The Right Moment

The Right Moment

Lucian Anghel, president of the board of governors at the Bucharest Stock Exchange (BSE) and CEO of BCR Pensii explains how the capital market could solve some of its sore problems and proposes investment alternatives for local pension funds.

Q: How would you characterize 2012 from the capital market’s perspective, considering that stock prices increased, but the number of investors and of transactions decreased? 
Lucian Anghel: There are several reasons why 2012 can hardly be considered disastrous. Firstly, it ranked second in terms of transaction values within the last four years, except 2011 when Fondul Proprietatea was listed. Secondly, we ought to take into account the uncertainty that dominated international markets, as well as Romania’s political instability – we had four governments and three prime ministers in one year. Thirdly, if we factor in the insolvency of Hidroelectrica – which was very close to be listed, a consultancy contract with Citibank, BRD Societe Generale and Intercapital Invest being signed in this respect – we get a more complete picture of the realities that influence the local capital market. If Hidroelectrica had been listed five years ago, with a minority stake of 10% to 15%, the company wouldn’t be in this situation now. 
Nevertheless, we had one ace up in our sleeves and that was the listing of Transelectrica, which turned out to be a very successful SPO. Towards the end of the year we also had the corporate bond issue of GDF Suez, the second largest in BSE’s history and the first issue of this kind within the last five years. In addition, we have managed to trim the number of fiscal reports from five to one, easing the work of retail investors. 
To conclude, I think it would have been very difficult to achieve much more than this in 2012, considering the context described above.
Q: What was downside of 2012?
Lucian Anghel: The downside of 2012 was the market’s liquidity, which reached a historical bottom on mature markets as well. However, in the second part of 2012, the FED and the European Central Bank supported these markets through liquidity injections, part of which came back to the same mature capital markets.
Liquidity depends on the existing offer. Whilst European states sprang up the capital markets through public offers of state-owned companies, it was not the same in Romania. Here, long term investors such as pension funds and asset management funds buy stocks and keep them in their portfolios. As they don’t sell them back into the market, we can’t talk easily about boosting liquidity into the capital market. This is the investors’ profile in Romania and that is one of the reasons why local brokers need to bring new companies to the stock exchange and the Romanian government to list state companies. 
I think it is crucial for Romania to develop its capital market and adopt similar standards with those in more mature markets, especially when it comes to trading costs, which could foster both liquidity and market transactions.
Q: Considering the listing of the 15% stake in Transelectrica, which are the chances it will be followed by other listings such as Transgaz, Romgaz, Hidroelectrica or Nuclearelectrica?
Lucian Anghel: Transelectrica’s listing managed to gather a binding offer of EUR 50mn. And this is a lot for a capital market like the local one. If we add the RON 250mn bond offer of GDF Suez Energy Romania, we can say the stock exchange has slowly started to play its role as a financial intermediary. 
I was part at the road show team for Transelectrica’s listing and I can tell you that we promoted to international investors not only the company itself but also Romania and its investment opportunities. We’ve been to six international cities and discussed the country’s macroeconomic evolution, as well as the financial results of both the local stock exchange and Transelectrica. If we look at the results, I think this listing was a success for Romania. The current price on the stock exchange is higher than the one in the offer.
Last but not least, local and general elections held in 2012 brought something that all investors are looking for: political stability. Therefore, I expect to see several public offers of state-owned companies this year. It would be difficult to imagine a better moment for public offers than 2013. And there are several international signs that support this view -- one of them is that the Dow Jones Industrial index reached its historic maximum level on March 7. 
Q: Have you received any signals that private companies plan to get listed on the BSE?
Lucian Anghel: All I can say at this stage is that we had several discussions with private companies that could turn into listing transactions within the next 12 to 18 months. I hope we will have a clear plan for the listing of a private company by the end of this year.
One of the reasons we haven’t seen private companies beating path to the local stock exchange has to do with the lack of listing on the state-owned companies’ side, in the last year. State’s public offers give trust to investors and develop the capital market as a financing alternative for the country. Romania needs this alternative because economic growth requires financing. The more financing alternatives we create, the higher are our chances to generate economic growth due to access to financing resources such as pension funds and capital markets. 
Q: How has the local market reacted to GDF Suez’s corporate bond issue? Do you think it has paved the way for other bond issues?
Lucian Anghel: The GDF Suez’ corporate bond issue was oversubscribed. It is worth noticing that its structure was pretty well-balanced with pension funds, asset management funds, banks and insurance companies. This shows that the success of such a bond issue doesn’t depend on buyers from a certain market segment. 
I think it is likely to see other corporate bond issues this year. There are ongoing discussions in this respect and it feels like companies’ interest in these kinds of instruments has been animated after GDF’s successful bond issue. I’m sure GDF was questioning whether the market offers enough liquidity for a RON 250mn offer with a five years maturity. There are not many financial institutions that could have intermediated a financing with such a maturity in Romania now.  
Q: How would you comment on the exit of several important brokers such as ING and UniCredit at the end of 2012? How did this impact the local market?
Lucian Anghel: Although nobody was happy that large, international brokers left the country, I think it’s important to see these decisions in the right context:  they were the result of changes in regional strategies, which can hardly be influenced from a local level. However, we cannot neglect that there might have been one element that contributed to their decision to leave and that is the lack of public offers announced by the state. 
I guess there are brokers who took advantage of this situation and increased their market share by taking over the clients of the international brokers who left. I had several discussions with international brokers that are not currently present on the Romanian market. They asked us many questions about the country and the local stock exchange, but things are in a too early stage to have something to announce.
Q: Which are the most important macroeconomic policies the present government should implement in the coming period?
Lucian Anghel: During the next ten years, the most difficult task for any European government will be to create new jobs. The economic crisis has reduced demand for products and services, with long-term negative effects considering that investments before the crisis have led to an overcapacity of production. The problem is that such capacities were created in 1990-2000, when Romania was reluctant to foreign investors. Therefore, they were created in countries such as Poland, the Czech Republic or Slovakia. 
The problem is that, when demand comes back, companies will not create new production capacities. They will rather look for new markets to sell their products. That’s why it will be very difficult for Romania to attract investments that will create new jobs.
Overall, Romania still consumes more than it produces, which leads to higher imports and current account and commercial deficits. This translates into approximately EUR 5bn flowing outside the country each year. We need to borrow back this money which, in the end, will finance production in other countries.
On a medium and long term, I think it’s crucial for Romania to be able to use its internal resources. The current government does a very good job in developing the energy sector, an approach that, in time, is boosting Romania’s chances to become a regional energy hub. 
The absorption of European funds is another issue to be considered in the near future. I can assure you that nobody in Brussels will be sorry if Romania doesn’t succeed in attracting these funds. I don’t expect the red tape for such projects to be trimmed. The top country performer in attracting EU funds for 2007-2013 has managed to absorb approximately 60% of them, while Poland attracted about 50%. Romania has still a long way to go. We need to keep in mind that this is the cheapest financing method and Romania will  lose a unique opportunity if it doesn’t take advantage of it.
The third issue the government should consider is to increase the efficiency of state-owned companies. Private management is a good start, but it’s not enough. These companies also need to improve both their transparency and financing, and one way of doing it is by listing of 10% to 15% of their stakes to the local stock exchange. 
Q: Romania will have to repay top tranches  of its external debt in 2013 and 2014. What strategies should the government use to obtain cheaper loans form external creditors and reimburse the external debt? 
Lucian Anghel: The financing sources Romania could use depend on international investors’ perception on the country’s evolution. As these perceptions are unpredictable, they need to be well taken
care off.
Romania is on the right track from a macroeconomic perspective. The country has managed to cut its budget deficit in an election year and amid a volatile international climate. Very few European countries have marked down such an achievement. A lower budget deficit had a positive impact on economic growth. Investors noticed this and positively adjusted their perception on Romania’s economy and its perspectives.  
The current peak on Romania’s external debt is not to be worried about. We will not have a reimbursement problem. Part of the money already exists in the Central Bank’s foreign currency reserve and, in addition, the Finance Ministry has borrowed money that will allow it to repay the entire debt. 
The issue that needs to be taken care of is how to reduce Romania’s borrowing costs and how to inject money back into the economy, to generate economic growth. In my view, infrastructure should be the government’s zero priority.  All other sectors such as tourism need infrastructure.
Q: Which are the main challenges that compulsory private pensions have to face during the next few years? 
Lucian Anghel: The most important challenge is to increase people’s financial culture. Today we have 1.2 retired persons for only 1 tax payer and this number will most likely increase to 1.5 in a few decades. The question is if, in these conditions, the state will be able to support the current pension system. The state offers EUR 400 fiscal deduction for the third pension pillar if a person creates a voluntary pension for herself and makes a monthly deposit for it. When the person retires, her standard of living will be higher because of this pension. 
Higher life expectancy, lower birth rates and more people working and paying taxes abroad will generate changes that will force us to save more when we are young in order to live better lives when we retire. 
On short term, I think the state should consolidate the growth of the pension funds. Last year, the pension funds in Romania generated 10% return, which was double the return generated by a bank deposit. 
Q: Pension funds have problems in finding local investment opportunities, as the market has few listings and bond issues. What solutions do you see for them (eg: large exposures on local companies, investments on external markets, etc)? 
Lucian Anghel: We need to take into account that local pension funds are only five years old and they haven’t reached a critical size yet. It’s too early for any of them to become a major player on the capital market. They are growing and I hope that, meanwhile, additional investment alternatives will be created on the capital market. I think they would be interested in a public offer for a state-owned or private company with good corporate governance and management, and a solid financial track record.
One issue to be discussed is how pension funds can diversify their investments. The existing investment options are suitable for the fund’s current development stage. Around 93% of the funds’ money is invested in Romania. Of course, we would like to have more investment instruments such as rated corporate bonds or solid, profitable state-owned or private companies. If the local market will not offer them new financial instruments, I think the 93 percent is likely to drop and more of these funds’ resources to be invested abroad. 
Of course, the real challenge comes when pension funds will start growing. That’s when we will need more and diverse investment options. In Poland, double the size of Romania, the pension fund sector amounts to EUR 50bn. If we keep our growth ratio, the size of this sector could reach EUR 25bn. We have a long way to go until this we reach such a number, but that’s the trend.