Tuesday, January 11, 2011

Romania: a rough ride to market

Financial Times
January 10, 2011 

Stefan Wagstyl

The long ride from Communism to capitalism in central and eastern Europe includes many a hurdle.

In Romania the government has got itself into a twist in trying to encourage privatisation and stock market development whilst also trying to squeeze cash out of state-controlled companies to plug budget deficit holes. Its contradictory approach has put Franklin Templeton Investments, the US-based investment manager, in an awkward spot.

Franklin Templeton’s emerging markets team is preparing the stock market flotation this month on the Bucharest exchange of Fondul Proprietatea, a €3.4bn government-backed company created to compensate Romanians ex-propriated under Communism.

Fondul, in which the state holds 39 per cent with most of the rest distributed among Romanian individuals, owns stakes in 83 companies, including Petrom, the oil group, and Transelectrica and Transgaz, the electricity and gas grids.

In theory, the flotation should be an excellent way of bringing new investors into a wide spread of companies in a key new member of the European Union.

In practice, the Bucharest stock exchange listing has been overshadowed by a rowbetween Franklin Templeton and one of Fondul’s key portfolio companies, Romgaz, the national gas group.

Franklin Templeton’s emerging markets team, headed by high-profile chairman Mark Mobius, ran into trouble with Romgaz within weeks of taking over Fondul’s management in September. Franklin Templeton launched legal action after Romgaz, where the state has 85 per cent, agreed to a government demand for a special 400m lei ($122m) ‘donation’ to public funds to help ease the budget deficit.

Franklin Templeton, owner of the remaining 15 per cent of Romgaz, is pulling no punches. It has called a Romgaz general meeting to vote on revoking the company’s directors and start individual legal actions against them. That is scheduled for January 17, just days before Fondul is set to float on January 25.

Nor is the US fund manager opting for quiet diplomacy. In a statement last week. Mobius warned:

The Romanian Government is taking a serious risk with foreign investors by following this course of action. We have strongly opposed such measures as we firmly believe they are detrimental since it could cause investors to lose confidence in the Romanian government’s willingness to honor its bond and the debt obligations as well as obligations to shareholders and suppliers of government owned companies.

That is hardly an idle threat at a time when Bucharest is dependent for its external financing on a Euro20bn International Monetary Fund/EU financing programme. It is fighting to reduce its budget deficit from 6.6 percent of GDP last year to 4.4 percent for 2011 in the face of sluggish growth forecast at 2 per cent for thie year.

Given that Romania’s leaders have often preferred short-term fixes to sound long-term polcymaking it would be no surprise that if this time too, they stick to fleecing Romgaz. But the long-term costs are not to be underestimated.

Since the global crisis, international investors have become very choosy about which CEE countries they back, generally preferring the central European heartland of Poland, the Czech Republic and Slovakia to the more distant reaches of the Balkans. If this distinction persists, Romania will be in trouble. The eventual bill for Romgaz’s 400m lei could be very heavy.

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