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Romania's main stock exchange has started to make gains

After a bear market and fund scandals, The Bucharest Stock Exchange’s market capitalisation is in the ascendancy. But more privatisation is necessary if the gains are to be consolidated. 
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Romania’s fledgling capital markets, previously tarnished by regulatory shortcomings, are becoming more transparent and liquid. New listings, including government and mortgage-backed securities, are forthcoming and one of the region’s biggest private equity deals has just closed.

The past two years have been happy ones for Romania’s nascent capital markets. The tiny Bucharest Stock Exchange (BSE), which in 2002 was the sixth-largest bourse in central and eastern Europe, saw its market capitalisation soar from €1.3bn in 2002 to €15.3bn last year (26% of GDP), up from €8.8bn in 2004. The BSE, which is still half the size of Hungary’s bourse and less than one-fifth as big as its Polish counterpart, is now the fourth largest stock market in the region.

While trading volumes in 2004 increased by 144%, reaching €600m, they nearly quadrupled last year, totalling €2.1bn. Although this is a fraction of the total turnover on the Prague, Budapest and Warsaw bourses, it is more than twice the 2005 turnover on the Bulgarian stock market, whose market capitalisation last year was a meagre €4.3bn.

Economic growth

After surging by 111% in 2004, the BET, the Romanian bourse’s main index comprising the 10 most liquid stocks, rose by 60% last year. The growth is being fuelled by robust economic growth, stemming from buoyant domestic demand. Last year, Romania’s economy grew by 4.1%, roughly half the rate in 2004, with consumption and investments increasing by a brisk 9% and 13% respectively.

Investor confidence in Romania’s equity market is underpinned by the country’s accession to the EU, probably in January 2007. The local capital market has recovered from a bear market following the Russian financial crisis in 1998 and the collapse in 2000, amid allegations of corruption, of the National Fund for Investments (FNI), then the largest open-ended fund in the country. The failure of the FNI exposed glaring weaknesses in the supervision of Romania’s financial sector.

The former management of Romania’s securities watchdog allowed the fund to continue operating despite having fallen foul of securities regulations for years. Lax supervision allowed the fund to grossly overstate the value of its assets.

Septimiu Stoica, the BSE’s new president, admits that the scandal took its toll on Romania’s small capital markets. But he insists that corporate governance and the protection of the rights of small shareholders is gradually improving. He says: “We had a good start after the mass privatisation [of 6000 companies in 1995] but then came the bear market and the scandals with the funds.

“Now we’re in a completely different phase. We have very strong interest in trading among retail investors and last year we introduced a code [of best practice] and established the region’s first corporate governance institute to educate companies and investors.”

Small local investors are playing an increasingly important role on the BSE. Mr Stoica adds: “In the late 1990s, foreign funds were moving the market. Then a very important development occurred three or four years ago: we witnessed interest among retail investors.

“We now have some 50,000 active retail investors. They account for approximately 20% of the turnover, with foreign institutional investors still dominating the market. We want to follow the example of Poland, which has 850,000 small investors. But in order to do this, we need more liquidity and listings.”

New listings

A dearth of new issues is holding back the development of the Bucharest stock market. Mr Stoica says: “Obviously we would like to get some more blue chips listed. We’re in talks with RomTelecom, BCR and CEC about listing some of their shares. We also need to convince smaller firms to list. This is not easy as the owners are often afraid of transparency.

“But this is one of our main challenges: to convince them to view the bourse as a means to raise equity and to convince the government to privatise more aggressively through the stock market.”

Although there are several corporate and municipal bond issues (with the notable exception of Bucharest, which launched a Eurobond) on the BSE, there are surprisingly no government securities.

Mr Stoica says: “Yes, it is quite a shock for everybody and unique in the region. The World Bank has been putting pressure on us but it is constantly postponed. However, we definitely expect government bonds to be listed in the coming months. This will be a milestone for us.

“We also hope to have mortgage-backed securities listed by the end of this year. This is also very important and banks have to learn to become more active on the market as intermediaries.”

Another fillip for Romania’s capital markets is the upcoming listing of a large fund, Proprietata, with a starting capitalisation of some e4bn, according to Mr Stoica, which will be used to reimburse Romanians who lost properties under communism that can no longer be returned. The government will transfer stakes in more than 100 companies, many of them utilities, sovereign debts and cash to the fund. Claimants who make successful compensation claims will be given shares in the fund, which will be listed on the BSE.

Private equity deal

Although still quite shallow even by regional standards, Romania’s capital markets are gaining depth and becoming more sophisticated. Private equity activity is starting to flourish. On March 30, Advent International, the UK-based buyout group, announced the sale of its 97% stake in Terapia, a local generic drugmaker and the country’s largest exporter of pharmaceuticals, to India’s Ranbaxy for $324m. Advent acquired Terapia in 2003 from two Romanian companies for $50m in the country’s first public-to-private leveraged buyout (LBO).

The deal was pulled off by Emma Popa-Radu, the 32-year-old Romanian head of Advent’s south-east European operations. In an interview with Bucharest Business Week, a local business journal, she said that Advent would target further investments in Romania, investing on average €50m of equity, with deal sizes ranging from €15-20m to much bigger transactions.

“The local economy has very good perspectives. Looking back at the time when we started investing in Romania, with skyrocketing inflation and [a] fast-changing regulatory environment, from where we are today, it is almost hard to grasp,” she told the journal.

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Read more about:  Central & Eastern Europe , Romania