The Romanian economy has grown significantly; by 27% in the past decade. According to an analysis by Coface Romania, this growth has entitled Romania as Central and Eastern Europe’s (CEE) growth champion in September 2018.
Despite the economic lift, most companies in Romania are currently confronted with a higher risk of bankruptcy now, compared to 10 years ago.
As stated by Iancu Guda – Services Director Coface Romania and the Association of Financial Analysts in Romania (AAFBR), “I don’t have statistical data but this is an economic paradox I have never seen before, in any economics book: when the economy is growing tremendously like it has been growing in Romania for the past 10 years, the risk of companies is generally expected to fall, companies should benefit from the economic lift, make more investments, have higher profits but this is not the case for Romanian companies”.
What data are these claims based on?
In 2007, the Altman-Z score, calculated for all active companies in Romania was 2.52 while last year the estimated score was 1.89, according to Iancu Guda. The Altman-Z score is an economic model which is, by definition, a credit rating that displays a company’s probability to face bankruptcy. A score below 1.8 represents a big risk of facing bankruptcy, 3 is a medium risk while a score exceeding 3 shows a low risk.
The highest Z score for companies in Romania, meaning the lowest risk of bankruptcy was in 2.65 in 2008 followed by 2.52 in 2007 and 2.43 in 2009.
On the other hand, the value of the Z score in 2014 indicates the highest risk of bankruptcy that Romania faced in the past 10 years. The lowest value was 1.17 and it was registered after 5 consecutive years of decline in the Z score: 2.43 in 2009, 2.43 in 2010, 2.23 in 2011, 1.91 in 2012, and 1.82 in 2013 (Ziare.com).
The increase in the value of the Z score has allowed local firms to pay off debts, however, their positive comeback lags compared to the diminishing rate.
Even though the GDP is growing, the mass of the active companies in Romania is composed of small-scale companies which are not always visibly benefiting from the economic growth. What is worrying according to Iancu Guda, is the fact that 96% of the active companies are small which leads to less performance and competitiveness when compared to larger, multinational companies. The AAFBR President has observed a trend between the size of a company and its risks and Z-scores. Larger companies lead to a higher overall Z score and less to no risks.
Nevertheless, there are very few companies in Romania with low risks, allowing the economic paradox to persist.
Heine , Max L. “Z Scores .” Z Scores , 2000, pages.stern.nyu.edu/~ealtman/Zscores.pdf.