Romania's prime minister Ludovic Orban
Romania’s economy faces “another lost year” with little progress on key reforms if attempts to bring parliamentary elections forward are unsuccessful, warned the head of listed local investment fund Fondul Proprietatea.
“We badly need a fully mandated government that can take the actions necessary to repair the damage caused by the previous government,” says Johan Meyer, CEO of Franklin Templeton Romania, which manages the fund.
Romanian politics have been in flux since October, when a coalition led by the populist Social Democratic Party (PSD) was ousted by a no-confidence vote after less than three years in power.
The PSD government had angered investors and local businesses with a series of populist economic policies, including a radical package of sectoral “greed taxes” and energy price caps – known as ordinance 114 – that was introduced at the end of 2018.
Repeated attempts to reverse improvements in corporate governance at state-owned enterprises (SOEs), implemented at the behest of the IMF and European Commission after Romania’s bailout in 2009, were also condemned by reformers.
A new coalition government led by the National Liberal Party (PNL) was formed in November under the leadership of prime minister Ludovic Orban and promptly began dismantling the PSD’s legacy.
Legislation to cancel most of the measures in ordinance 114, including taxes on bank assets and energy companies’ turnover, was introduced in late December. The new administration also announced plans for a phased removal of the caps on gas and electricity prices, to be completed by the start of 2021.
Ordinance 114 was almost the death knell for capital markets in Romania- Johan Meyer, Franklin Templeton Romania
PNL policymakers also promised to revive Romania’s stalled privatization programme, which has been on hold since the $600 million IPO of utility Electrica in June 2014.
The largest asset up for sale is hydropower producer Hidroelectrica, which was also due to list in 2014, but instead went into insolvency. An attempt to restart the process in late 2016 was abandoned following the election of the PSD government.
The Romanian state owns 80% of Hidroelectrica, with the remainder held by Fondul Proprietatea.
Set up to compensate Romanians who lost property under communism, the fund owns stakes in 19 state-controlled enterprises. It has been managed by Franklin Templeton since 2010 and was listed on the London Stock Exchange in 2015.
Both Fondul Proprietatea and the Romanian state will sell existing shares in Hidroelectrica’s IPO. Based on each selling a 10% stake, Franklin Templeton puts the value of the listing at around $1.2 billion.
The IPO would be the first from Romania since November 2017. Romanian assets suffered a dramatic sell-off at the end of 2018.
“Ordinance 114 was almost the death knell for capital markets in Romania,” says Meyer.
The gradual reversal of some of the more damaging elements of the legislation in response to market pushback by the private sector and opposition political parties, however, prompted a steady recovery.
Romania’s blue-chip BET Index rose 44% last year from a low in mid-January and made further gains this year, before being hit by the global market sell-off in mid-February.
Hidroelectrica is currently selecting equity and legal advisers for the IPO. Meyer notes, however, that the deal could take more than a year to come to market.
“It’s not going to happen overnight,” he says. “The likely timeframe, barring political headwinds, is the second quarter of 2021.
“Compared with a couple of years ago, however, the difference today is that we have a majority shareholder that is fully aligned with the principle of developing capital markets and listing SOEs.”
A successful IPO of Hidroelectrica could set the stage for the sale of a clutch of smaller state assets. Fondul Proprietatea also owns stakes in Bucharest Airport, salt producer Salrom and Constantza port, all of which have been earmarked for privatization.
In November, PNL finance minister Florin Citu also expressed enthusiasm for a 20% public listing of CEC Bank, Romania’s seventh-largest lender. The bank, which received a €200 million capital increase late last year, is wholly owned by the state.
However, progress on privatization plans will require the formation of a government capable of commanding a majority in Romania’s parliament.
The coalition government formed in October did not have a majority. Orban and Romania’s centrist president Klaus Iohannis have therefore been pushing to bring forward parliamentary elections scheduled for the autumn to end the instability and capitalize on PNL’s commanding lead in the polls.
Accelerating the process requires a vote of no-confidence in the government, which was set up and passed in early February, as well as the rejection by parliament twice in succession of a new designated prime minister.
However, Iohannis’s nomination of Orban for the post was ruled ineligible by Romania’s Constitutional Court on February 24 on the basis that it was made solely to trigger rejection by the PSD and thus early elections.
On the same day, the president also failed to win parliamentary backing for another interim government led by the PNL. Two days later, he asked former finance minister Citu to try to form a transitional government.
Analysts at Raiffeisen Bank International (RBI) said the court ruling reduced the chances of early elections to around 50%, adding that parliament’s rejection of the proposed interim government “demonstrated quite plainly that opposition parties have the means to prolong or even derail the procedure”.