Romania already has a proven track record of sustainable growth (currently it’s the fastest growing economy in the EU with 4.6 percent GDP annual growth). At the same time it’s a country that still has a lot to do to catch up with the per capita metrics of its western counterparts. But isn’t this one of those too-good-to-be-true stories? We don’t think so.
When other countries in the region that used to be ‘best in class’ are today embracing controversial economic policies (Poland) or remain lackluster in terms of capital investment and economic performance (Czech Republic) the eyes of the investment community are turning toward Romania – and justly so.
With 20 mn inhabitants, Romania is the seventh-most populous country in the EU. According to EU statistics body Eurostat, Romania’s GDP per capita was at 57 percent of the EU average in 2015, up from 41 percent in 2007 when Romania joined the bloc. Romania has a relatively attractive tax system with personal income, corporate and capital gains taxes all at a single flat rate of 16 percent, and no dividend taxes. The Romanian leu has been stable for the past eight years, tied to the euro under a managed free float regime. With the unemployment rate below 6 percent, public debt at 37 percent of GDP and price inflation under control, the macroeconomic indicators don’t raise any concerns, either. No wonder foreign direct investment continues to flood into the country.
The state-owned enterprises that often distort an economy have been dying out as privatization has progressed both in the energy and financial sectors, albeit rather slowly. Gradually, however, the evolving financial sector has opened up to competition, and foreign-owned banks currently dominate the banking sector. And what we see happening now (and what fuels our optimism) is that the Romanian capital market seems to be getting in shape and is ready for take-off. This is the result of significant improvements to the stock exchange infrastructure (including a new reporting system), macroeconomic stability, the increasing wealth of the Romanian public and the sheer size of the economy.
There are currently 90 companies listed on the main market of Bucharest Stock Exchange (BSE). The latest significant addition was the Romanian healthcare provider Medlife, which concluded its IPO this week, while a few more companies are purportedly in the IPO pipeline for 2017. According to BSE’s CEO Ludwik Sobolewski, the investor profile is rather balanced with inflows from all three vital sources: international investors (40 percent-50 percent), local institutions (30 percent) and individuals (20 percent).
So what would make the Romanian market more interesting and spark the eruption of activity we are predicting? First, we see a perfect storm: a healthy, growing economy operating below its potential and a growing capital market with what we believe are often undervalued stocks trading at a discount to emerging market stocks. This is, in our view, due to restrictions that discourage even bigger international fund inflows. One such obstacle may be removed as soon as in 2017.
We are talking here about the opportunity next year for Romania to finally be upgraded from frontier to secondary emerging market by FTSE Russell, which placed the country on the watch list this autumn. This upgrade would theoretically bring more foreign investors and more money to the BSE. Romania is also getting closer to inclusion in the MSCI Emerging Market Index.
Were Hidroelectrica to join the likes of Banca Transilvania and Romgaz on the BSE, the conditions for inclusion (three companies with market capitalization, average daily volume and percentage free float above certain levels) would finally be met. If this were to happen, it would not only provide an immediate technical boost from inclusion in the index but, more importantly, would also improve risk perception of the Romanian market and put the companies listed on the BSE in front of a whole new class of international investors.
And so my advice is this: watch Romania in 2017!
Radek Nemecek is IR director at Cook Communications IR&PR
