Tuesday, November 3, 2009

Market Politics

Oxford Business Group Latest Briefing

Concerns are growing that Romania's political crisis, which has seen something of a vacuum develop after the fall of then Prime Minister Emil Boc's government, could impact on the country's capital markets, harming investor sentiment and blocking the inflow of much-needed funds to the economy.

Though the ousting of Boc's coalition government after it lost a vote of no confidence on October 13 did not send a major shiver through the Bucharest Stock Exchange (BSE), the failure of prime minister designate Lucian Croitoru to form a new cabinet, and the obvious reluctance by opposition parties to back President Traian Basescu's nominee, are starting to undermine the confidence of Romania's capital markets.

While a respected economist, having been Romania's representative at the IMF from 2004 through to 2007 and a former advisor at the National Bank of Romania (NBR), Croitoru appears unable to command enough political support, with Boc's Democratic-Liberal Party (PDL) being the only party prepared to throw its weight behind Croitoru's efforts to form a government.

Parties representing around 65% of the seats in the parliament, including the Social Democratic Party (PSD), the National Liberal Party (PNL) and the Democrat Alliance of Hungarians in Romania (UDMR), are backing a bid by Klaus Johannis, the mayor of the city of Sibiu, to be given the mandate to form the next government.

Views vary on the impact of the government crisis on the economy and the country's markets, with Petru Rares, the president of the Romanian Banking Institute (IBR), saying the current political volatility should not affect the economy's progress towards recovery, as long as certain fundamental principles were maintained.

"Our anti-crisis programme is established together with the IMF and the EU, and we must stick to those coordinates," he said in an interview with the Agrepress news service on October 15.

Less optimistic was Gabriel Necula, deputy operations manager with brokerage firm Prime Transaction, who said in the lead up to the confidence vote in the parliament that the ongoing political crisis was making the position difficult.

"I believe the situation is ticklish for Romania, therefore the stock exchange can no longer correlate with external markets," he told daily Ziarul Financiar on October 10. "The political crisis Romania is confronted with at present reflects on the exchange rate and the BSE, therefore we cannot stay indifferent."

While the market has not remained indifferent since the fall of the Boc government, it has remained cautious, the gains of one day being all but cancelled out by falls the next.

Of immediate concern is the $5.2bn needed to meet budgetary requirements up to the end of the year. With no government in place, the expected sources of much of this funding, the IMF and the EU, are not in a position to fill the gap.

The IMF has announced that it will not resume talks over the release of a $2.25bn tranche of its standby agreement with Romania until a new government has been formed, while Brussels is reluctant to hand over up to $1.5bn in agreed funding. Further widening this funding hole is the fact that the political crisis has meant the Finance Ministry has had to defer plans to raise around $1.5bn of Eurobonds through the international market.

On October 20, Croitoru said it would be difficult to raise the $5.2bn in a short time, a situation made "even harder to collect in a time of political crisis".

"Any delay can bring upon enormous costs," he said.

To avoid at least some of these costs, authorities are looking to domestic markets to obtain the funds needed to keep the state running, though there could be limits on the levels of capital available, and borrowing costs could also be higher, especially for loans in local currency.

On October 19, the Finance Ministry held a successful bond issue worth $77m, with the key subscribers being Romanian-based banks. The ministry has said it plans to raise up to $2bn through treasury bond issues in October, having drawn $19bn from the market in the first nine months of the year, up from $4.33bn in all of 2008.

Though the success of this stepped-up borrowing programme does indicate lenders are still prepared to service the state's needs, the higher costs of raising funds through the local capital markets is likely to come back to haunt the next government.

With the approval of a government not expected until the end of October at the earliest, Romania's markets will have to wait until the first half of November or beyond before there will be any clear indicators over a time line for release of the IMF and EU funds.

This uncertainty, coupled with the lack of a hard economic policy from either Croitoru or Johannis, could signal a lack of direction for Romanian's capital markets in the short term, with prospects not likely to firm up until late in the year.

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