Investment Adventures in Emerging Markets

Power Struggles and Progress in Romania

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Bordering the Black Sea in Southeastern Europe, Romania offers visitors a variety of beautiful and dramatic landscapes concentrated in a relatively small land area, including modern cities and medieval villages, sweeping mountain vistas, broad plains and sandy beaches. Romania may also be one of the more attractive investment destinations in emerging Europe today, but its political environment has been characterized by some power struggles as dramatic as its scenic views. The most recent political turbulence in Romania provides an example of how politics and power struggles can thwart economic progress, but now that some of the political uncertainty has been removed, I believe Romania should be able to move forward in a productive way.

This summer, Prime Minister Victor Ponta and President Traian Basescu were locked in a battle for authority which caused Romania’s currency (the Leu) to fall to a record low against the Euro. This impeded the country’s efforts to sell debt, and undermined investor confidence. In July, the Parliament, led by Ponta’s coalition, the Social Liberal Union (USL), suspended Basescu from office and sought impeachment based on accusations of unconstitutional behavior.

Mark Mobius in Romania

A referendum on the impeachment was invalidated in late August by Romania’s Constitutional Court, clearing the way for Basescu’s return to office, but the friction created some economic fallout which was exacerbated by the negative impact of the Eurozone crisis. Still, unlike some other parts of Europe, Romania doesn’t look to us to likely be falling into recession this year. According to IMF projections in August 2012, Romania’s 2012 GDP growth is estimated at around 1%, and is expected to improve to 3.0% in 2013.1

Public backlash against austerity measures is certainly not unique to Romania, and parliamentary elections scheduled in December 2012 could add another layer of uncertainty and volatility. However, political debates about reform and change in Romania are not new to us. These kinds of debates take place all over the world and in nearly every country. The good news is that Romania has been moving toward positive change and reform for some time, and going forward I think the long-term outlook for the economy is good.

My reasons?  Romania has already taken a lot of “bitter medicine” recommended by the IMF and, as a result, appears well positioned to potentially experience accelerated growth in coming years. Of course, 2012 has been challenging due to the problems in the Eurozone and the political strife, but once these problems ease, I think the Romanian economy could well emerge as one of Europe’s growth leaders. Most other EU countries still need to apply the difficult types of austerity measures that Romania has already implemented. Although forced to spend down some of its reserves, Romania has been able to shrink its budget and repay its debts, a state of affairs that has been recognized by some rating agencies this year, in contrast to many EU countries which suffered downgrades this year.

Also on the list of positives, Romania’s natural resources offer it a global advantage. Most people know about Russia’s vast oil riches, but Romania was actually the first country in Europe to produce oil on a large scale, with petroleum production officially registered in the international statistics. We believe more natural gas and oil may be discovered there, so that’s another area we are excited about as investors.

Many readers may not know that in 2010, Franklin Templeton opened an office in Bucharest to begin managing a US$4.28 billion2 mandate from the Romanian government, Fondul Proprietatea. Listed on the Bucharest Stock Exchange, Fondul Proprietatea’s unique mandate is to compensate Romanians whose property and assets were seized by the country’s former communist regime. As a portfolio manager, we push for corporate reform efforts, better standards of corporate governance, greater transparency and improved profitability in the country. We have been working closely with the Romanian government to institute reforms, which in turn, should help boost economic growth and profitability for listed companies.

We believe Romania’s local capital market has a lot of room for development, and we would like to see the Romanian government bring more state-owned companies to the market. This is key because, as I see it, the biggest roadblock for investors in Romania is the profitability of these companies. It will be important to institute change, new managements and new ways of working so that these companies become attractive not only to local investors, but also to international investors.

A progressive step forward was made with the adoption in December 2011 of a new Corporate Governance Ordinance for state-owned companies, crucial in the process of increasing their transparency, efficiency and profitability. However, the current status of implementation of this Ordinance is rather slow and a bit disappointing in our view.  As manager of Fondul Proprietatea, we hope the Romanian government will speed up this process and address non-compliance with corporate governance principles, in order to successfully restructure state-owned companies.

From an investment standpoint, we are currently optimistic about the potential of infrastructure-related companies, such as those which distribute or generate electricity or engage in construction of bridges, roads, railroads and the like.

Politics and change can of course disrupt or delay reform efforts, but my team and I believe that in the long-term, democracy, and the capital markets in Romania, should strengthen.

1. Source: IMF, August 2012.

2. Source: Fondul Proprietatea, 31 August 2010, NAV reporting based on CNVM (local regulator) standards.


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