When it comes to attracting the attention of international investors, Romania has for many years been the wallflower of emerging Europe. Despite an economy and population second in size only to Poland among the EU transition countries, Romania’s vulnerability to external shocks, underdeveloped capital markets and reputation for political and financial unreliability have tended to deter all but the most enthusiastic fund managers.
Events of the past 12 months suggest global investors are finally waking up to Romania’s charms. In the equity markets, the long-awaited resumption of the government’s promised privatization programme received a warm welcome from the international investment community. External buyers took around two-thirds of each of April’s secondary offering of a L322 million ($96 million) stake in pipeline operator Transgaz, a L282 million IPO of Nuclearelectrica in September, and November’s L1.7 billion IPO of natural gas producer Romgaz, Romania’s largest-ever IPO.
Meanwhile, Romania’s regular visits to the international bond markets since the start of 2012 and the impressive performance of its Eurobonds – combined with the inclusion of its domestic sovereign debt in both Barclays’ and JPMorgan’s emerging market indices for the first time in March – prompted a growing number of bond investors to explore the local-currency market.
From just 14% at the end of 2012, foreign holdings of Romania’s domestic sovereign bonds soared to close to 26% by the start of May. This continued to rise, despite the emerging market sell-off prompted by Federal Reserve chairman Ben Bernanke’s tapering comments at the end of that month.
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| Marzena Fick, head of CEE debt capital markets at Citi |
The nascent local corporate bond market also saw the Romanian subsidiaries of Raiffeisen Bank International and UniCredit both selling leu-denominated notes on the back of GDF Suez’s inaugural issue in October 2012. In early December, state-owned power-grid operator Transelectrica was on the point of issuing local-currency debt. What is more, as bigger emerging markets funds have moved into Romania’s local-currency markets, the sovereign’s Eurobond issues – which totalled $4.2 billion in 2013, split between euros and dollars – have drawn a diverse investor base. “As more positive news has come out of the country it has started to attract smaller accounts and investors from farther afield, including Asia but also central Europe,” says Marzena Fick, head of CEE debt capital markets at Citi.
In 2013, that positive news included Romania’s exit from the EU’s excessive deficit procedure, announced in June, as well as the successful completion – after many setbacks – of a substantial chunk of the privatization programme. Both were key conditions set by multilateral institutions, led by the IMF, that bailed out the country to the tune of €20 billion in the wake of the financial crisis – and bankers say policymakers’ ability to deliver on their promises despite political volatility has earned Romania credibility with foreign investors.
“We see a momentum behind Romania at the moment,” says Ingo Bleier, head of investment banking at Erste Group. “The government has kept its word in continuing with the privatizations, supporting local capital market development and addressing weaknesses on the fiscal side, and these efforts have been recognized by the international investor community.”
The improvement of public finances has been particularly impressive. From more than 7% of GDP in 2009, the budget deficit was brought down to 2.9% in 2012 and was forecast to achieve the government’s target of 2.5% last year. That is good news not only in its implications for overall public debt levels – which look set to peak at a very modest 38% of GDP – but also, say analysts, because it should mean an end to the aggressive fiscal tightening that has crimped domestic demand in recent years.
“Fiscal policy will likely be less of a drag on growth in the near term,” says William Jackson, emerging markets economist at Capital Economics. “There has been very large fiscal consolidation in Romania over the past few years, and now that the budget deficit has been reduced to below the Maastricht threshold it looks as though they may at least ease the pace of austerity.”
The government has already indicated that it plans to take advantage of the increased budgetary flexibility to support the uptake of EU structural funds – something Romania has struggled with in the past, due to the co-financing requirement on recipient countries. In the 2007-13 funding round the country managed to absorb just 25% of the funds on offer. Hopes are high that this can be substantially improved for the funding round that begins in 2014, in which Romania will have access to €20 billion for much-needed infrastructure upgrades.
Perhaps the most encouraging news for Romania investors came in December, when third-quarter GDP data releases revealed that the country’s economy had grown by 4.1% year on year. That was more than double expected levels and higher than for any other EU economy – although analysts warned that this was boosted by one-off factors including a bumper harvest and the continuing impact of the activation of Ford’s new factory in Craiova in the southwest of the country in late 2012.
Nevertheless, growth forecasts in the 2% to 3% range for 2014 remain extremely good by the standards of emerging Europe – only the former Yugoslav Republic of Macedonia and Turkey are expected to grow faster this year – and Romania’s other macroeconomic indicators were also comparatively robust. An increased focus on export-led growth since the financial crisis has shrunk the country’s current account deficit from 13.4% of GDP in 2007 to a forecast 1.9% for 2013.
Citing this rebalancing of the economy towards external demand as one of the key drivers for its upgrade to positive of the outlook on Romania’s rating in November, Standard & Poor’s – the last main rating agency to assess the country as sub-investment grade – noted that this had been facilitated by an extensive programme of labour market reforms implemented in 2011. The latter has helped unemployment to stabilize at a relatively low – by European standards – rate of around 7%.
Moderating inflation – expected to come in at 3.1% for 2013, within the central bank’s target range – allowed the National Bank of Romania to reduce interest rates by 100 basis points in four successive cuts in the second half of last year to a record low of 4% in a bid to promote growth.
Both analysts and multilaterals such as the European Bank for Reconstruction and Development are warning, however, that domestic demand – seen as key to Romania’s long-term recovery – is unlikely to pick up until the issue of high and rising bad debt levels in the country’s banking sector is resolved.
Some leading lenders have already started taking action. Erste subsidiary BCR, Romania’s largest bank by balance sheet, achieved the first reduction in its non-performing loan ratio since the financial crisis in the third quarter of 2013 following a restructuring programme. The central bank has also responded to calls for intervention, although its first move – a standardization of the reporting requirements for impaired loans – is expected to result in a jump in NPL levels from this month.
Another recurrent Romanian weakness reared its head again in December, when the country’s president, Traian Basescu, refused to sign a memorandum of understanding with the IMF – a condition of the release of the next tranche of a €2 billion stand-by arrangement – in protest against a round of fuel tax increases proposed by prime minister Victor Ponta.
Although it might have served as an unwelcome reminder of the potential for political volatility in Romania, analysts say the latest salvo in the long-running dispute between the prime minister and president is unlikely to have any long-term impact on the economy, particularly as the latter is due to step down following presidential elections this year.
Bankers confirm that, for bond investors at least, the key issue around Romania concerns the speed of the domestic demand recovery. “It’s definitely the question we get asked most often,” says Fick at Citi. “Investors can see that the economy is moving in a positive direction, but they can also see that it’s slightly lagging its regional peers domestically, so they want to know about the strength of the demand recovery process.”
Mark Mobius, executive chairman of Templeton Emerging Markets Group, notes that investors of all stripes will want to see the continuation of the privatization process – in the form of the IPOs of energy firms Hidroelectrica and Electrica promised for this year – as well as a move to make the bureaucracy of investing in Romanian capital markets less cumbersome for foreign funds.
Overall, however, Mobius is upbeat about the development of the Romanian market, adding that if the country stays on the path to reform it might finally fulfil its potential and post one of the region’s highest levels of growth. “The solid fundamentals and the positive trends of late give us reasons to be optimistic that the country will quickly move towards closing the gap to other European countries,” he says.
With GDP per capita in Romania currently just $8,630, compared with $13,333 in Poland, catching up with its larger peer would clearly mean an impressive leap for the former. If that materializes, Romania’s new cohort of foreign investors will reap rewards for their readiness to explore what could yet become emerging Europe’s hottest market.
