What was behind the tripling of Romania's FDI in Jan-May

The Romanian National Bank (BNR) announced that non-residents' direct investment in Romania more than tripled to EUR 2.43 bln in Jan-May this year, from EUR 758 mln in the same period last year.

Equity investments, including the estimated net reinvestment of earnings, accounted for EUR 2.34 bln, BNR says, whereas intercompany lending (FDI companies borrowing from parent groups) was EUR 92 mln (no annual comparison provided).

The 2021 FDI figure looks impressive at first sight - particularly as more detailed data provided by BNR indicate a tenfold YoY expansion of the equity investments (not including reinvested earnings) to EUR 585 mln. A first question mark is raised by the small share of the equity investments (the most relevant segment of FDI) in total for the first five months this year.

Compared to the EUR 1.86 bln worth of FDI in Jan-May 2019 (before the crisis), the EUR 2.43 bln still looks impressive and more than just a base effect caused by the absence of the foreign investors last year. The details show, however, that it's not the foreign investors' rush that resulted in the tripling of FDI to Romania in the first five months of the year.

Out of the EUR 2.43 bln FDI, more than two-third - EUR 1.76 bln (from EUR 395 mln last year) - was formed by reinvested earnings, meaning profits declared by FDI companies in Romania for tax purposes. This category of foreign investments (under BPM6) has increased artificially this year as the companies deferred their taxes due last year, under a Government allowance. BNR estimates these "foreign investments" based on the taxes paid by companies and not on an accrual basis.

Corrected for the deferred taxes, we estimate the FDI in Jan-May at EUR 1.4 bln at most, still well below the EUR 1.86 bln FDI in the same period of 2019.

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