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14 I Companies & Markets bne March 2020
EAST CAPITAL:
Romania – can 2019’s best frontier market continue to perform in 2020?
Tim Umberger, East Capital's deputy head of Eastern Europe
It is now over a year since the Romanian government, in December 2018, unexpectedly introduced draconian taxes across different sectors, which – together with proposed rules that would have had devastating effects on the private pension system – sent the local equity market into a tailspin, causing a drop of almost 20% in the course of just over
a month.
Only the very brave would have believed that Romania could end 2019 as one of the best markets globally. But this is exactly what happened: total return for the market for the year stood at a staggering 39.5% ($), behind only Russia and Greece. While returns of this magnitude could suggest limited upside going forward, we believe the long-term investment case for Romania remains highly appealing.
We were in Bucharest four times in 2019, meeting companies and authorities, including representatives of National Bank of Romania, where we took this photo in September.
When discussing convergence of Eastern European countries towards Western Europe, Romania is often overlooked. But
it is perhaps the best example of the catchup process taking place in the region. Over the last decade, the economy grew at 4.3% p.a.on average, substantially outperforming all regional peers (and the Euro area as a whole, which only managed to grow at 1.9% p.a.). Romanian GDP per capita will effectively double in 2020, to €11,800, vs. €6,000 at the end of 2007 (with only a small part of this being due to the somewhat shrinking population). While the numbers are impressive,
the economy has a long way to go, as current GDP per capita accounts for 81% of the Polish, 56% of Czech, and just 32% of the Euro zone level.
CAGR of Nominal GDP (in EUR) in 2008-2018
The growth of the past decade has been largely fuelled by increasing consumption, which in turn was driven by high wage growth and low unemployment. Wage hikes in the private sector were partially aimed at improving the migration balance, which is slowly turning positive. The flip side of the story is that macro imbalances were gradually building up, in particular, the fiscal deficit, which is estimated at 4% of GDP
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Romania's is the second-best performing stock market globally since the end of 2016.
in 2019, and the C/A deficit. The new transition government that has been in place since November 2019, and will be until the general elections in 2020, will have to tackle those issues by curbing fiscal spending and attract more FDIs.
However, the start point remains favourable, with debt levels among the lowest in Europe. For example, the government debt to GDP remains very modest, at 35%, meaning that
the policy makers can allow for a gradual consolidation that would not significantly derail the economy. The key focus
for the government should be on improving infrastructure and attracting more FDI that would strengthen the competitiveness of the local economy. The private sector remains in good shape.
A friendly tax regime with favourable 16% corporate tax,
a well-capitalised and functioning banking sector and local interest rates that are still poised to compress – 10 year government bonds are currently yielding 4.4% in local currency – bode well for future GDP growth, which could, in our view, remain above 4% for the next 5 years.
“Romania is the second-best performing market globally since the end of 2016”
Equity market remains attractive
Apart from a temporary scare in late 2018 and early 2019,
the Romanian equity market has performed steadily for the last few years. Romania is the second-best performing market globally since the end of 2016.
We have been investing in the country since 2002, and consistently advocate better governance and more effective capital allocation in Romanian companies. One of the reasons behind the strong performance of the market in recent years has been a government decree introduced in 2017, calling for a 90% dividend payout from the state-owned companies.