A SUPPLEMENT TO EUROMONEY/APRIL 1999: EASTERN EUROPE
After years of delay, bank privatization in Romania finally got underway last month with the sale of a controlling stake in the Romanian Development Bank (RDB) to France’s Société Générale. And, as Euromoney went to press, the privatization of a second bank, the smaller Banc Post, was close to being finalized with GE Capital and Banco Português de Investimento both negotiating to take strategic stakes.
The deals were overshadowed by problems at Bancorex, the largest domestic bank and by a host of other problems: a foreign debt crisis is looming; the local currency the leu has been devalued sharply, local banks’ credit ratings have been downgraded and economic data for 1998 have turned out worse than expected.
But the sale of the two banks is a big step forward for both the country’s privatization programme and the development of the banking sector. SG has spent $200 million to acquire a 51% stake in the RDB through a direct stake and a capital increase.
RDB will also buy SG’s existing local business. SG set up a local office in the early 1980s and has since become one of the most prominent international banks in Romania. Until now, however, the bank has been concentrated in Bucharest and on corporate banking.
“This was a big opportunity for Société Générale – the chance to buy something of real scale in a large country in the region,” says Guy Harington, head of Schroders’ central and eastern European team, which advised the French bank.
RDB is the smallest of the country’s five biggest commercial banks but still, says Dan Pascariu, head of Bank Austria Creditanstalt’s local commercial banking operations, the deal marks a turning point for the financial sector. “Both Romanian and foreign banks operating here will have to rethink their strategies,” he says. “For the first time a foreign bank will have critical mass on the market. Until now, foreign banks were concentrated in Bucharest and a few other cities. RDB already has a competitive edge. This will put extra pressure on the local banks.”
Bank Austria, which through the former Creditanstalt operations was one of the first international banks to establish a local investment-banking presence, has also been expanding in retail banking. Last September it established a local commercial bank which, among other things, has been targeting high-net-worth individuals. It claims to be the first of the major international banks to target this segment of the Romanian market. Meanwhile, Pascariu says that competition remains intense for good corporate clients. That reflects the difficult outlook for the economy.
Inflation ended the year at 41%, helping keep interest rates at prohibitive levels for corporate borrowers. GDP, originally forecast for zero growth, slumped by 7.3% last year, after falling more than 6% in 1997. Matthew Vogel, an economist at Merrill Lynch, expects the economy to shrink a further 3.5% this year.
With the final completion of the sales of stakes in RDB and Rom Telecom – the national telecoms operator in which OTE of Greece recently bought a 35% stake for an initial $675 million – bankers hope there is a renewed impetus behind privatization.
“The government is setting itself some tough targets but they are achievable,” says Istvan Racz of Credit Suisse First Boston. “There are still a lot of assets to sell – in the banking and energy sectors, for example. There are now some privatizations that have happened and others that are ongoing so they are already on the right track. We couldn’t have said this a year ago.”
Among the other privatizations underway are the sale of the Bucharest water utility, as well as that of Sidex, the largest domestic steel producer. In late March Renault looked to be close to taking a majority stake in Dacia, the largest local car maker and one of Romania’s biggest industrial companies.
A tender for one of the biggest Romanian mandates to date, to advise on the sale of a stake in Petrom, the national oil company, also closed in late March. Before last year’s drop in the oil price, Petrom, which is an integrated oil company, was valued by analysts at $1.75 billion. The government plans to keep a 51% stake and has yet to decide whether it will attempt to float Petrom or first find it a strategic partner.
After Banc Post, the next state bank on the block could be the Romanian Commercial Bank, a large commercial bank with a network of more than 240 branches and some 1.4 million customers. In the mid-1990s, Romanian Commercial Bank, as one of the prime lenders to Romanian industry, suffered a high proportion of bad debts but observers say that since then it has used profits from other lines of business to make significant provisions.
“RDB and Banc Post were the relatively easy banks to sell but it was fair to start with these and to gain experience before moving on to the privatization of the more complicated ones,” says Salvatore Candido who heads the EBRD’s Bucharest office.
Analysts also believe that Banca Agricola is a lot stronger than it was and could also become a candidate for privatization in the not-too-distant future. In 1997 the state was forced to bail out Banca Agricola and Bancorex to the tune of about $1 billion after both banks ran into severe liquidity problems: both had been used by the former leftist government to prop up state industry and agriculture with soft loans in the run-up to the 1996 elections.
“A lot has been done at Banca Agricola. They have made a serious attempt to restructure,” says Candido. Among other things, the bank has cut staff and begun to rationalize its network which in the communist era was huge, stretching to every small town and to many villages. The bank, which operates EBRD and World Bank credit lines to agriculture and agro-industry, is also gaining further know-how and western expertise through a recently agreed twinning arrangement with Bank of Ireland.
But concerns remain over the strength of the banking sector. On March 2, Thomson BankWatch, the ratings agency, downgraded Romanian banks again, saying the disappointing performance of the economy was “heightening the overall level of systemic risk throughout the banking sector and raising the spectre of a financial crisis”.
The most pressing issue for the sector remains finding a solution for Bancorex, the former foreign trade bank. The bank was placed in special administration in late February after its top management resigned, citing differences over restructuring plans with the World Bank. It was also given a $200 million emergency loan by the central bank after depositors queued up to withdraw their savings.
The bank’s president Vlad Soare, a respected former deputy governor of the central bank, had been in place less than a year. Local bankers say that while it was recognized that Bancorex’s problems started earlier – several former executives were accused of corruption and influence-trafficking – the World Bank felt the restructuring was proceeding too slowly. Analysts say that by western standards the bank is insolvent. The authorities now have 45 days to come up with a new restructuring plan. One option would be for the bank’s bad loans, estimated at up to 80% of its portfolio, to be spun off into a restructuring agency and for the bank to be recapitalized with state bonds. Some analysts say that the institution accounts for about half of the bad loans in the banking system. According to central bank statistics, some $4 billion or 70% of total gross bank credits were considered “sub-standard” in June 1998, an amount equivalent to about 10% of GDP.
The problems at Bancorex, coupled with looming foreign debt repayments and the release of disappointing economic data for 1998, were among the factors behind a run on the currency in mid-March. After the central bank temporarily backed off from intervening in the forex market in the week starting March 15, the value of the currency plummeted in the grey market from about Lei14,000 to the dollar to over Lei20,000. After the central bank governor Mugur Isarescu, reappointed late last year for a second term, appeared on national television and the bank resumed its intervention, the leu stabilized again, closing at about Lei15,000 on March 19, down from Lei11,000 at the start of the year.
It is hoped the devaluation will help narrow the current-account deficit which soared to $2.9 billion in 1998 on the back of a 1.6% fall in exports and a 4.8% increase in imports. But the high deficit, which Merrill Lynch expects to reach $1 billion in the first half of this year, is still a factor behind Romania’s problems in repaying its $9 billion foreign debt.
The country faces a bunching of repayments this year with a total of about $3 billion due. Some $1 billion of it falls due in May and June alone. The situation has been complicated by controversial suggestions from IMF officials that Romania “reschedule” or roll over Eurobonds due in May and June and that this refinancing be made a condition of further official lending. This is partly because the IMF does not want Romania to run down its reserves which at the end of February stood at about $1.5 billion excluding gold, and because, looking to Russia, it wants private banks to bear some of the risk of lending to countries with potential repayment problems.
Commercial banks and the Romanian authorities themselves have responded by saying a “rescheduling” would essentially amount to a default which would be far more damaging to the country’s reputation and to the economy than running down reserves. “Default would have very serious implications and the IMF might find itself with a worse problem on its hands,” says Merrill Lynch’s Vogel.
This is a sensitive issue in Romania which for many years was excluded from international capital markets after dictator Nicolae Ceausescu unilaterally decided to repay the entire $10 billion foreign debt ahead of schedule in less than a decade in the 1980s.
As it is, last year’s repeated downgrades in the sovereign rating have pushed up the cost of borrowing for corporates.
MobiFon, for example, which operates Connex, one of the two local GSM mobile phone providers, in January took out a second syndicated loan, arranged by ABN-Amro, for $105 million priced at 525 basis points over Libor. This was 200bp higher than its first $180 million loan led by the EBRD in 1997 borrowed at a time when the company was just starting out. This is despite the fact that the company, which is majority owned by Telesystem International Wireless of Canada and AirTouch of the US, now has a successful track record and a fast-growing business.
Many analysts believe Romania will be able to ride out its foreign debt problems without jeopardizing its relationship with the IMF, even if it means dipping into its $950 million gold reserves to fund some of the repayments. Merrill Lynch estimates that if Romania reaches agreement with the IMF it stands to receive $1.3 billion in loans from official creditors alone this year. Observers add that a positive element of the debt crisis is that it has focused government attention on speeding privatization.
However, they say Romania still needs to do more to create a better operating environment for both local and foreign investors. “The government focuses on the macroeconomy, it doesn’t look enough at the fundamentals of the microeconomy,” says Vivien Ashton, a banker with Robert Fleming and a former government adviser on capital markets. “Romania makes life so hard for business. The private sector needs to be allowed to breathe.”
