Romania looks to EU membership
Romania's stock market is flying, but it remains narrow and shallow. The BET-C composite index was139% up in December year on year and rose another third over the first three months of this year. But with a total of 61 companies listed, most of the action takes place in a handful of stocks with limited shares in circulation.
"The market is demand driven, but it remains small, with only half a dozen blue chips, and even these have a low free float of about 15%," says Sergiu Oprescu, chairman of the BSE. "But the market is growing very fast and still has a lot of upside."
So far most of the running has been made by domestic portfolio investors, but Oprescu says that foreign investors have begun to return to the market since the end of last year.
"Over the past two years the growth of the market has been driven by domestic demand, but over the past six months foreign investors have reactivated dormant accounts that have been idle since the [Russian financial] crisis in 1998," says Oprescu.
The government intends to give capital markets a leg-up with the "Powerful Market" programme launched last year. Stakes of 5% to 15% in seven state-owned companies are to be sold on the BSE and more were added to the slate at the start of this year.
The initial list included five utilities. Some more attractive names were added recently, such as gas distributor Transgas, electricity distributor Trans Electrica and the government's remaining 20% stake in Romtelecom and a 10% stake in Petrom.
Equities make up 95% of the exchange's €13 billion capitalization. Only one corporate bond (Impact, a construction company), two bank bonds and 18 municipal bonds are listed. But the state also plans to create a secondary market in its treasury bills through listings as part of the programme.
With valuations rising rapidly, four big domestic companies are making noises about possible IPOs – still a rarity in central and eastern Europe. One is Flamingo, a leading seller of consumer electric goods that needs money to continue its rapid expansion in this increasingly competitive market.
Plans to boost the supply of securities on the BSE seem to be moving ahead, but there is still a lot of work to do in developing the demand side. Pension reforms have barely begun and there is no private pension industry to speak off. The government also needs to loosen rules on the booming insurance companies to encourage them to invest their capital.
"The insurance sector is growing quickly, but both the insurance and pension funds make only limited use of the capital markets. The government needs to change the rules to incentivize them," says Oprescu.
The bond market has yet to take off in Romania. With the bulk of the banking sector in foreign hands, the banks are well capitalized and able to meet most companies' financial requirements through loans.
The government has also shied away from issuing bonds. There are only four international issues and Romania's external debt is an extremely modest 28% of GDP.
"Romania's international borrowing is very low. There is plenty of room to borrow more from abroad and at a time when this borrowing is very cheap. But the government remains reluctant to make use of its investment-grade rating and raise money from overseas," says Florian Citu, managing director of Balkan Advisory Company.
The treasury bill market is small, with average maturities of three to six months. However, at the start of this year the state sold its first two-year and five-year bonds, with 8.5% and 7% yields respectively, as it begins to build out a yield curve. Even longer maturities are being developed.
Officially foreigners are excluded from the domestic bond market but experts estimate that hedge funds have invested up to e1 billion in domestic bonds through various grey schemes and maybe as much as €3 billion to €4 billion is waiting at the border to come in once currency controls are lifted in April.
"The window of opportunity is now wide open, but we need to grab it. The government can do more to encourage investors to use the capital market and we are doing what we can to push things along. But we need to see some real and tangible deals," says Oprescu.