Romanian stocks hit for six as credit crunch spreads across region

By bne IntelliNews August 6, 2008

Dominic Swire in Bucharest -

Stock markets across Central and Eastern Europe have been reeling as economic worries drive foreign investors into dropping assets in emerging countries. One of the worst affected has been Romania, with the recovery prospects for the Bucharest bourse looking grim for the rest of the year. However, long term, analysts believe the country is developing at such a pace it's just a matter of time before market confidence returns.

Stock markets in Southeast Europe registered a terrible first half of the year. The Bulgarian market closed the first half of 2008 with losses that erased last year's gains. The SOFIX was down 34.7% and the BG 40 dropped 40.8%. The Belgrade BELEX 15 index of most liquid shares recorded a drop in value of 23.1% during the same period, while Slovenia's SBI20 dropped 30.7% and Croatia's CROBEX fell 31.5%. But the most affected market in the region has been Romania. In just two days, July 15-16, over €2.1bn was written off the Bucharest Stock Market, with the value of listed companies falling 50% over 12 months to €16.9bn. Many analysts worry the losses will continue throughout the year.

One of the main reasons the Romanian stock market has been hit so hard is because of the disproportionate number of foreigners investing in it, argues Oleg Galbur of Raiffeisen Capital & Investment in Bucharest. During the current global crisis, many investors have been consolidating assets and selling riskier investments in emerging markets. "Foreign investors were net sellers in the whole region, including Romania. However, the Romanian capital market lacks strong local institutional investors that could offset the sharp fall," Galbur says.

One reason for this has been the relatively small number of IPOs in the Romanian market that usually attract more long-term investors, as well as insufficient liquidity and doubts about Romania's macroeconomic stability. "In our opinion, foreign investors overreacted to the widening of current account deficit, depreciation of domestic currency and growing inflationary pressure, which otherwise is something common for a fast-growing economy," says Galbur, who believes foreign investors will be attracted back once the international context improves. "The economic growth of at least 6-6.5% in 2008 coupled with decreasing inflation and a contracting current account deficit should motivate investors to pay higher attention to domestic-listed entities," Galbur says.

It is highly unlikely, he argues, that Romania will climb out of its current mess until at least the end of the year. Nevertheless, such concerns seem trivial when put in the wider perspective of the country's rapid development over the last few years. A recent report by the Organisation for Economic Cooperation and Development (OECD) on the economic performance and social policies of countries in the Black Sea region praises Romania on many levels.

Silver lining

The OECD report entitled, "Black Sea and Central Asia: Work and Wellbeing," highlights Romania's rapid economic growth and "drastic" reduction of inflation, which was 34.5% in 2001, compared with an estimated 4.3% in 2007. In 2006, the report points out that Romania attracted an impressive $11bn of foreign direct investment compared with just over $5bn each for Bulgaria and Greece.

Evidence of this fast economic development can be seen in the growing number of Romania's Diaspora that are returning to the country as new opportunities are being created and the standard of living rises. In 1990, Romania's net external migration figure was 96,900 people. The latest figures from the OECD show that this figure dropped to 7,200 in 2005, two years before joining the EU. Since then, the report says the country's economy has been one of the fastest growing in the 27-member bloc, benefiting from structural reforms and sound macroeconomic policies.

"Romania's getting to the top of the scale where Romanians are thinking about coming back. The economy is expanding and jobs are being created at all levels," Colm Foy, Head of Publications and Media Relations at OECD Development Centre, told bne in Bucharest.

A new Ireland

Standing under a hotel parasol on a hot Bucharest afternoon Rainer Münz, Head of Research at Austria's Erste Bank, carefully rescues an earwig from a neighbouring table before waxing lyrical about how vital EU membership is for Romania.

"Think back to where Ireland or Spain were twenty years ago," Münz tells bne. "They were seen as, how do you say, semi-poor countries on the fringes of Europe. Look where they are today. This is exactly what we are expecting from this part of world... We think we see an Ireland economy ahead of us."

Romania has certainly attracted some big name investment over recent months, namely Nokia's €55m new plant in central Transilvania; Renault's €146m gear box plant in southern Romania; not to mention Erste Bank themselves putting their money where there mouth is and stumping up €3.75bn for a majority stake in Romania's biggest bank BCR at the end of 2005. Yet despite the investment Münz says it could be a generation before the country approaches anything close to a western standard of living. But the catch-up period is likely to be highly lucrative for the companies that stick around.

"The firms that remain here during this time will be rewarded with a very business-friendly environment," says Münz. "The markets here are not saturated yet."

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