Romania showing glimpses of a brighter future

Despite recent corruption probes and massed street protests in the capital city of Bucharest, Romania is proving an increasingly interesting investment story.

“We have been very bullish on Romania for quite a few years,” confirms Rafaella Tenconi, chief economist at Wood & Co, speaking at a recent Romania Investor Day in London, where central bankers, government officials and Romanian companies took turns to set out their stall to potential investors. Among the positive economic indicators she points to “a historical shift to lower borrowing costs” in local currency, a tight labour market, strong levels of foreign direct investment with more capacity available and an ongoing housing price recovery.

Bearing in mind these glimpses of a brighter future for a country which recently joined the EU, following a dark age of brutal communist dictatorship, Ms Tenconi is very upbeat, predicting 4 per cent plus GDP growth during 2017.

As recently as February, Bucharest saw 500,000 protestors on its streets – the largest demonstrations since those leading to the fall of communism and the detested Caucescu regime in 1989 – but the crowds played their part once more. A government decree aimed at lowering penalties for corruption has been scrapped due to popular pressure.

This role of the Romanian street as a moderating influence against the excesses of its elected politicians means the protests are actually making the country a more attractive place to invest, rather than amplifying political risk.

“The reforms of the Romanian government during the crisis years really did leave a mark,” says Ms Tenconi.  “It would need to become a lot more of a shambles before we begin to see something really alarming.”

What soon becomes obvious when speaking to those involved in Romanian investments is the desire to perform well against the local benchmark – in Romania’s case this is the rival Hungarian economy next door. “Romania’s corporate tax rate is 16 per cent and ‘they’ are on 9 per cent, so the FDI we can tap will be a bit less,” laments Ms Tenconi.

But labour costs are still relatively cheap, competitively close to levels in Russia, Poland and Turkey. Reduced labour mobility in the EU post Brexit will also lead to more workers, who migrated temporarily for work, re-entering the local labour force.

The main factor currently driving interest in Romania as an investment destination is the forthcoming raft of privatisations, with the leading candidate that of Hidroelectrica, a potential $4bn listing in Bucharest, overseen by Morgan Stanley and Raiffeisen. The company, one of the largest hydropower producers in Europe, currently provides 30 per cent of the country’s electricity and has the potential to also supply customers in Hungary, Serbia and Bulgaria.

“Hidroelectrica has recovered spectacularly from insolvency and has posted record high profits in the last two years, of €197m ($214m) in 2015 and then €277m in 2016,” says Gregorz Konieczny, portfolio manager of the $2.8bn Fondul Proprietatea, and CEO of Franklin Templeton Investments’ Bucharest branch, which oversees the fund. He says Templeton has helped curtail old-style corrupt processes of selling electricity contracts to favoured colleagues at well-below market prices and is now helping pave the way for the IPO.

“Without Hidroelectrica’s IPO, it will be difficult for Romania to be upgraded by MSCI to Emerging Market status and we think Romania really should be on the radar screen of investors looking at emerging markets in the central European region,” adds Mr Konieczny.

Another core holding is Bucharest Airports. “The airport needs expansion of its terminals, given that passenger traffic has significantly increased in past years,” he says. “We are pushing for a decision from the government on expanding the terminals and the IPO may secure funding for this project.”

Mr Konieczny feels prospects for the Romanian economy and his fund will further improve once a stronger corporate governance code is enacted and after more expatriate Romanians return home to work.

And the ever-watchful public will continue to monitor its institutions, says one well-regarded Romanian journalist. “While the protests have died down, you can still see the sentiments, the fury expressed on Facebook,” he says. “It’s not just about the ordinance any more, people have a wider grievance. It’s about the rule of law, not pensions or wages. Romanians see themselves as Europeans and they want to be governed by European standards.”