- Tue March 17, 2015

Romania’s economy outpaces EU peers; governance fears remain

Privatizations in the country promise to further turbo-charge growth, a bright spot in emerging Europe. But worries about the stability of the ruling coalition and governance persist.

Mark Mobius’s February 2012 prophecy on the European Union’s second-poorest nation is finally coming true. “ Romania,” noted the chairman of Franklin Templeton Emerging Markets Group, “is developing much as other eastern European countries have done. But I have a feeling it will leapfrog many of those countries in coming years.”

Two years on, that prediction seems remarkably far-sighted. A preliminary report issued on February 14 by the national institute of statistics estimated that Romania’s economy had grown 5.2% year on year in the final three months of 2013, nearly double consensus estimates, boosting full-year GDP growth forecasts to 3.5%, one of the highest rates in Europe. Industrial production surged 7.9% year on year in December, with exports and retail sales up sharply.

“Fourth-quarter figures surprised everyone on the upside,” notes William Jackson, an emerging market economist at London-based Capital Economics.

The NIS data cap a remarkable few months for Romania, which has dodged the turmoil unsettling larger emerging markets. In November 2013, domestic natural gas producer Romgaz raised L1.7 billion ($515 million) in the country’s largest-ever initial public offering, pushing the Bucharest Stock Exchange, which gained 27% in value in 2013, to new heights. Domestic equity capital market issuance hit $1 billion in 2013, up from $76 million in 2012 and $3 million in 2011, according to Dealogic data.

Victor Ponto-large
Prime minister Victor Ponta

However, political instability this week threatens to tarnish economic progress, amid fears of a split in the coalition government of prime minister Victor Ponta, as ministers eye the May European elections and the November presidential poll.

Sovereign bond
Nevertheless, market sentiment remains upbeat. In January, Romania launched its first 30-year sovereign bond in the US dollar market, raising $2.1 billion in a dual-tranche sale generating $11.5 billion-worth of orders. On February 4, the central bank cut its key interest rate by 25 basis points to 3.5%, and left the door open to further cuts, in an effort to boost growth further. Romania’s currency, the leu, was barely affected, underscoring the esteem in which some emerging market funds hold the economy.

Investors are quietly hopeful that Romania can now book another stellar year, led by a steady stream of privatizations. In January, the government picked Raiffeisen and Morgan Stanley to advise on the IPO of state-run power producer Hidroelectrica, set to raise around $400 million-plus as early as June. The government is also looking to sell minority stakes in coal-fired power generator Oltenia and power distributor Electrica around midsummer. Bankers expect the Electrica sale to net the state up to $700 million.

“Romania is definitely moving in the right direction with its privatization programme,” says David Smart, global head, sovereign funds and supranationals at Franklin Templeton Investments, which manages national investment fund Fondul Proprietatea. “There’s no reason why Romania can’t emulate what Poland has achieved over the past 10 years.”

Marius Dorner, head of corporate banking at Citi Romania, says the privatization programme “makes Romania more visible in capital market terms, raising its profile with global investors”.

Yet dark clouds still hang over the resurgent economy, some of the country’s own making.

A bill approved by parliament in December, but overturned by the constitutional court, would have exempted lawmakers from continuing corruption investigations and annulled previous graft convictions against senior officials.

Many see the bill, set to return to the lower house for debate in the months ahead, as the thin end of the wedge.

“Romania needs to commit itself to EU reforms on corruption,” says a Bucharest-based fund manager. “If they can’t or won’t on simple issues like legal reform, it sends a terrible message to global investors.”

Politics is also likely to dog the months ahead, as the country gears up for two rounds of presidential elections in November.

“When political issues flare up, as they will, we also tend to see sharp slowdowns in fund inflows, which causes domestic demand to slow,” says Capital Economics’ Jackson.

A broader fear is that, having benefited from a series of generous harvests and a spike in EU funds, growth will slide. Capital Economics expects the economy to expand by 2% in 2014, on a par with Hungary and Czech Republic, but lagging behind Poland.

Perhaps the bigger problem, for an economy desperate to join Europe’s middling economic leagues, is the sorry state of the regulatory system. It isn’t unusual for companies, having called for a simple general meeting of shareholders, to wait up to seven months for approval from CNVM, the securities regulator. In May 2013, shareholders of Fondul Proprietatea, majority controlled by foreign institutional investors and widely seen as the nation’s best-run investment fund, voted overwhelmingly to amend a share buyback programme. Eight months later, they are still awaiting the go-ahead.

Old headaches

Bucharest-focused investors say the biggest impediments to the coherent development of capital markets are burdensome regulations and old-fashioned ineptitude.

“There are some elements of the regulatory process that are causing significant annoyance to international investors,” says an emerging market-focused fund manager with exposure to domestically listed stocks.
Capital Economics’ Jackson adds: “Romania still tends to be quite poor on the institutional and regulatory side, even compared with the Czech Republic or Hungary.”

Mark Mobius’s prophecy might seem prescient, although two good quarters don’t necessarily amount to sustainable economic growth. Investors are hoping for a solid 2014 underpinned by strong export figures, several money-earning privatizations and smooth sailing in November’s elections. But in the long term, investors will want to see greater progress on reforms and within the nation’s sclerotic bureaucracy.

“Romania could go either way,” says the Bucharest-based fund manager. “They’ve made great strides in recent years, but they’re also more than capable of shooting themselves in the foot.”

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