“When is this crisis going to end?” The negative and the “more realistic” scenario for Romanian market

Part 2

(to read part 1, click here)

During 2005 – 2007, I was positive about Romania's future, considering the country as an almost "ideal" place to invest in. In 2007 (November 23^rd interview to "Curierul National" newspaper) I stated for the first time that part of the Real Estate prices during 2008 will go down (and almost everyone laughed). Today I have been explaining to you all the problems that exist around us. But too many people ask me: "Ok, Ilia, I understand what you mean and maybe I can also agree with you. This is who we are and we will not change any time soon. So, taking into consideration all these observations of yours, all the mistakes that you see here, when do you expect the Romanian economy and Real Estate market to exit the crisis?"

Many uncertain factors involved

This is not an easy question to reply to. The problems are very complicated, the uncertainty of the worldeconomy grows every single day and it looks like it is going to take a while until everything will stabilize. But "Romanians are very eager to get rid of the crisis" as the media and too many people say every day. So I will try to approach the issue carefully (and realistically) and provide a reply which will be very close to the truth, as I perceive it. But keep in mind that there are also many unexpected factors. For example, if the Romanian economy starts moving and all the owners double their prices, the market will be blocked again and the economy will lose its "locomotive", the Construction and Real Estate segment.

Does "reaching the bottom" mean also "exit from crisis"?

In October 2008 (during EXPO REAL conference, Munich, Germany) I had stated that we will reach the bottom of Real Estate market during the first half of 2010. It looks like this is what will happen. But reaching the bottom does not mean that we exit from the crisis. On the contrary, there is always a serious possibility for an economy (and a country) to get blocked there and enter in a "lethal spiral" (as George Soros recently described the dangers of Greek economy). So, let us analyze together the 3 possible scenarios that can happen here in Romania: The positive, the negative and the "more realistic one" (which I consider that has the biggest % of possibilities to happen).

To read the positive scenario, please press here

Negative scenario for Romania:
Exiting the crisis during: Second half of 2012 – First half 2013

Possible bad news (worldwide):

• The European countries will not exit their own crisis any time soon.
• British elections will result to an unstable government and the country will face major difficulties.
• Chancellor Merkel will see her Government falling and the political instability will keep Germany in a negative economic trend for long time.
• The "Greek" crisis will be replaced by the "Portuguese", "Spanish", "Italian", "English" etc.
• Countries at the Baltic region (such as Latvia) will default, causing new trouble and losses for banks. "Spill over effect" at its worst version.
• The Chinese Real Estate bubble will burst, causing shivers all over the world.
• Goldman Sachs scandal, the bankrupsy of more banks and the more expensive dollar (as Euro will decline) will block the recovery of the fragile, overdebted American economy.
• Crude Oil prices will return to their 2008 highs, over 100 – 120 Dollars / Barrel, blocking the World economy for good.

Possible bad news (Romania):

• Romanian economy mainly exports to Eurozone countries. If Euro will further decline, Romania will become more expensive and its products will lose ground towards the European ones.
• Foreign Direct Investments will continue declining, causing less new investments and jobs.
• New political instability or any problem regarding the Governor of BNR will immediately impact to the economy.
• Unemployment will reach 10%, as companies will avoid hiring.
• Small and Medium Enterprises will suffer.
• Bankrupsies will continue rising, causing major problems to the market and serious headaches to the banks.
• Banks will remain "defensive" for a long time, avoiding credit expansions.
• Romanian Banks will have to face their own (carefully hidden) reality. Non performing loans (covered by assets whose value has collapsed) amount to several hundreds of millions (or few billions) of Euro. If things will continue for a long time, this bubble will burst and cause a new cycle of problems.
• Bankers will remain skeptical towards almost all investments.
• Most of the major public projects will end up frozen.
• The field of alternative energy will be underdeveloped, due to "uncertainties".

Negative scenario. A slow process:

• European economies will remain unstable during 2010.
• They will continue their ups and downs for the first half of 2011 too, as new challenges will rise.
• In the second half of 2011 they will enter into a weak "road to recovery".
• They will boost during 2012.
• Romania will follow them, starting with the second half of 2012.
• In the first half of 2013 Romanian will accelerate as well.
• Banks will not open their gates until 2012.
• The Real Estate market will remain "frozen" for another two years or more.

"More realistic" scenario for Romania:

Exiting the crisis during: Second half of 2011 – First half of 2012

What can happen:

• European economies will start growing until the end of 2010, or maximum during the first half of 2011.

• Romanian economy will follow Europe with 3 – 9 months delay, but things will definitely improve during 2011.
• The last quarter of 2010, maybe also the first quarter of 2011 too, will be the most difficult months for the Romanian people.
• As of 2011, serious local companies will see their revenues increased not because of higher demand, but because of the thousands of bankrupsies that their competitors face. (This is always the first sign of recovery, companies grow by taking over the market shares of the ones who didn't make it).
• Romanian banks will unfreeze lending only during 2011. They will move with very careful steps and the procedure will be slow (bankers claim that they learned by their mistakes).
• The Real Estate market will continue being "idle", at least until the end of 2010.
• The owners' attempt to raise the prices without clients will cause the extension of blockage for several more months.
• Romanian Real Estate market will remain a "Buyer's market" for at least another 12 – 15 months.
• When the Romanian economy will start growing, the Real Estate market will try to immediately benefit and raise the prices, but again investors will not follow.
• To cut the long story short: Things will be better during 2011. If logic will be the main factor of every decision, 2011 will be the first "good year" since 2007. If people will be greedy, we will see serious growth only during 2012.
• If at any moment Romanians raise their prices too much, the market will be blocked again, delaying the economy as well.

PS.1. I am closer to the last scenario, which I consider more probable to happen. I would give to it 60% chances, while I would give 20% chances to the other two scenarios.

PS.2. I declare that I am not involved into Romanian politics. I don't know any politician and I don't have any friends or enemies between them. The text above is just my personal approach, trying to avoid any political talk. Time will tell if my predictions are right or wrong. This does not mean that I am against or that I support the Government or anyone else.