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After Romania and Bulgaria became EU member states in 2007, the process of change in these countries has continued at a rapid pace. Romania in particular is a country we like to visit often during our travels to the region. There are several reasons for that.
The first is that the country's economy is doing well. Relatively solid growth for many years (the IMF has recently adjusted up expectations for this year and next year's economic growth to 2% and 2.2% respectively), the low budget deficit (the target for this year is 2.4% of GDP) as well as low public debt (38% of 2012 GDP) are key ingredients for the strong performance of Romania's economy.
The other reason is the resolute fight against corruption, with several leading politicians having been arrested and convicted in court. A third reason is the strong performance of large companies on the stock exchange. Romanian company OMV Petrom is particularly noteworthy, because it is benefitting from both high oil prices and continuing liberalisation of the domestic gas market.
But the most important thing for us as financial investors is the country's impressive plan for privatisations, with the Romanian state listing the companies on the stock exchange as a step in the process. Regular readers of our newsletter know that we often emphasise how important a functioning capital market is for a country's growth. The superstar when it comes to capital markets in Eastern Europe has been Poland's Warsaw Stock Exchange for many years now. But it looks as if Romania and the Bucharest Stock Exchange have decided to give the Poles a run for their money.
Why is this happening now? There are two primary explanations. One of them is that Fondul Proprietatea, a large fund that is a part-owner of many public sector companies, is pushing to bring visibility to the values in its portfolio and IPOs are the best way to do that. The other is that the IMF, which has negotiated a new standby arrangement for Romania, is heading in the same direction, i.e. is encouraging the privatisations of several companies.
So far this year, a large investment in shares has taken place in the form of an SPO, which involved shares in Transgaz, an operator of the domestic pipeline system for gas. We are also expecting the green light in the coming days for an IPO of Nuclearelectrica, Romania's nuclear power company. In addition, an IPO is being planned this year and next year for Romgaz, Romania's largest gas producer, and Hidrolectrica, which produces nearly all of the country's hydropower.
If all of these IPOs go through, the Bucharest Stock Exchange will attract lots of attention from many international investors. It is already attracting a lot of attention, because the market is also benefitting from the investor trend of seeking out frontier market investments, and Romania is classified as such a market.
For those of us at East Capital, Romania has for many years been one of the countries in Eastern Europe we give the highest priority to, not just a destination we enjoy traveling to. In light of the trend we are seeing at this time, there is a good chance that this will be the case in the future as well.
bne- East Capital
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