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July 28, 2021

Coface survey: High number of insolvencies caps 2011- 2015 economic growth at 3 pct

Romania would have seen an economic growth of more than 5 percent in 2011 – 2015, had the number of insolvencies been in line with that elsewhere in Central and Eastern European countries instead of being four times higher, as it was, shows a survey by Coface Romania.

“In the past five years, Romania had more than 100,000 corporate insolvencies, with an incidence per 1,000 active companies four times above the Central and Eastern European average and a 3 percent successful reorganization rate, which is ten times below the average in EU developed countries. The very high number of insolvent companies has capped economic growth at an average of 3 percent compared to 5.25 percent as it would have been, had Romania’s insolvency rate been in line with the region average,” says Coface Romania Services Director Iancu Guda (photo).

Thus, had the number of Romania’s insolvencies been similar to that in neighboring countries, the country’s potential GDP would have been 75 percent higher in the analyzed five-year span, argue Coface representatives.

Moreover, tax revenue losses could have financed approximately one third of the budget deficit, given that the companies that entered insolvency in 2011 – 2015 had 451, 956 employees, accounting for 11 percent of the total jobs reported by all active companies.

At the same time, lenders to the economy had record-high losses of 127 billion lei, with private providers standing to lose the most, as they accounted for 47 percent of the total debts reported by insolvency firms, Guda adds. Financial institutions are ranked second by the amount of losses with 28 percent of the of total debt, and state bodies are third with 20 percent.

On the other hand, the survey shows that 2,933 of the companies that entered insolvency during the said period had a turnover in excess of one million euros, while the average number of active companies in this revenue segment was 23,455. “The Romanian business environment has lost in the past five years about 13 percent of high revenue companies,” Coface said.

Coface officials say that in comparison with other countries in the region, insolvency was misused in Romania, as financially troubled companies exploited a weak legal framework that was overprotective of debtors.

“Moreover, the share of insolvent companies for which the insolvency procedure was initiated at the debtor’s request increased from approximately 30 percent in 2008 (the level before the financial crisis) to almost 55 percent in 2015,” shows the Coface study.

However, after the coming into force of a new Insolvency Code, the number of newly opened insolvencies decreased steadily beginning with 2014 by 28 percent in 2014 and 50 percent in 2015, with Coface estimating a further decline by yet another 25 percent in 2016.

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