Adina Postelnicu -

With inflation touching its lowest levels since 1989 and EU entry just around the corner, Romania is enjoying its biggest investment boom since the fall of communism.

In August, foreign direct investment (FDI) in major projects amounted to €117m – of which €81m was in greenfield investments – compared with just €10m made in such projects during the same month last year, according to the Romanian Agency for Foreign Investments (ARIS).

All analysts agree that a frothy real estate market is the main attraction, but energy, manufacturing and pharmaceuticals are other hotspots. Although IT and agriculture are still underexploited, analysts expect a bounce in these sectors next year.

"The main trend is in real estate, where investments are overwhelming," says Ionut Popescu, a former finance minister.

According to an official with the Romanian privatization agency, foreign investors interested in the last 400 state-owned companies that will go under the gavel have a beady eye on those firms' real estate portfolios.

For example, the Romanian Savings Bank CEC, the last major Central and Eastern European (CEE) lender up for sale, has a sizeable property portfolio that might be included in the sell-off. "It's very interesting to them," the privatization official says.

Romania's economic growth and rising corporate profits have also brought about changes in the balance of power between foreign and local investors. Having earned a packet from the ballistic economic growth, many local firms now find themselves with enough in the bank to be able to compete with foreign investors in the auctions for the remainder of the state assets. For instance, Biopharm, a local pharmaceutical company, wants to bid for Antibiotice Iasi, the last generic drug maker up for sale in CEE, with a market capitalization over €200m. It faces competition from another 22 bidders, most of them foreign.

And there is growing competition amongst the locals as business is divvied up between established rich local businessmen and an emerging class of hugely successful young entrepreneurs. The former have invested mostly in manufacturing, oil and other traditional industries, while the latter is found more in consulting, marketing, advertising and IT. "Typically, they go for different markets," the privatisation official said.

Mutual benefits

Industrialists are confident that next year will be as good as this, but the prospects for the equity capital markets are less certain.

Among the optimists is ex-finance minister Popescu, who believes a growing number of companies listing on the stock market will inevitably bring a surge of investment into the capital markets.

However, Mihail Ion, head of the fund manager Raiffeisen Prosper, disagrees. "There aren't too many companies listed on the stock exchange, and I do not expect too many new entries," Ion says. "I don't see a boom comparable with the one in 2006, or in the last two years. For 2006, I still expect a double-digit yield, but lower than the [50% yield] in 2005."

Even so, no one disagrees that the equity market is shallow and narrow, and would welcome some new names. The few companies that have floated in the last year were met by high demand; when Transelectrica, a local energy distributor, floated earlier this year the issue was eight times oversubscribed and the shares rose 40% following the company's debut.

Likewise, the Romanian mutual funds industry is considered underexploited, being worth only 0.2% of gross domestic product (GDP) compared with the 5-8% of GDP in other CEE countries. Experts say one of the reasons why the mutual fund industry remains so small in Romania is a legacy of some nasty bankruptcies in the savings industry, including those of SAFI and Certinvest.

"I don't expect to get to similar levels in the next years, but even if the market [for mutual funds] goes up to 1-1.5% of GDP, this means €1bn-2bn in the next three to five years," Ion says. For its part, Raiffeisen Prosper, which is owned by Raiffeisen International's Romanian subsidiary, has seen its assets jump to €10m in the five months since the fund was launched.

Greenfields forever

In the first four months of this year, Romania attracted $17.1bn in FDI, with projects over $1m coming mainly from the Netherlands, Austria, France and Germany.

What is especially pleasing for the Romanian government is that the amount of money flowing into greenfield investments – direct investment in new facilities – appears to be gaining some momentum. According to ARIS' data, greenfield investments rose to €707m in 2005, a 35% jump from the €555m in 2004. And in the first 10 months of 2006, greenfield investments have already reached €625m, which brings the cumulative total to €6.4bn since 2001.

"There is spectacular growth in the greenfield area," Popescu says.

As the focus of outsourcing turns from low cost to more sophisticated IT work, a new study by the Economist Intelligence Unit (EIU) predicts that CEE countries, including Romania, will be the top outsourcing locations for Western Europe. "We are going to see massive outsourcing in IT," reckons Bogdan Baltazar, a financial consultant.

In September, Hewlett-Packard announced plans to open a new outsourcing centre to employ 1,200 Romanians. The Bucharest-based operations centre will provide services to customers in the Europe, Middle East and Africa.

And more recently, Accenture, a Bermuda-based company that offers management consulting and outsourcing services worldwide, has opened a new delivery centre in Bucharest. Amazon, the US online retailer, also recently decided to open its second software-development centre in Romania, creating about 600 jobs.

Send comments to Adina Postelnicu