Narrating a frontier economy for bonds and equities

15 Oct

How do you tell a story about a country that still has some stuff to sell but whose austerity sputters like a 1950s jalopy? Here’s a sample from FT:

Financial Times

October 14, 2012 4:35 am
Romania pins hopes on its privatisation programme

By Fiona Rintoul

Sometimes investment is about making money and sometimes it is about more than that. For Dragos Valentin Neascu, chief executive of Erste Asset Management in Bucharest, establishing the conditions for domestic and foreign investors to have confidence in Romanian equities and bonds is above all about freeing the EU’s second poorest country from the vagaries of politicians.

“Our lives should be less in the hands of the politicians and more dependent on the real economy,” says Mr Neascu.

However, the kind of freedom Mr Neascu seeks requires the financial markets to develop. That is one reason why he believes entry into the euro is still important for Romania, whatever local difficulties the eurozone may have – although Romania’s euro journey may be of the type where it is better to travel than to arrive.

“The technical criteria associated with euro adoption are very important,” says Mr Neascu. “They are more important than the euro itself. They will make us more predictable as a [bond] issuer. Then companies can finance themselves on the local market and internationally.”

For the moment, however, foreign interest in Romania remains muted. The country is not so much in the wrong place at the wrong time as in all the wrong places. It is classified as a frontier rather than an emerging market, and so it misses mainstream emerging market investment. However, within the frontier markets universe, it is, currently, seen as one of the less compelling options.

“In comparison to global frontier markets, Romania unfortunately does not offer many attractive investment opportunities,” says David Wickham, investment director, emerging markets at HSBC Global Asset Management. “The economy’s near-term performance is closely tied to the success of the EU being able to resolve the Italian, Spanish, Portuguese and Greek debt crisis.”

Before the crisis the Romanian economy was growing at about 7 per cent a year, but gross domestic product growth for 2012 is predicted to fall below 1 per cent. Although, its debt to GDP ratio is not high compared with western Europe, its economy is weakened by its surroundings.

“The Romanian economy does not currently benefit from its low wage costs,” says Mr Wickham. “The European economies [the main export markets and providers of foreign direct investment into Romania] are in, or approaching, recession. This provides no stimulus for the Romanian economy and no relief for its high unemployment rate.”

Not only that, Romania is close to, and tied up with, Greece. “Greek banks have a big exposure to Romanian banks, and so there is the question of what would happen if Greece exits the euro,” says András Szálkai, fund manager in the emerging markets equities team at Raiffeisen Capital Management.

But not all Romania’s problems come from outside. Only a few months ago, investment prospects looked much brighter. Then in April the government collapsed after losing a vote of confidence and Victor Ponta was appointed as Romania’s third prime minister of the year.

“At the beginning of the year, it looked like Romania would be a good story for equity investors,” says Mr Szálkai. “Until May the stock market was up 25 per cent in US dollar terms.”

Political squabbling has meant that a programme of reforms agreed with the International Monetary Fund, including a series of privatisations, has stalled. The Romanian currency, the leu, has also come under pressure against the euro, falling 5.3 per cent this year and hitting a record low in July.

The privatisation programme is critical to broadening choice on the stock market and improving liquidity. Overall, the market capitalisation and liquidity of the equity market would have tripled had the programme gone ahead, says Mr Szálkai.

The hope now is that a general election on December 9 will deliver a clear result and the privatisation programme – which includes Romgaz, the country’s largest oil producer – will be resumed. Not only will this mean that important economic sectors, such as utilities, will be represented on the stock market, it may also encourage private listings.

“Investment bankers have drawn up plans to list family businesses that have developed over the past 10 to 15 years in sectors such as pharmaceuticals and tourism, but these exercises have not been concluded,” says Mr Neascu.

If private listings come hand-in-hand with privatisations, it will make for better representation of Romania’s key sectors. This could help to allay the concerns of foreign investors such as Mr Wickham, who says that currently “it is difficult to invest in domestic consumption stories or companies offering strong top-line growth”.

A deeper stock market would also help the development of domestic institutional investors, such as pension funds and mutual funds, which in turn would provide additional stock market liquidity, creating a virtuous circle.

Meanwhile, a secondary listing on the Warsaw Stock Exchange of Fondul Proprietatea, a portfolio of energy stocks including the unlisted Hidroelectrica, is planned with a view to expanding the shareholder base – a route that other companies may in due course follow.

In time, Mr Neascu hopes that Romanian companies will also seek to finance themselves through corporate bonds. At the moment, the portion of his funds invested in corporate bonds is mainly in leu-denominated bonds issued by international companies in Luxembourg.

“We would prefer to finance the Romanian economy,” he says.

Much hinges, then, on the privatisation programme going ahead smoothly. If it does – and if problems such as corruption, political instability and poor infrastructure can be alleviated – Mr Szálkai is upbeat about Romania’s long-term prospects.

“Maybe in 10 years’ time it will be the new Poland,” he says.

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