Investment Adventures in Emerging Markets

Privatization in Romania

Recently, Franklin Templeton opened an office in Bucharest to begin managing a significant mandate from the Romanian government, Fondul Propietatea. It is a mandate with the unique objective to compensate Romanians whose property and assets were seized by the country’s former communist regime. Over the last year we have been visiting many companies in Romania and believe that a number of them could benefit from privatization.

I’ve often stressed my strong belief in the merits of privatization. In my opinion, privatization brings positive development for emerging and frontier markets. It makes companies more attractive to investors, including foreign investors, and leads to higher efficiency, which can lead to higher profit margins. In the past, I’ve seen that privatization not only boosts local stock markets but also benefits the domestic economy.

In my view, privatization in Romania is no exception and would help their market become more liquid, efficient and productive. Greater transparency, higher reporting standards and more opportunities to invest should attract both local and foreign investors to the Bucharest stock exchange. The market is currently dominated by Romanian residents, who made approximately 70-80% of the exchange’s trade volume in 2009, but foreign investors play an important part as well. Although they accounted for only 20-30% of trades that year, they are often seen as trend-setters.[1]

For Romanian companies, an increased inflow of capital, both local and foreign, into the Romanian market would result in increased liquidity, which would decrease the cost of capital and provide an alternative financing route, making them more competitive and less dependent on bank financing. Increased liquidity should also provide the benefit of increased tax revenues, enabling the country to improve its fiscal situation.

In terms of specific sectors, I believe the greatest potential in Romania can come from privatizing companies in the energy sector. The transportation sector also appears to have important potential in the long term, as do postal services. Over the past months, our continued interaction with Romanian companies has given me further insight into the quality of management in Romania, which has been good in many instances.

For example, we visited a small company specializing in the manufacturing of alloy ingots. Its output is almost entirely exported to industrial companies located in the European Union, the United States and Asia. In 2010, the company expects to produce the highest output in its history. According to the company’s management, the market is cyclical and is currently at the start of a decade-long uptrend, driven by increased demand from the aerospace industry as companies renew their fleets. Management also noted that a rise in demand from the aerospace industry often squeezes out other sectors that need for alloys and alloy ingots, representing an opportunity for smaller players (like this company) to gain market share and clients. The CEO has been with the company from day one and was quite passionate, and many other managers have also been with the company for more than a decade.

Of course, there are still a number of companies where there is room for improvement, which is gradually taking place. In our role as portfolio manager, it is one of our duties to push for corporate reform, better standards of corporate governance, greater transparency and improved profitability. Reform is also crucial in the public sector, in the public pension system, and it is currently being implemented by the Romanian government. Like many other countries in the region, Romania has to adjust the size of its public sector and pay greater attention to how public money is spent. Although painful, these reforms may prove vital in securing solid growth in the coming years.

With our new office now set up in Bucharest, I am likely to visit Romania frequently in the future. I look forward to working toward unlocking value and finding opportunities in Romanian companies. Just as the Warsaw stock exchange is the hub for Central and Eastern Europe (CEE), we could perhaps see increased liquidity make the Bucharest stock exchange the hub for Southern Eastern Europe and thus foster the development of high value-added financial services in Romania.

[1] Source: Bucharest Stock Exchange (BVB), National Securities Commission (CNVM)

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