Romania and Bulgaria step up their games

Publish date: Astazi, 28-03-2007
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The executive, head of strategy at Romania's state-controlled power-grid operator Transelectrica, was sitting in the lobby of New York's Waldorf-Astoria Hotel, taking a short break from meetings with American investors to promote the attractions of the European Union's latest entrant.

"The Bucharest Stock Exchange is very small, but in terms of returns you can make much higher margins than in developed markets," he said. As a result, "the visibility of Romania among international investors has increased."
Purdila's own company is a case in point. Transelectrica, which has a market capitalization of about 1 billion euros ($1.33 billion), floated 10% of its shares on the Bucharest Stock Exchange last August. Its stock price has since tripled.

Small wonder, then, that Purdila brushed aside questions about the country's failure to implement important reforms or the deepening political crisis caused by tussles between members of the government.

"In Romania, the market is less and less dependent on the political situation," Purdila said. "This is not to say that there aren't certain tensions, that we're not preoccupied. Electricity, however, is not political."

Dragos Simion, vice president of Romanian technology retailer Flamingo International, agreed: "The issue with politics is something that creates noise." But now that Romania is part of the E.U., domestic politics are no longer a dominant issue, he said.

"Romania is no worse than any other Central or Eastern European country. There may be problems with corruption or the judiciary, but they are not bigger than in other countries," he said.

Toughing it out

With a population of 22 million, Romania joined the E.U. on Jan. 1, together with neighboring Bulgaria, both countries having overcome misgivings in Brussels about their preparedness. The pair were allowed into the 27-member trading bloc on the condition that they step up efforts to fight corruption, reform judiciaries and improve administrative capacities.

The two countries are eligible for large amounts of E.U. structural funds, which could significantly improve development, especially in infrastructure.

That's not the only benefit.

"As new entrants into the E.U., both Romania and Bulgaria will most probably benefit from an increase in foreign direct investment," said Adrian Ciocoi, the Romania-based head of research for the emerging European markets at the Riedel Research Group.

That was certainly the case when Poland, the Czech Republic and Hungary joined the union in 2004. Foreign direct investment in Poland, for example, rose to 9.7 billion euros that year from 3.8 billion euros in 2003.

Fast-growing sectors like information technology, real estate, financial services and tourism offer abundant investment options in Romania and Bulgaria.
"There are many opportunities and not enough capital to fund them," said Valeri Petrov, the director in Bulgaria for Global Finance, which manages more than $850 million in private-equity investments in Greece, Bulgaria and Romania.

Bulgaria has received 7 billion euros of foreign direct investment in the last three years, Petrov said. Real estate is popular and generates huge returns in the region, growing at 30% to 40% annually, he said.
And Bulgaria as a whole, with about 8 million people, has been expanding fast: GDP rose 6% in 2006 and is expected to grow at a 5.4% pace in 2007.

Romanian economic growth is robust, as well. The economy expanded by 7.7% last year. The Economist Intelligence Unit is expecting GDP growth of 6.4% in 2007.

The level of convergence between Romania and Bulgaria and the E.U. is still lower than in other Central and Eastern European countries, said Vladimir Milev, financial analyst for the Metzler/Payden European Emerging Markets Fund.

However, "strong economic growth, discounted valuations and rapidly developing markets [mean] the two countries provide some good investment opportunities," he said.

"Apart from liquidity, the level of investor communication and overall corporate governance could improve, but with the recent E.U. accession we are optimistic about the future of these markets."

In Romania, Milev's fund has its greatest exposure to banks, such as the Romanian Development Bank; Banca Transilvania; and the country's largest bank, Banca Comerciala Romana, which is majority-owned by Austria's Erste Bank.
Low liquidity, particularly in Bulgaria, is a problem. As a result, foreign investors can capture growth in these countries by investing in companies listed elsewhere that have exposure to the region. For example, investors can buy stock in Austrian oil company OMV or Czech utility CEZ, both of which have acquired assets in Bulgaria and Romania.

Cloudy short-term outlook

Still, even with their economies are on a growth path, the short-term outlook for Romania and Bulgaria is murky. Both have big current-account deficits and have further to go in implementing reforms.

"Ratings of the two E.U. newcomers, Bulgaria and Romania, seem to be a bit too positive, given the underlining fundamentals in the two countries," said Lars Christensen, senior analyst at Denmark's Danske Bank.

The outlook is most negative for Romania: "We would expect a downgrade of Romania's sovereign-debt rating from at least one of the rating agencies, most likely Fitch," he said.

Bulgaria, which overturned its communist government in 1989 only to re-elect communists under a new name a year later, lagged in the area of economic reform in the early years of transition. The country was plunged into an economic crisis in 1997 from which it is still recovering.

Reforms implemented in the late 1990s succeeded in stabilizing the currency, the lev. As a result, the country's ratings have dramatically improved over the last decade. The key fiscal risk to the country right now is the current-account deficit.

The governing coalition is a hodgepodge of parties led by a socialist prime minister, but it has managed to function, unlike the government in Romania, which is in the midst of a multifaceted political crisis.

"Bulgaria has made tremendous progress since 1997," Christensen said. "I'm much more doubtful about Romania. The political situation has deteriorated quite dramatically. Going into the E.U. is what's keeping things afloat."

The feud between Romanian President Traian Basescu and Prime Minister Calin Tariceanu, who have been sharing power in the coalition government, has slowed down the fight against corruption as well as much-needed reforms in the public-administration and justice systems.

"There are a tremendous number of reforms that need to be implemented," said Jon Levy, an analyst at the Eurasia Group. "You have a loss of steam now that Romania is in the E.U."


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