companies that register natural or legal persons as administrators established in the UK, to the extent that they do not register and have at least one shareholder from the UK, were not considered
Thus, according to the official records of the Ministry of Finance and the Trade Register, there were a total of1,094local companies that register shareholders with the head office in the UK and meet the above criteria. They represent only 0.3% of all active companies in Romania, but generate about 2.2% of the total turnover of all the companies registered in Romania.
By analysing the sectorial distribution according to several criteria, we note the following:
- 354 of these have not registered any activity during 2015, given that the turnover level was zero, while another 248 companies reported an income level below EUR 100,000. Thus, there are only 492 companies left with incomes of over EUR 100,000 in 2015, registering an average annual turnover of approximately EUR 11 million in that year;
- The average life of these companies is 8 years considering, that only 152 of these were registered in the past three years, and only 128 companies were registered in the period of 1990-2000. The year in which investors from the UK registered the most start-ups in Romania is 2007, the year of accession to the EU respectively, level that can be compared to the entire period of 2008-2010, when the volume dropped considerably due to the effects of the financial crisis;
- Most companies focus on sectors like services (17%), real estate (16%); construction (13%); wholesale and distribution (10%) and IT (8%);
- However, if we analyse the dispersion of income at the sector level, we can see several different industries. Thus, the revenue generated by these companies is concentrated in metallurgy (16%), wholesale and distribution (15%), post and telecommunications (14%), IT (12%) and food and beverages (7%);
- Local companies that are owned by investors from the UK reported in their financial statements for the year of 2015 a total of 66,637 employees, or 2% out of the total number of jobs registered in the private sector in Romania. Out of these, most are concentrated on IT (19%), metallurgy (17%), textiles (13%), machinery and equipment, as well as services rendered, in general, to companies, each having a weight of 8%. Basically, these sectors generate about two-thirds of all the jobs reported by the entire sample;
- Taking into account the specific object of activity, most of the long-term investments, funded by investors coming from the UK in local companies were oriented towards post and telecommunications, metallurgy, food and beverage, construction and real estate. Basically, these five sectors generate almost 70% of the value of all non-current assets, thus, indicating the proportionality of strategic investments.
By analysing the financial situation of these companies, we note the following:
- Capital structure shareholding of local firms in the UK is better than the average recorded nationwide. Thus, companies owned by investors from the UK record a 70% average indebtedness, compared to the national average of almost 78%;
- Despite this fact, the average efficiency level of these companies is very low, given that overall profitability is negative. Hence, local companies owned by investors from the UK registered a consolidated loss of RON 60 million in 2015. This situation, coupled with a degree of debt (financing from banks, suppliers, the state and affiliated entities) below the average registered nationwide, imply that those firms that recorded losses were sustained by the shareholders through their capitalization;
- In the context of growing uncertainties caused by Brexit, investors coming from the UK, probably, will not be able to allocate additional funds to finance local companies, taking account of the fact that the latter registers losses. In this context, these companies will have to go through a restructuring process, and the sectors that register the highest losses and will be the most affected by this process are (we consider only companies owned by investors from the UK): construction (-38%), mining and quarrying (-30%), agriculture (-24%), food and beverages (-24%), real estate (-19%) and retail (-18%). The aforementioned sectors generate a total of about 6,300 jobs, concentrated on 406 companies;
- On the opposite side there are very profitable local companies that are owned by investors from the UK, the sectors with the highest level of profitability being transport (17%), metallurgy (9%) and chemical products (6%). Though, taking account of the level of capitalization of the companies which in these sectors is very high, 60% respectively (correlated with a very low level of indebtedness, approximately 40%), and the parent companies in the UK will need capital to stabilize the problems encountered in the context of Brexit. A disinvestment of these sectors is quite likely to happen, given that the tax on dividends paid is very low compared to the levels recorded in the past. These sectors generate about 15,000 jobs.
"Investors in the UK directly hold only 1,094 local companies, out of which only 492 companies have incomes of over EUR 100,000 in 2015. Because the share of these companies in total revenues recorded nationwide is only 2%, possible problems of these firms cannot cause a systemic effect among private economy. Instead, we can talk about certain risks. Thus, although these companies have an acceptable level of capitalization of 30%, 7 out of 10 register losses, and net consolidated result is negative at the sample level. In this context, and amid uncertainty fuelled by Brexit decision, investors coming from the UK, probably, will not be able to allocate additional funds to finance local companies, given that the latter registers losses. Thus, the companies will have to be strengthened through restructuring measures to enhance competitiveness.", stated Iancu Guda, Services Director, Coface Romania.
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