Thanks to a comfortable rate of return and loans granted during a period when interest rates were low, Romanian companies were not too affected by the rise in loan prices. But the situation may worsen in 2024.

Changes in interest rates, which determine the “price of money,” have major implications for companies and are transmitted through prices throughout the economy.

Two years ago, companies borrowed from Romanian banks at interest rates of about 4%. In November 2023, banks lent to companies at almost 9%, i.e. twice as much. In November 2021, the NBR key interest rate was 1.75%. It is currently at 7% and is not likely to decline until April 2024. It is true, this transfer of BNR interest to the loan value cannot be done instantly, as some companies have loans with fixed interest in the first years, and banks have to wait until the end of this period to raise rates. In any case, those who want to take a loan to finance a new project do so under much stricter conditions than in the recent past.

Despite the doubling of interest rates, the profits of companies increased

According to BNR calculations, net income increased across all business sectors, with utilities and mining leading the way (+286% and +186% respectively).

For other sectors, net profit growth ranged from 11% (for manufacturing) to 37% (for construction and real estate). “This increase in profit was also driven by the practice of some higher margin sectors. Their level has increased compared to previous years both overall (+1 percentage point, up to 8%) and for most sectors. The largest increase compared to 2021 was observed in the utility sector (+7 percentage points), mining industry (+3.2 percentage points) and the real estate sector (+2.9 percentage points). The real estate sector’s rates of return are still the highest (24%), followed by mining (17%), the Central Bank also said.

However, the coming months will prove to be more difficult

Large groups of companies are less dependent on banks (and credit expansion) because they can choose to issue bonds or even resort to private debt. In contrast, small companies do not have such opportunities, they only have bank loans. And their risk profile is higher than that of corporations, which makes the interest they have to pay higher. This difference of one point and the recent increase in rates is not insignificant in SME accounts.

The landscape of small Romanian companies does not look the best at all. Almost a third of companies have significant capitalization deficiencies (almost 140 billion lei), which affects payment discipline as well as access to credit. According to BNR, they generate 58% of non-bank non-performing loans and 21% of non-performing loans. The majority of atypical firms are firms with zero employees (38.6% of non-financial firms), and 21% of firms have zero turnover.

The degree of indebtedness of enterprises increased to 166.7%. The distribution of the degree of indebtedness shows that 16% of companies are in the risk zone (have a degree of indebtedness above 200%), and possible risks (maintenance of inflation, risks related to the war in Ukraine, etc.) may create difficulties for companies with bank loans.

The number of unprofitable companies (about 225,000 companies) remains high, about 29% of all operating companies. Of these, 15% recorded sustained losses over the past three years.

Banks say credit risk for SMEs continues to grow. In terms of SME size, this quarter banks considered small businesses to be the most risky (42% net interest), followed by micro enterprises (30% net interest). Similarly, credit risk increased in 8 out of 10 sectors reviewed, with energy being the riskiest, followed by industry and transport.

What are the expectations of company managers?

After the fiscal measures, other problems of Romanian entrepreneurs, according to the Confidex S2 2023 survey, are the lack of working capital and cash flows (15% of respondents, significantly ahead of 5% at the beginning of the year), the increase in the cost of raw materials and utilities (12%, increasing from 9%), declining sales, fewer customers and orders (28%, up slightly from 27% in the first half of this year) and labor shortages (15%, but down from 27%).

Regarding the prospects for the development of the national economy for the next six months, more than 60% of managers believe that it will worsen, and are already preparing for a worsening of working conditions, or even for a recession, which will correspond to market trends in the region and the euro zone.

Large companies are more optimistic

Although the overall impact of the new fiscal measures is perceived negatively, at the individual level the situation is more weighted, according to Confidex data. The level of the confidence index is different depending on the size of the company: the higher the staff turnover, the more optimistic the managers. Companies with a turnover of more than 10 million euros have an index of 51.2, which is almost 12% higher than the representative index for companies with a turnover of between 100,000 and one million euros, which stands at 45.8.

“The optimism of the first half of 2023 dissipated, giving way to caution. However, if you look segmentally, you can see that the value of the mood index of managers who manage large companies with a turnover of more than 10 million euros is more than 10% higher than that of companies with a turnover of less than 1 million euros. These figures indicate a greater degree of resilience of big business in the face of environmental uncertainty. This is a signal that indicates the need for investments in the direction of strengthening market positions for companies whose strategic goals are development and scaling,” said Andriy Chonka, CEO and co-founder of Impetum Group.

The glass is half full: what opportunities do Romanian managers see in difficult times?

In this economic context, 55% of Romanian businessmen declare their openness to exploring alternative sources of financing, apart from internal financing methods (reinvestment of profits or capital injection from shareholders). Cost control and reorganization is also an option for the 10% of managers at the level with access to European funds.

Given that access to credit is problematic for a quarter of managers participating in the study, they are open to other sources of financing, such as investment funds, business angels or other entrepreneurs focused on investing in already established companies. A study by Confidex shows that 80% of managers have a good or very good opinion of these sources of business financing.

“Whenever our economy faces challenges, companies find themselves in a position to not only adapt, but to open up new opportunities that didn’t exist or weren’t very visible during periods of calm. Now more than ever, it is necessary to discuss mechanisms to prevent instability for Romanian entrepreneurship, which is much less resistant to any shock waves than large multinational companies. Thus, the need for financing and development of Romanian enterprises opens the way to explore alternative sources of financing that can meet the needs of managers, especially in these periods when the economy is tense,” said Andrej Csonka, CEO of Impetum Group.

According to the latest CONFIDEX survey, other opportunities targeted by Romanian managers are increased market demand (18% of managers compared to 15% in 1H 2023), product diversification and development (15%, from 9%) and easier access to markets and international expansion (decrease from 19% to 11%).