Sometimes, change and reform don’t happen as fast as we’d like in some countries, and Romania has been one of them. However, we currently see signs of shifts taking place there that we are quite excited about as investors. Growth has been improving since 2009 along with the economy generally, and the capital markets are transforming with new public listings and new participants. I’ve invited my colleague in Romania, Greg Konieczny, to share his outlook for the country in the year ahead and some of the developments in the economy he is excited about right now. We think Romania is on the right track!
The Romanian economy had a successful year in 2013, surpassing initial expectations. Romania’s GDP growth is expected to have reached or even exceeded 2.5% in 2013,1 coming in ahead of forecasts 12 months ago of growth below 2%. The capital market has experienced probably its best year in the last five years, with some initial public offerings (IPOs) at record values. We expect this trend could continue in 2014 and, based on the facts discussed below, are optimistic there could be further acceleration of growth as well as crucial capital market developments this year.
In our view, there is potential for a positive evolution of the local Romanian economy, which could benefit from a recovery of global growth that seems to be gaining momentum, along with an uptick in global trade. We agree with the World Bank’s expectations for Eurozone growth to potentially accelerate to an annual average of 1.1% in 2014.2 Within the Eurozone, it seems most probable to us that Germany will be the engine of growth for the region in 2014, which means any positive spill-over effect could be felt in the periphery and in Central and Eastern Europe, including Romania.
We think the Romanian economy could continue to potentially accelerate. The World Bank currently forecasts GDP growth of 2.5% for 2014,3 but this may even be improved if this year’s harvest turns out to be similar to the one in 2013, which saw particularly strong wheat, corn and barley crops that helped drive export growth.
One of the drivers for Romania’s potential growth in 2014 is likely to continue to be tied to exports, in our view. We see opportunities in services, the energy and the automotive sectors. In addition, Romania has access to European Union (EU) structural funds, which are one of the main EU instruments designed to sustain economic growth while reducing disparities between regions in the EU. Romania’s economy could be boosted by its higher absorption rate of EU structural funds as well as a pickup in construction (both commercial and residential). Moreover, we believe one of the strongest contributors to growth could likely be consumption. Domestic demand in Romania has been picking up very slowly in the past couple of years but, with record low inflation, decreasing interest rates, low and stable unemployment levels and a low base compared to 2007-2008, we expect it could improve in 2014.
We do not anticipate inflation to grow meaningfully over the next 12 months. It is our view that interest rates could further decline following cuts in the Romanian central bank’s base rate that took place in the first weeks of this year to a record low of 3.50%. In 2013, Romania recorded the lowest annual inflation rate since 1990: 1.55%.4 For 2014, the National Bank currently estimates inflation will not likely surpass 3%. Further cuts in the base rate would follow a trend set by the central bank last year, when the base rate was cut gradually by a total of 1.25%.
This year may be another year of transformation for the country’s capital market that we believe could ultimately lead Romania—currently classified as a frontier market by index provider MSCI—closer to achieving emerging market classification. In 2013, Romania saw a significant growth of the capital market, with two IPOs of state-owned enterprises (SOEs). Given that the government is committed to respect the calendar of new IPOs currently in the pipeline, 2014 could continue this positive trend. MSCI has several criteria related to capitalization, free float and other factors that a market must meet to be classified as emerging. With the upcoming IPOs, Romania may get closer to meeting these criteria.
Romania’s current frontier status has proven to be very beneficial, as investors had a very strong interest in these markets last year: Frontier markets saw record high inflows despite net outflows recorded by emerging markets generally. In 2014, it’s possible we could see another record-high issuance of new equity and secondary placements for Romanian shares, given current listing plans. We anticipate the most important transactions are still expected to come from the state, with several announced IPOs in utilities/electricity. We may also see some private companies looking at IPO opportunities, as banks in Romania continue to be very cautious in their lending policies. Also, the corporate bond market could continue the encouraging volumes of new deals from 2013; issuance of corporate bonds was the preferred method of financing for several companies last year, as interest rates for loans are still high.
The increasing participation of retail investors could be another key element in the development of Romania’s market. Private individuals have shown a great deal of interest in the state’s public offerings last year, and we expect them to be increasingly more active not only in IPOs and Secondary Public Offerings (SPOs) but also by potentially investing in retail investment vehicles which in turn invest on the Bucharest Stock Exchange, Bursa de Valori Bucuresti (BVB). A good incentive for accelerating this trend is the fact that interest rates for deposits have fallen to record-low levels in the past six months. We also think Romanian pension funds could likely increase their exposure to equities, which represent only a modest share of the market at this time.
Of course, there are always risks and unexpected events that could change the outlook. On a political level, 2014 will be marked by two electoral campaigns which usually generate a lot of noise and volatility. This may affect investors’ decisions in the short term. However, we do not expect this to have a strong long-term impact on the economy, as what we deem to be Romania’s strong fundamentals and commitment to its agreements with international bodies such as the International Monetary Fund (IMF) may help prevent any major sideslips. Despite this possible election-related short-term volatility, we are hopeful Romania’s economy and capital market will quietly continue moving in a positive direction.
Dr. Mobius’ and Mr. Konieczny’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or a recommendation to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. This material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
All investments involve risks, including possible loss of principal. Foreign securities involve special risks, including currency fluctuations and economic and political uncertainties. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets.
1. Source: The World Bank. 2014. Global Economic Prospects, Volume 8, January 2014, World Bank, Washington, DC. doi:10.1596/978-1-4648-0201-0 License: Creative Commons Attribution CC BY 3.0.