Thursday, March 27, 2008

Romania: Temporary Setback 25 March 2008

Oxford Business Group Latest Briefing

The Bucharest Stock Exchange (BVB) announced excellent 2007 results last week, and could be looking at another year of comfortable growth, with a series of important listings in the pipeline. These, combined with Romania's high growth rate, could offset the negative impact of a global shift away from capital markets, and off-putting comments from Romanian tycoon Dinu Patriciu.

On March 19, the BVB reported an 87% year-on-year increase in its preliminary net profit in 2007, hitting $12.3m. The exchange's total revenue was $22.2m, an increase of 55%.

The major factors behind the strong performance "were the rise in the number of investors, the diversification of their investment behaviour and the more active presence of non-resident investors," according to Stere Farmache, the BVB general manager and CEO. Non-resident investors accounted for 40% of all transactions in 2007, a seven-year record.

The bourse has already made further impressive gains this year, with market capitalisation reaching $55.35bn on March 19, up from $43.62bn at the end of 2007. However, on March 20, the market took a big hit, after comments by Dinu Patriciu raised doubt about the BVB, deepening the effects of a global retreat from capital markets.

The blue chip BET index lost 7.29% on March 20, while the composite BET-C index dropped 6.72% and the BET-FI, which covers Special Investment Funds (SIFs), organisations that own stocks in privatised companies, fell 4.1%.

Perhaps most strikingly, the ROTX, an index of Romania's 11 most liquid stocks, which is listed both on the BVB and the Vienna Stock Exchange, lost 7.83%. Major stocks such as BRD- Société Générale, the second bank in Romania in terms of assets, and energy firm Petrom, lost almost 10% each.

Patriciu, the richest man in Romania, is chairman and CEO of Rompetrol Group, a Romanian company headquartered in Amsterdam, which owns the BVB-listed refining firm Rompetrol Rafinare. On March 19, he was reported as saying that he had little faith in Romanian capital markets and did not invest in them himself.

"I do not invest on the Romanian capital market. (...) When the fifth-largest bank in the States [Bear Stearns] collapses, you want me to have faith in the Romanian market?," Patriciu was quoted as saying. He allegedly added that he thought the BVB is overvalued, and only worth half current capitalisation.

The BVB authorities will be hoping that Patriciu's comments do not tarnish the bourse's reputation in the long run. They have certainly come at an unhelpful time, with investors across the world increasingly wary in the wake of the global credit crunch. Stocks on major European and North American bourses have dropped significantly over the past week, as money flies to safer assets, such as commodities and the strengthening euro.

Over the past couple of years, the BVB has developed into one of the strongest performing bourses in the region, after a quiet start. It was originally launched as a mechanism for privatising state-owned companies, but more initial public offerings (IPOs) in recent years have broadened the scope of the exchange and increased liquidity. However, the development is still work in progress, and the BVB can ill afford a serious blow to investor confidence. Last year, a major ratings agency lowered its credit rating for Romania due to fears of political instability.

Reassuringly, the exchange is expected to make most of the losses back fairly quickly over the next week, as the drop was "too big and ungrounded" according to one broker quoted in the national press. Patriciu is known as something of an outspoken commentator. Romania's growth rate, expected to hit 6% this year, after a similar figure in 2007, should reassure investors that the country is a safe bet, at least in the medium term.

The BVB should also receive a welcome liquidity boost from the IPO of restitution investment fund Fondul Proprietatea (Property Fund), which aims to give shares in state firms to Romanians who lost properties during Communism. The fund, which will list 20% to 30% of its stock by year-end, holds shares worth an estimated total of $6.22bn in a wide range of Romanian companies, and therefore would boost liquidity, capitalisation and the number of people participating in the exchange considerably. While the recent fluctuations of Romanian stocks may add to criticism that the fund is providing compensation in assets with uncertain value, the fund and the BVB should find the listing mutually beneficial if the expected recovery occurs.

A further boost should come from the offering of four airports and four port operating companies, all currently in public hands, announced on March 13 and expected by the end of the year. The airports include Henri Coanda and Baneasa- Aurel Vlaicu, both in Bucharest and undergoing expansion, as well as the thriving regional airport in Timisoara. The fourth is Constanta, on the Black Sea coast, which is likely to become an increasingly popular destination for business travellers as well as tourists who have long flocked to surrounding beaches. The ports being privatised, on the Black Sea and Danube, are also ripe for development as Romania builds its reputation as a logistics and transportation centre. Nuclear power operator Nuclearelectrica is also expected to launch a major IPO this year.

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