THE VOICE OF THE MARKETS ROMANIA IN THE CAPITAL … · nities in the present European Union. Romania has advanced well eco-nomically, after making it through the recession and economic

ROMANIA IN THE CAPITAL MARKETSJanuary 2017

THE VOICE OF THE MARKETS

Sponsored by:

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INVESTORSTATEMENT

Romania in the Capital Markets • January 2017

We believe that foreign investors will remain overall positive on Romania, lured by long term economic growth prospects. With its low level of GDP per capita, Romania should continue to outpace its regional peers in terms of economic growth in the long run. When you include in the equation the country’s lows level of debt/GDP, it becomes even more of a positive story.

Within this positive context European companies continue to be the most important investors in terms of foreign direct investment, a situation we believe will not change too much in the foreseeable future. In addition, the Romanian service sector continues to be one of the bright spots of the Romanian economy in terms of exports.

As mentioned earlier, the rapid growth in GDP from 2015 and 2016 was fuelled mainly by domestic consumption. The Government’s decision to reduce taxes and substantially increase public sector wages boosted private consumption. Wages in the private sector followed, but to a lesser extent. Going forward, the pace of economic growth should moderate once the favourable impact stemming from the fiscal impulse fades out.

However, if Romania can utilize the EU funds allocated to it under the 2014–2020 programme, providing much needed real investment in the country, then economic growth could continue in a more balanced way.

The current rapid economic growth has been accompanied by the enlargement of macro-economic imbalances (public budget deficit and current account deficit). In the short run, this does not seem to be of huge concern to financial investors as the macro disequilibria are not very loose from a regional and historical standpoint.

This is also being substantiated by the three rating agencies who see Romania as investment grade. The one big risk could come from the fiscal policy. As long as there is no major policy slippage after the elections, the ratings should remain unchanged.

We continue to believe that Romania will

continue with the listing of state owned companies via the capital markets.

We see this as positive on several points: 1) Romania is currently on the FTSE Emerging

Market watchlist for moving from Frontier Market to Emerging Market status. The continued listing of minority stakes in SOE will help us to move up to emerging market status;

2) The Romanian Government could realize revenues from the stakes sold via the capital markets;

3) More companies listed will allow local asset managers and pension funds to invest more of their assets in Romania rather than investing abroad;

4) Improving corporate governance.

In reference to the FTSE Emerging Markets Index, there is approximately $44.4 billion following this index. Estimating the weighting of Romania at 0.08%, this will bring an additional $36 million from the index followers.

This does not include other monies should Romania be included in the MSCI index. This also does not include the active funds that would participate in the market as activity picks up.

We have experienced this before in 2013 when Romania was included in the JP Morgan Emerging Market Index of local currency bonds. This inclusion in the index produced significant increases in volumes in the local currency debt of the Ministry of Finance, thereby causing a considerable deepening of the market.

Raiffeisen Bank Romania is proud to have participated in the development of the local capital markets. We have worked with the Romanian Government on almost all the IPOs and SPOs of state owned enterprises via the capital markets, as well as being one of the major primary dealers for the Romanian Ministry of Finance on its local currency debt issuance and Eurobond issuance.

We look forward to working with all the constituents in the ongoing development of the local capital markets.

Romania: Moving ahead

Romania is once again on course to post another robust year of economic growth. Romania’s economy grew by 3.9% in real terms in 2015 and by 4.9% in Q1-Q3 2016 — one of the fastest in the EU. The question is: what lies ahead in the foreseeable future and what does it mean for investors?

By James Stewart, VP Treasury and Capital Markets, Raiffeisen Bank Romania

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CONTENTS

Romania in the Capital Markets | January 2017 | 1

ROMANIA IN THE CAPITAL MARKETS

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DACIAN CIOLOŞ, PRIME MINISTER OF ROMANIA2 Romania seeks more pragmatic and predictable government

WOLFGANG SCHÄUBLE, FEDERAL MINISTER OF FINANCE, GERMANY 4 ‘I’m certain that Europe has a positive future’

ANCA DRAGU, MINISTER OF PUBLIC FINANCE, ROMANIA 7 Fast growth in GDP, investment and exports

ROMANIA INVESTMENT AND FINANCING ROUNDTABLE8 Tax cuts and wage growth get Romania moving — can reforms finish the job?

Romania: Delivering Returns in a Challenging Global Economy Romania’s Ministry of Public Finance and GlobalCapital organised a high level gathering of investors and industrialists in Bucharest on October 26, entitled Romania: Delivering Returns in a Challenging Global Economy. It was sponsored by Raiffeisen Bank.

This report includes edited versions of the keynote speeches given at the meeting by Romania’s then prime minister Dacian Cioloş and finance minister Anca Dragu, and by German federal finance minister Wolfgang Schäuble.

It also comprises a roundtable discussion on investment and financing in Romania, chaired by GlobalCapital.

In January, Mr Cioloş and Ms Dragu stepped down and Sorin Grindeanu became Romania’s new prime minister, after the Social Democratic Party (PSD) came first in the general election on December 11. Viorel Stefan became the new finance minister.

The new administration promises an expansive policy, including raising the minimum wage, pensions and public sector salaries; more public investment and defence spending; cutting and simplifying taxes; reforming corporate law and financing start-ups.

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2 | January 2017 | Romania in the Capital Markets

DACIAN CIOLOŞ, PRIME MINISTER OF ROMANIA DACIAN CIOLOŞ, PRIME MINISTER OF ROMANIA

ROMANIA IS a country of many chal-lenges, but also a country of opportu-nities in the present European Union.

Romania has advanced well eco-nomically, after making it through the recession and economic crisis of 2008-9. In 2017 we celebrate our 10th year of EU membership.

Yet we remember well the post-accession enthusiasm, which was weighed down by the economic crisis.

Romania was forced to make deep reforms, which were expensive from both a social and a political perspec-tive. But since 2011 we have experi-enced economic growth, creating new opportunities for work and invest-ment.

Growth is good, but we must still confront regional disparities within Romania, and economic disparities between different classes of the pop-ulation. That is why we have devel-oped an anti-poverty programme this year, with long term measures to reduce these disparities, which have been emphasised by the migration of Romanian workers to western and southwestern Europe.

In Romania we are living in a para-dox. We have enjoyed a few years of economic growth, which now pre-sents us with the challenge of trans-forming this growth into a process of development, where disparities can be reduced between regions, social classes and rural and urban areas. However, we are going through a peri-od of transition, in an electoral year, when we will move from one type of governance to, hopefully, another, more pragmatic, predictable and effi-cient one.

Our main objective, around which we have built the government pro-gramme and this year’s economic pol-icies, was to ensure the predictability of economic and fiscal policies, while

at the same time initiating reforms that not only have no negative impact on economic growth, actually stimu-lating it, but which more efficiently channel economic growth into devel-opment.

Fighting corruptionThis is where we have started work-ing, which will surely need to be continued in the years to come — to increase the state’s effectiveness in terms of the business sector, distribu-tive policy, social policies and in con-tinuing its fight against corruption, with more attention being given to prevention and education.

It is simply not enough for only the judiciary to fight corruption. All of us, by understanding that corruption leads to severe poverty, must change the way we carry out our work.

Surely such measures for fighting corruption could lead to more effi-cient state involvement in the econo-my and in relations with its citizens.

So we have begun, with apparent-ly more minor actions — measures to reduce bureaucracy and simplify and clarify the law.

These measures need to be backed up, in the years to come, with very clear political support. They must be complemented by a reform of public administration for greater effective-ness and to focus on results and on our citizens.

Reforming public administrationOf course, this reform cannot be done without de-politicisation. That does not imply eliminating politics from administrative relations, but rather clearly delineating the relationship between politics, government policy and public administration.

We started with some things here that we did not take any further, sim-

ply because we realised that they require political commitment to adopt the administrative reform.

But we do need this reform and to rethink administration, as well as what we have already begun — sim-plifying administration and cutting bureaucracy for the business sector and citizens.

Meanwhile, we have continued implementing corporate govern-ance measures, to make the action of the state more effective, when it is a majority shareholder in companies.

These companies are mainly in energy and infrastructure, so efficient state action in running them creates opportunities to develop the business sector and make it more appealing.

It is no coincidence that private companies are very interested, not only in the government’s budgetary policy, but also in its corporate gov-ernance policy.

These state-owned companies can be an asset to economic development, but they can also be a hindrance if they do not operate transparently and effectively.

So we have taken several measures to review the legislation on state-owned companies, to make it clearer, and to implement it in the recruit-ment of managers and administra-

The economic growth of the last five years is great for Romania, but is just the beginning, said Dacian Cioloş, Prime Minister of Romania, at an event in Bucharest organised by the Ministry of Public Finance and GlobalCapital. The country has to translate growth into development, to redress the inequalities between richer and poorer classes and regions.

That means building a more productive, high value added economy, with investment in research and innovation; fighting corruption; improving governance at state companies; making the public administration more efficient; and stronger education and training.

Above all, Romania must focus on generating prosperity for the younger generation.

Romania seeks more pragmatic and predictable government

Dacian Cioloş: it is not enough for only the judiciary to fight corruption

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DACIAN CIOLOŞ, PRIME MINISTER OF ROMANIA DACIAN CIOLOŞ, PRIME MINISTER OF ROMANIA

tive boards, as well as in the way we define their duties.

Stimulating R&D and trainingWe want to continue to advance in certain sectors of the economy. We have taken some fiscal measures that have shown clear results in the IT sec-tor, for example. Using this same rea-soning we came up with tax incen-tives for research, development and innovation, because future econom-ic development, and particularly industrial development, are becom-ing increasingly connected to the out-comes of research and innovation.

Not only do we need to develop industry — we need to develop com-petitive industry, which produces added value.

To add more value to the economy, we also need to raise the quality of the workforce. Romania faces a lack of skilled workers. We already have com-panies investing in central and west-ern Romania that are seeking workers from neighbouring countries.

Yet we still have unemployment above 6%. Although this is lower than the European average, it means we have the potential for a skilled work-force that can fill the jobs created through investment and economic development.

Therefore, professional training, dual training, and creating a link between business and the educa-tion system are very important for the near future, and we will at least improve legislation in this regard.

Capitalising on the diasporaAnd then, Romania has several mil-lion citizens working abroad, mainly in the EU. Some of these have prob-ably decided to settle there, but I believe we have great potential on which we can capitalise, while recon-necting Romanians working abroad with those in Romania.

Romania has an advantage in its relationship with Germany, with the Romanian Saxons and Swabians, who left Romania many years ago and are now well integrated into German society. Their connection to their homeland is beneficial to both the Romanian and German economies.

When we put in place a support system for the Romanian diaspora abroad, Romanian enterprises must not infer from this that we favour the Romanian diaspora over them.

Connecting Romanian companies with companies from other EU mem-ber states through the diaspora can benefit the growth of Romanian capi-tal, which requires a larger market than the Romanian one to develop.

It may also help a social reintegra-tion of the diaspora with the current situation in Romania.

And we certainly need measures aimed at creating opportunities for the development and progress of domestic capital, because domes-tic capital means, for the main part, small and medium-sized enterprises, which make up over 90% of enter-prises.

Domestic aims need foreign investmentHowever, if for populist political rea-sons our development of domestic capital opposes foreign capital, the Romanian citizen will lose out.

Therefore, we need to make domestic capital develop in tandem with foreign investments, which are needed in several economic sectors, but also in infrastructure.

In the future, we must focus not only on economic figures, but more importantly on raising the quality of economic development.

Sustainable economic develop-ment means an increase in the added value produced in the economy, and in quality.

We have come up with a pro-gramme named Competitive Roma-nia, which proposes areas of inter-vention to establish economic development up until 2020. This involves not only measures in the economy, but also in education, health and infrastructure.

We need to boost capital market development and the adaptation of the labour force to the demands of the economy.

Bring the EU closer to citizensFinally, a few words about develop-ments in the European Union, and not only because of the Brexit issue or the economic crisis.

The EU has gone through an exten-sive enlargement process, which in my opinion should have been fol-lowed by a more thorough process of integration of new member states.

In the years to come, we will be able to turn this context into an opportunity to redefine the EU in a

way that brings it closer to citizens, and makes it more pragmatic and effective.

Certainly, Romania would like to be a more proactive member state. It would like to put forward ideas so that the tools we have at a communi-ty level will produce more security for citizens and generate more prosperity and development opportunities.

We should be thinking about inspiring the younger generation. The introduction of Romania to the EU and free movement in Europe benefited me when I was younger. But the younger generation is going through a difficult period now, with high unemployment among them.

Should Europe produce prosperity, it must produce it primarily for the younger generation. If young people do not believe in Europe’s capacity to produce prosperity, then the future of Europe is exposed to high risks.

Therefore, we should connect this vision we have on the EU with the vision we have for our youth.

Now we can expect a period of intense reflection and decision mak-ing regarding the European Union. It is not only due to the Brexit issue, but also to the preparation of a new EU budget for the post-2020 period and the rethinking of some European pol-icy instruments, to make them more efficient and results-orientated.

Romania is particularly interested in taking an active part in this pro-cess of reflection over the next few years, as it will be holding the presi-dency of the European Union Coun-cil during the first semester of 2019.

I would like Romania to be a testa-ment to the consistency in its vision, and to the freshness it can bring to the European Union, on this occa-sion. However, this will require it to be involved in the whole process, starting from now. s

Cioloş: we need to boost capital market development

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WOLFGANG SCHÄUBLE, FEDERAL MINISTER OF FINANCE, GERMANY WOLFGANG SCHÄUBLE, FEDERAL MINISTER OF FINANCE, GERMANY

I BELIEVE Romania and Germany have a close relationship. There are close ties between our two coun-tries, also thanks to significant por-tions of the population, and we have a great deal of respect in Germany for everything Romania has done and achieved over recent decades, most of all the results they have attained in their political sphere over the past few years.

Romania is a dependable partner for cooperation within the European Union. As with joint work in inter-national organisations, such as the Atlantic Alliance, we in Germany understand and we will never for-get that we owe a debt of gratitude to Europeans and their desire for unity in helping restore the good for-tune of our country after the Second World War and overcoming parti-tion — these positive developments would not have been possible with-out the support of our European part-ners. This is why we will never forget. Our country’s history and central location in Europe also encourage us to engage with others — we want to form the strongest possible links between north and south, as well as east and west.

Romania has one of the most dynamic growth rates in the Euro-pean Union, which is no small feat, given the difficult times in which we find ourselves. Romania also per-forms well in terms of its national debt, which is less than 40% of its GDP. For the German Finance Min-ister, this is always of the utmost importance. I would suggest that we try and preserve this rather than put-ting it at risk.

Youth training vitalRomania has a relatively low level

of unemployment. In some regions, there is even de facto full employment. As with other European coun-tries, there are prob-lems with youth unem-ployment, which is why I believe that dual voca-tional training is very valuable. Of the specific advantages enjoyed by Germany, the system of dual vocational training is the most significant and is linked to the fact that both vocational training and university qualifications are regarded as important in Germa-ny. The range of qualifications pro-vided by a differentiated dual train-ing system also leads to good career prospects.

We have very close bilateral rela-tionships. Our finance ministers enjoy close and trustful cooperation. We have a wide range of close-knit relationships. Germany is Roma-nia’s number one trading partner and we are experiencing strong growth in bilateral trading volume and the number of investments being agreed.

I also think it’s very important for you to avoid a discussion between foreign investors and other individu-als, just as we should avoid any form of dispute arising between small, medium and large scale investors. At the end of the day, the dynamism of the economy comes from small and medium-sized companies but, of course, we still need large, success-ful companies. During the economic crisis 10 years ago, it became appar-ent that when large companies go through difficult times, such as the car industry in Germany, then small

and medium-sized companies soon start to experience a whole range of problems.

Help from KfWGerman companies know — and we promote and try our best to support this understanding — that Romania is an attractive and successful loca-tion, and are working through part-nership to make Romania an even more attractive place for invest-ments.

This is why we collaborate very closely with our development bank, KfW, which has a very good reputa-tion in our country and works closely with Exim Bank and the Romanian development bank.

We provide support — irrespective of whether the relationships should be formalised — and provide consul-tancy.

Furthermore, from next year I will once again chair the administrative board of KfW — provided my col-league, the Minister for Economic Affairs, and I are in agreement. You can rely on the KfW remaining a committed partner.

Europe must take the wake-up call of the UK referendum seriously, argued Germany’s Finance Minister, Wolfgang Schäuble, at a high level meeting in Bucharest organised by the Romanian Ministry of Public Finance and GlobalCapital. The EU must make itself more visible and accessible to the people, and demonstrate that Europe can resolve problems in a way that no single country would be able achieve on its own.

The strong co-operation between Romania and Germany shows that the EU can make a difference — Romania needs more investment to address the economic differences between European regions and the EU Budget should focus more on implementing country-specific recommendations of the European Commission.

‘I’m certain that Europe has a positive future’

Wolfgang Schäuble: European unity can be fragile if errors are made

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WOLFGANG SCHÄUBLE, FEDERAL MINISTER OF FINANCE, GERMANY WOLFGANG SCHÄUBLE, FEDERAL MINISTER OF FINANCE, GERMANY

My Romanian colleague and I will work towards improving funding and more European investment for Romania. I am prepared for this challenge because I have always been aware that investment needs to be specifically requested in areas where we still have some catching up to do in comparison to other econo-mies. This is in addition to the impetus given by the Juncker Initiative and the large scale funds on offer. The purpose of such funds is not to enhance differences within Europe, rather they should achieve the exact opposite.

Breaking down economic differencesThe more the economic differenc-es between the various regions of Europe are dismantled, the strong-er Europe can be. I also believe — as does the Prime Minister of Romania — that we Europeans can join togeth-er to work on achieving this.

I already know and understand that countries such as Romania need many years and sufficient invest-ment to make the changes needed. But I believe it is also important that in using European funds from the EU budget, we commit ourselves more fully to achieving true added value in the centre of Europe — such as using them to support the country-specific recommendations by the Commis-sion — and also to ensure that we actually implement what we have agreed on.

This is important and we all know that we need to consistently follow this path throughout Europe. Even in my country, we cannot rest on our laurels. The changes in global mar-kets are so breathtakingly fast — and they affect us all in every part of Europe — that we can only progress if we work on maintaining what we have and increasing our resilience and competitiveness.

What does Europe mean for people?You asked me to comment on the situation in Europe from the German Finance Minister’s perspective. We should not fool ourselves: Europe is not in the best situation and the fun-

damental problem is that the people in Europe do not fully understand what Europe means for them, what it does for them. The connection between European institutions and what people experience in everyday life is far too small.

Of course, the decision made in the British referendum on June 23 — which we all regret deeply — has given us a wake-up call. The state-ment this referendum made, aside from all the other factors which char-acterise the British, is being increas-ingly reflected in other European countries, and we need to take this seriously.

This is why it is crucial that we make Europe more visible and acces-sible to people everywhere and dem-onstrate that Europe can resolve problems which no single country would be able achieve on its own.

Need to co-operate on migrationI want to quickly cover six points here and you will understand that I, as a German and a member of parlia-ment, will first of all mention migra-tion based on our experiences over the last year. I will not touch upon the debates held over the course of the past year, but we did see how fragile European unity can be if errors are made, or we do not react appropriately to challenges that arise. The movement of people experienced recently in our neighbouring coun-tries, about which some are more pleased than others, comes primarily from nearby crisis regions in the Mid-dle East, but there is also a risk posed to our eastern neighbours by migra-tion from all across Africa.

Only by joining forces as Europe-ans can we control these movements

without risking our inner stability. This is why we need to protect our exter-nal borders jointly and dis-tribute the burden in a fair manner.

I know that proportion-al distribution of refugees coming from a variety of different situations into 28 member states is no sim-ple task, but we need to be flexible and more gener-ous. We also need official procedures and to work jointly with our neighbour-ing states to ensure that

traffickers — one of the worst forms of organised crime — do not get to decide who comes to Europe. We should be the ones making that deci-sion.

The second point is closely related and it concerns neighbourhood poli-cy. We need to provide more support to our neighbours in the east and south, which can only be achieved by working together. This is a Europe-wide challenge and we will only be successful if we all do our part.

EU indispensable for securityNow I come to my third point. If we want internal and external security in the 21st century, with its diffuse threats, new forms of fundamental-ism, the spread of violence and other more general changes, then Europe is indispensable. Only when working together can Europe achieve this. In my home country, particularly in the western part — the former West Ger-many — we have become very accus-tomed to not feeling truly responsi-ble for external security and we were content with this state of affairs. This is what our allies were for and, ulti-mately, we knew that the Americans would not leave us high and dry. I am speaking here in very simplified terms of course.

However, over the coming years, the Americans will not be taking the same level of responsibility for our external and internal security, contra-ry to what many of us had hoped for. We need to take more responsibility and no single European country, not Romania, not France, not Germany, can manage this alone. Together, we can manage it while demonstrating how important Europe is.

And now I come to my fourth

Wolfgang Schäuble, Dacian Cioloş and Anca Dragu at the GlobalCapital event in Bucharest



WOLFGANG SCHÄUBLE, FEDERAL MINISTER OF FINANCE, GERMANY

point. Changes in global econom-ic trends, which can rapidly be destructive, can only be conquered through the joint effort of all Euro-peans. The Juncker Initiative called for both a digital union and an ener-gy union, and these are the right points to be focussing on.

Without a large, single market, we will not meet the basic condi-tions needed for economic develop-ment under digitalisation, nor will we be competitive, especially when we look at the speed of innovation in other parts of the world.

And that is why this point of becoming stronger and more efficient Europeans is so important — we can-not achieve it by working alone.

More mobility neededThe fifth point is the workplace and training. I understand that there are bilateral activities between our two countries, we have partnerships — including professional training — also including at the federal state level such as with my home region, Baden-Württemberg. This is by far the most beautiful part of Germany. The ambassador will agree with me, but this is more intended for Ger-man listeners.

When I see the unacceptably high rate of youth unemployment in many parts of Europe, and then I contrast this with the fact that there are hundreds of thousands of train-ing vacancies in Germany this year which are not being filled by young people wanting to undergo training but unable to find the right oppor-tunity, I feel that Europe needs to be more flexible if we want the younger generation to feel included and be more mobile.

This does not need to follow a single direction; we know that we need more mobility, espe-cially amongst young-er people. For example, I live near Strasbourg on the German-French border and I spoke to a young French person in Strasbourg who said that the French peo-ple working in Germa-ny were older than the rest. The willingness of older French workers to seek work in Germany

is higher than in the younger gen-eration. This is crazy but it is how things stand. The figures back it up. This means that promoting mobil-ity across all qualification stages in young people eager to learn in Europe is crucial.

Keep the euro stableNow, I would like to move on to the next point: you are not yet members of the European Currency Union, but the euro is naturally the cur-rency of the European Union, as we know from the Lisbon Treaty, and we will not be able to hold Europe together if we cannot keep the euro stable. That much is clear.

In this light, our efforts in the Eurogroup as finance ministers are important to all our friends and partners in the European Union.

We’ve come a long way since the banking crisis. We have managed to keep the euro currency stable, despite much scepticism. We need to keep fighting and pushing towards this. But we need to ensure that the rules are complied with. A feder-al structure, particularly a curren-cy union, cannot function indefi-nitely if rules are not adhered to. As German Finance Minister, I do not receive much sympathy for this posi-tion, but it has to be this way, other-wise stability cannot be ensured.

We’ve advanced the Banking Union and reduced risks. This will be dem-onstrated in the discussions of the European banking sector which we will be holding, and it will be shown that we are much more resilient. We are working towards a Capital Mar-kets Union which will gradually sta-bilise the key aspects of economic integration within the EU in general.

No Europe à la carteA final word on the British refer-endum: I believe we all regret it deeply. We need to take note of it. Ultimately, it is up to the British to decide how the process of depar-ture plays out, but it is clear that it cannot be an à la carte process. We have been steadfast in putting this across very clearly to the Brit-ish. Cherry-picking will not be per-mitted. If they want access to the Single Market, they need to follow the rules of the Single Market and accept all the four basic freedoms — if they do not want this, they cannot be part of the Single Market.

That much is clear and there will not be much flexibility on offer. The decision is up to the British. We want to minimise the damage to Great Britain as much as possible, as well as to Europe as a whole. There is no point in punishing Great Britain. But we must keep Europe togeth-er, which is why there are no rights without obligations. Europe is not à la carte, the rules apply to everyone, even in testing times.

If we do this and work resolutely to demonstrate to the people that Europe has real value, that we can resolve problems which would oth-erwise be insurmountable, then I am certain that Europe has a posi-tive future.

For this reason, we should not exhaust ourselves in day-to-day rivalries between individual institu-tions and we should not place the blame on each other — on the Com-mission, or on the European Parlia-ment, or on the individual mem-ber states. European citizens are not interested in hearing this. They want to know that we are pushing ahead with key areas and that this will also have a tangible effect on their own lives.

Europe and its abundance, Euro-pean diversity in its manifold forms, its great contrasts which we do not want to lose — giving them up would be a stupid move; it would make Europe far less inter-esting. The true task we face here in Europe is to properly combine diversity, freedom and unity. We should not lose sight of the huge amount we have achieved, and we should not be pessimistic but rather continue to work resolutely toward our goals. s

Schäuble: Europe cannot be competitive without a large single market



ANCA DRAGU, MINISTER OF PUBLIC FINANCE, ROMANIA

WHEN WE look at the dashboard of the Romanian economy, we see that it is resilient to shocks and the figures are looking fine.

We had 5.2% growth in the first semester of 2016, the highest in Europe, and investment growth of 7.4%. Foreign direct investment in the first eight months of 2016 was €2.7bn, the highest level since the crisis.

Exports have risen by 6.6% in the first eight months. We have new job creation, 3.4% in the first eight months, while wages have increased by almost 13%.

We have issued public debt at our lowest interest rate. Of course, our public debt is at a very comfortable level, only 40% of GDP, but we want to stay there, even to consolidate.

So the Romanian economy is now in the most favourable situation for the past decade. We have sound and sustainable growth, based on a posi-tive contribution from all economic sectors, especially investment.

Speeding up investmentWe hope to see an accelerated pro-cess of investment, for many reasons. Romania enjoys political, econom-ic and monetary stability. We have a privileged geographical location, being the gateway to the European Union, and a Black Sea harbour.

We have an attractive fiscal envi-ronment and a generous package of incentives for research and develop-ment, and for IT. We also have sup-port schemes for investment, and of course a stable exchange rate.

This year was full of challenges, but also a year full of achievements. We have shown that we can keep the budget deficit under control in an election year and lay the foundations for irreversible reforms.

Macro-economic imbalances have been closed, according to the Europe-

an Commission.We have cre-

ated the largest online budg-et platform in Europe. With just one click, any citizen can learn about the expenditures and revenues of almost 14,000 public institu-tions and over 200 state-owned enterprises. On top of this, we will soon add non-governmental organisations that are financed from public money.

We have embarked on the largest simplification and red tape reduc-tion process in tax administration. We are now launching for public debate a second package of meas-ures, intended to support taxpayers.

Putting the state’s house in orderImportant progress has been made on implementing corporate govern-ance in the institutions under the Ministry of Public Finance.

The selection of a profession-al board and management for CEC Bank, the state bank, have been started, and will continue, with other companies under the Ministry of Public Finance.

We have also enhanced the legal base and taken important steps in the field of investment prioritisa-tion and increasing public spend-ing efficiency. We have first draft reports for the ministries of Trans-port, Health and the Environment.

Important reforms have been con-ducted that are creating the founda-tions for sustainable growth.

Forecasts indicate economic growth of around, or even above,

4% for the medium term, and investment growth of over 7%. Exports by 2020 should increase at an annual average rate of 9%.

Of course, there are also risks and we do not overlook them, both inter-nal and external. We see a moderate risk related to Brexit, and also from lower than expected growth in the main economic partners of Roma-nia. Another risk is the proximity of our country to conflict areas.

For internal risks we see domes-tic demand much higher than the domestic supply, and another risk may be delays in implementing structural reforms and bottlenecks in financing investment projects.

For all these reasons, we consider that we have laid the foundations for strong growth and taken proac-tive measures to limit these risks.

To improve the possibility of financing important projects we are working on setting up a develop-ment bank and we are benefiting from the expertise of KfW.

For all these reasons, the presence of investors, with projects they want to develop in Romania, is important. They will contribute to better sus-tainable growth, higher integration and more rapid convergence. s

Romania is in its best shape, economically, for a decade. With the budget deficit under control and employment growing, the prospects look bright, argued Anca Dragu, Minister of Public Finance, at an event in Bucharest organised by the ministry and GlobalCapital. The government is striving to make the public finances more transparent, with granular details of spending and revenue published online, and is trying to simplify taxation and cut red tape.

Risks include Brexit, domestic demand outstripping supply and bottlenecks slowing down the process of reform and investment.

Fast growth in GDP, investment and exports

Anca Dragu: we have created the largest online budget platform in Europe

7 Anca Dragu speech.indd 7 09/01/2017 15:15

8 Romania in the Capital Markets

Romania Investment and Financing Roundtable

: The Romanian economy is one of the fastest growing in the EU. It grew in real terms by 3.8% in 2015 and 5.2% in the first half of 2016, and Standard & Poor’s expects around 3% average growth until 2019. What is driving this growth?

Enache Jiru, Department of Treasury and Public Debt: The achievement of 5.2% growth is remarkable.

The first driver is consumption, which is keeping the same trend as last year, a result of measures the government has taken like tax relief and VAT cuts.

They went directly to consumption, but the second round effect of consumption will be reduced from next year. We expect consumption to contribute 4.5% to growth in 2017, falling to 2.4% in 2019.

The second driver is investment, because tax

Participants in the roundtable were:Mihai Boldijar, general manager, Robert Bosch SRL, Romania and Robert Bosch OOD, Bulgaria, Bucharest

Marius Dan, head of investor relations, Fondul Proprietatea, Franklin Templeton, Bucharest

Paul Gheorghiu, head of the Prime Minister’s Chancellery, Bucharest

Stephen Jefferies, head of emerging markets and FX trading, JP Morgan, London

Enache Jiru, secretary of state, Department of Treasury and Public Debt, Bucharest

Christian Kraemer, first vice-president, head of management affairs department, KfW, Frankfurt

Steven van Groningen, CEO, Raiffeisen Bank Romania, Bucharest

Liviu Voinea, deputy governor, National Bank of Romania, Bucharest

Jon Hay, moderator, GlobalCapital

Tax cuts and wage growth get Romania moving — can reforms finish the job?

Romania is the economic growth star of Europe. Tax relief and VAT cuts have stimulated consumption and investment is strong. Wages are rising fast, but Romania remains competitive. With labour costs a fifth of the EU average, it should be — but that statistic shows how big a hill the country has to climb.

To close the gap with richer economies, Romania needs sustained growth, at a fast pace, for a long time. The present stimulative policies are working and have not yet sparked inflation. Romania’s bond yield

has come down enormously in recent years. But with the Federal Reserve set to raise US interest rates, life is going to become more difficult for emerging market borrowers.

More fundamentally, reform is crucial if the economy is to make lasting progress. The government is committed to privatising state-owned enterprises and is on a concerted drive to stamp out corruption and improve governance.

GlobalCapital gathered some of Romania’s leading government and financial officials, as well as senior bankers, investors and industrialists, for a roundtable discussion in Bucharest, with an invited audience.

Romania should, they argued, avoid sudden about-turns in policy and cultivate a lively dialogue between the public and private sectors. Government implementation of reforms must become more effective and the big disparities between richer and poorer parts of the country need to be evened out.

The challenges are big, but the scope for improving the lives of Romania’s people is enormous.

8-17 Romania in the capital markets RT.indd 8 09/01/2017 15:02


Romania in the Capital Markets 9

relief has been a stimulus for all sides — consumers, individuals and investors. We have had a reduction in dividend tax and a tax exemption for reinvested profits, which helps private investment.

The pace of public investment has kept up at about 6.5% of GDP.

So it’s coming from all sides, consumption and invest-ment and exports. Net exports are the negative element, but much lower than before the crisis period. The nega-tive net exports will continue to be reduced until 2019, to 0.6%; now they are 1% of GDP.

This is part of the current account deficit, where there has been a remarkable achievement. It’s about 2%, but don’t forget what it was in 2008 — 13%. It was huge.

Paul Gheorghiu, Prime Minister’s Chancellery: We would like to see a higher average rate of growth in future years. We need to grow by about 5% to close the gap as soon as possible with more developed states in western Europe.

This year was probably a special year, since we had the fiscal stimulus, which drove growth mainly through consumption.

But in the next few years we will need to look more closely at how we can attract more foreign investment. FDI is still low; very low compared to the years before the economic crisis.

At the beginning of this year we created a new institution, InvestRomania, to help foreign companies wanting to invest in Romania. Some results have already been seen and I’m sure that in the next few years it will continue to grow and have an impact on increasing FDI.

We should also look at government investment as a source of growth. Government investment, unfortunately, is lower than we would want it to be, mainly because of a lack of administrative capacity in the ministries which should do these investments. For example, the Ministry of Transport is almost constantly unable to spend its budget because of different problems.

This year we have made a lot of effort to streamline government investment activities and we’re hoping that in the next few years we’ll see an improvement.

Probably these will be the two main sources of growth. Another interesting thing is that if you look at what has grown this year, apart from consumption, companies have bought a lot of fixed and long term assets, compared with previous years. It’s 10% growth or something like that. This means companies are preparing for a bigger volume of activity and I’m hoping this will also translate into higher industrial production and exports.

: Liviu, we’re getting a picture of strong consumption growth and fiscal stimulus. Sometimes these things worry a central banker — how do you feel? Is growth under control and proceeding at the right pace or do you have concerns?

Liviu Voinea, National Bank of Romania: First of all, there are more drivers of growth — higher income for households, fiscal stimulus and supportive financial conditions.

Even by comparison with our peers and our history, we have quite supportive financial conditions —

positive real interest rates. It’s too early to be concerned about overheating,

because, first of all, this is only the first year when the output gap has turned positive after seven years of it being negative. This is still preliminary data, and probably our potential GDP can be higher.

Also, it appears that actually the budget deficit will be significantly lower than forecast.

At this point there are no concerns regarding sustainability of growth, and several indicators point in this direction.

For example, foreign direct investment is made of three flows of capital: equity, reinvested profits and intra-company loans. For many years before the crisis, intra-company loans were more than half the total foreign capital flow. The FDI now of €3bn is not so much compared to €7bn before the crisis. But those €7bn, or €9bn in some years, were more than half short term private debt.

Now, because of deleveraging, which in general is a bad thing but in this case is a good thing, you basically don’t have intra-company loans, so those €3bn of FDI are actually pure equity and reinvested profits.

In 2015 and 2016, for the first time after the crisis, reinvested profits have made a positive contribution to FDI flows. Foreign companies did not withdraw money from Romania but reinvested profits, for a number of reasons. Maybe it was the tax exemption on reinvested profits, or the economic recovery really picking up.

That’s one thing showing that there is more resilience and robustness of growth than one might think.

The current account deficit, yes, is going towards 2% by the end of next year. But think of all this demand stimulus. By the way, most countries in Europe are concerned because they cannot manage to stimulate demand. Now I understand we are concerned with stimulating too much demand.

I would say it depends a lot on where this demand goes. Is it matched by domestic supply? Then it’s OK. Is it matched by foreign supply? Then we should be worried.

And according to evidence, about 80% of the additional demand created by this stimulus has been matched by domestic supply.

That’s why the increase in the current account deficit is actually very low, compared to what could have been. And also 10 times less than it was 10 years ago, as a

Liviu Voinea, National Bank of Romania




percentage of GDP in real terms. So, again, this is a reason for the robustness of growth.

Furthermore, we no longer export only textiles, footwear and some furniture. We export medium to high value-added products. In the last five years their share of total exports has increased from 38% to 48%.

This shows that we are no longer, or not to the same extent, price-dependent. Competition of our Romanian products is no longer based on cheap labour and low prices.

So this is why it makes sense to have both an increasing unit labour cost — which we’ve had in the last two years, partly because of rising minimum wages — and at the same time an increase in external competitiveness.

That’s from an overall perspective. The central bank is concerned about three major stabilities: price stability, financial stability, and exchange rate stability. And we have reached all these three stabilities.

Prices are stable. Financial stability — we didn’t put any public money in to save our banks, as most EU countries did. And volatility of the exchange rate is very low. So there are, overall, more reasons to be content than concerned.

: Steven, you’ve been running Raiffeisen in Romania for 15 years, you’ve seen the economy in every kind of phase. Do you share this confidence that growth is stable to improving, in a sustainable way?

Steven van Groningen, Raiffeisen Bank Romania: Yes. Romania needs high economic growth, otherwise we’re not going to catch up with the rest of the EU. It will probably take Romania about 20 years to become the 10th economy in the EU; that is possible. But you need to have a very high level of economic growth. So maybe the question is not if growth is too high; maybe the question is if it’s high enough to achieve the potential.

But that’s only part of the question. The other part is what is the composition of growth. What I see is that growth is about twice as fast in consumer loans as in loans to companies.

That illustrates that on the level of consumers, there is apparently now a high level of confidence. And confidence is one of the most important indicators. Nobody is going to consume money when they are concerned about their future, and they are even less likely to take a loan.

So maybe it’s normal we should see first an increase in consumption and then investments by corporates.

But in the long run we have to outperform the EU every year for the next 20 years with significantly higher growth. We also need investments by the private sector and the state in infrastructure, in measures that increase productivity.

Although this has all the right signs of a good start, what we need is really long term, sustainable growth. So far, so good, but I really hope that in 20 years, we can look back and say this was the start, when Romania started to catch up and work on its ambition to have the position in the EU that it really deserves.

Christian Kraemer, KfW: You can ask why do you

need a development bank if you have such a good eco-nomic situation?

Let me give you an example we had in Germany. We introduced, roughly 20 years ago, a very successful programme for people to renovate their houses to make them more energy-efficient. You get new roofs, new windows and the cost of heating goes down and you make your house more energy-efficient. What we didn’t think of, but found out after a while, was that the job creation effect is massive, because this is done by local craftsmen. New windows and roofs can be a clever trigger to combine private consumption with certain economic effects you want to achieve, in addition to the climate change issue.

: Mihai, you’re central to that high value-added export growth Liviu was talking about. Do you have confidence for the future?

Mihai Boldijar, Robert Bosch: We rediscovered Romania 21 years ago. We did business here until 1921 — I was not around at that point, but I have been around since 1994 when we established a company here. We’re looking very carefully at Romania as having one of the biggest potentials in the region.

We’ve gone through a very painful period during the financial crisis, but exactly in that time we have invested a lot. We opened the first factory in 2007 and since then have tripled the number of workers. We opened our second factory in 2014. This means we have found a well-designed framework to develop our business.

Of course, it’s not perfect. It’s a subject of discussion with the government and other partners. But once you are here making an investment you have to think not in years — you have to think in decades.

That makes you a reliable partner for discussion for the authorities. Once you come here and develop your business, you also develop collateral business with your suppliers.

It’s all about trust and confidence. We’ve heard a lot of figures, percentages, and so on. But beyond the percentages is a trust on the investor’s part that things are going well or reasonably well, or at least the best in the region. We always have to benchmark the country against central and eastern Europe and see if we are doing things right.

Because this 5.2% growth is not a given. It is coming

Christian Kraemer, KfW




from the past and shows that things have been done well. Some things have been done well, but we have a long list of things that have to be improved.

We are looking now very carefully to what will happen after the general election in December, and also to the law passed in the last couple of days, which abolished 102 taxes.

Is it the right time to make changes? Probably not. So why do we need the changes?

Stability is the biggest and strongest pillar of confidence. If you change the rules during the game, it’s not good for sustainability. You have to keep on the way of consistency. But I hope that we will be on track from December and will keep the pace of growth.

: Coming from the UK, I have experienced political risk at first hand recently. Marius, you’re managing a portfolio of stocks which represents an important part of the Romanian economy. What’s your perspective on the economic trajectory?

Marius Dan, Fondul Proprietatea, Franklin Templeton: Given that our portfolio is 85% exposed to the energy sector, one could say it was a proxy for Romanian GDP. We view the current situation as extremely encouraging. I tell our foreign institutional investors that we’ve never been as bullish on Romanian macroeconomics as we are today, and we’ve been in the country for more than six years.

We’ve talked for quite some time about the recovery of the Romanian economy, so now it’s good that we’re in the early days of a real expansion.

There is a lot of room for growth. Some of the drivers are a continuation of the structural reforms that have been implemented; a higher absorption of European Union funds; the fact that Romania has a highly skilled workforce. Romania has the highest number of IT workers per capita in the EU and sixth in the world. That’s a big part of what can drive the economy.

Rising productivity is also encouraging. On the other hand, the banking sector has gone through a huge deleveraging and credit expansion is still quite low. What we need now is a continuation of a pro-growth and pro-capital market government. We’re still playing catch-up with other countries, because wages are one fifth of the EU average. This hopefully will be corrected and GDP per capita should move up as well.

: Steve, does the debt market share the enthusiasm for Romania that we’ve been hearing?

Stephen Jefferies, JP Morgan: I think it has done. Just after the credit crisis, Romanian yields at the short end of the curve were trading above 100%. Now we have 10 year yields around 3.3%. So in the last eight or so years, there’s been a lot of positivity around Romania.

At this point, it’s a bit more concerning — not for Romania on its own, but all the central European economies. The yields are so low, and as we see from the European Central Bank and Bank of Japan comments recently, and the fact that the Federal Reserve is going to continue its hiking cycle in December, yields are probably going to start rising.

With any country where yields are relatively low,

without that cushion against rising Bund yields, you have to be on watch.

Is it too early to get concerned about what is happening in Romania? At this stage it’s probably, as Liviu said, too early, because the curve is still relatively steep.

The wage rises have not fed through into inflation just yet and you have some cushion, some time, to see what happens after the election before we should get too concerned about Romania.

It is probably in one of the better situations of the four main central European economies, if you compare it to Hungary or Poland. Having debt to GDP below 40%, it’s still in an OK situation.

Just touching on the current account, which has stirred a bit in the last couple of years, it’s more than financed by FDI and EU funds, so it’s not a huge concern.

But overall, the debt markets are a bit on watch, though I wouldn’t say Romania is in any worse situation than others.

Voinea, National Bank: I think you are understating it. I think the debt markets are very happy with the fact that Romania is delivering quite high returns, compared with our macroeconomic position.

We are probably underrated, if you ask me. That’s what I tell the rating agencies. I told them this also when we were considered a junk investment, and we have been upgraded. So I think we still have room to reduce the cost of servicing debt.

Regarding your comment that wage rises will be seen in inflation soon, I would emphasise that a significant part of all these rises in household income did not go to consumption, it went to savings.

The savings rate is growing steadily. In the last nine months the pace of growth of household deposits has been triple the rate of growth of household loans, local and foreign currency together.

In local currency alone, loans are growing faster, but nevertheless, the loan-to-deposit ratio is steadily falling and is below parity.

So low inflation is probably here to stay. If you discount for the lower VAT for food and non-food, inflation would be around 1%. Our two year estimate is that it will get into our target band, 2.5% plus or minus 1%, so I wouldn’t say we are in any danger of higher

Stephen Jefferies, JP Morgan




inflation in the next couple of years.

Jefferies, JP Morgan: My comment is more that in a global economy, anything that happens in 10 year Treasuries or Bunds is reflected quite quickly in prices of emerging market debt. So if Bund yields go from negative to positive, even positive 0.25%, then the outlook for Romania will unfortunately not be as positive.

Voinea, National Bank: I know, but my colleagues from the finance ministry can tell you about their experience in February 2014, when there was a short-lived emerging market crisis, involving South Africa, Brazil and so on. The Ministry of Finance was able not to make its regular issues of bonds for three weeks or one full month, which proved to the markets that we really have a buffer. That buffer is still there. It allows for four, five, sometimes six months of financing, so temporary fluctuations in the price of debt can be cushioned.

: Liviu mentioned the rating. Standard & Poor’s decided not to raise the rating in October. It said it might raise it, if budgetary consolidation resumed and net government debt was firmly on a downward trajectory.

It also mentioned two other conditions: if Romania’s governance framework improved, trans-lating into more predictable and stable growth and finances, and the other issue was privatisation.

Governance is clearly very important and was mentioned by the prime minister earlier. Paul, what efforts are being made to improve governance and are they bearing fruit?

Gheorghiu, PM’s Chancellery: The first and simpler type of governance concerns state-owned enterprises. This year we’ve made tremendous progress in updating our legislation to make sure the governance of state-owned enterprises is aligned with international best standards.

The law has been passed, so we have consensus among all political parties that it is very good and reflects what should be done. We’ll probably have stability here.

In the second part of the year we started implementing the new standards brought in by the law. Probably this implementation will prolong itself until the beginning of next year and after that I am very confident we will start seeing even better results.

We did some analysis of how the governance of state-owned enterprises improved even after we implemented the first version of the corporate governance framework, Law 109, and some companies had registered very good improvement in their figures.

: How do you measure success in governance?

Gheorghiu, PM’s Chancellery: In terms of profitability. We’ve seen very good increases in profitability for most large state-owned enterprises. Probably this was doubled by an improvement in market conditions for the energy sector and by the good performance of the Romanian

economy as a whole. But still, the reforms have shown results.

The second type of governance relates to the government itself. We face a list of problems in trying to push reforms through Parliament, and then implementing them.

Once you start having reforms which involve more than one ministry, you have problems with coordination. This is why some of the important reforms announced in the last few years took a very long time until they were put through legislation, or were somehow forgotten. So the government is trying to strengthen its coordination through the Chancellery.

We’ve already implemented a number of initiatives to centralise functions which go across ministries, for example, the IT function.

Coupled with this, we need to improve the way the centre of the government monitors its priorities. Once you have a clear list of priorities, you need to make sure you implement it in due time. To do this you need a proper monitoring mechanism, which until recently we lacked.

We’ve now developed ways of monitoring progress on our main reforms agenda, but we still have a lot of room for improvement. Unfortunately we haven’t had time to implement everything we wanted.

But for the future, the government needs a project delivery unit, properly staffed by about 100-150 very good professionals, to do project management for each large priority.

We need to do this in a very transparent manner. Each large project should have a plan, which should be publicly available online and the progress should be publicly updated by the project delivery unit.

This is the single most important thing that needs to be done at the level of central government, to improve governance and make sure reforms are pushed through much faster than they currently are.

: Enache, can you put us in the picture about how the privatisation plan is progressing?

Jiru, Treasury: The government has approved a memo-randum with a full list of state-owned companies that should go public. They are from different industries, especially energy, such as Oltenia and Hidroelectrica, energy producers, and the Port of Constanţa. We will list

Paul Gheorghiu, Prime Minister’s Chancellery




stakes of about 15% or 20%. We know the figures exact-ly for any company.

With one group of companies, all the receipts from privatisation will stay with the company for its development. There is another group which need first to have a capital increase before going public. In these cases, privatisation receipts will go to the budget and will be probably used for public debt reduction. We are in discussions with the regulator, financial supervisory agency and the stock exchange about privatisation.

: Hidroelectrica’s initial public offering has been talked about for a long time. The prime minister has said companies will go public when they’re ready. Paul was saying a lot of the corporate governance work had been done, so can we expect some of these transactions to start to happen soon?

Gheorghiu, PM’s Chancellery: At least for Hidroelectrica, I’m sure things will progress, irrespective of the next government. The consultant has started drafting the privatisation prospectus. Unfortunately the schedule was too short to be able to do the listing this year but I’m sure that next year we will be able to list Hidroelectrica.

Dan, Fondul Proprietatea: We have been big supporters of the introduction of this corporate governance code, especially for state-owned companies. Even with partial implementation, companies have become significantly more profitable.

In our portfolio, the state-owned entities where we are a minority shareholder have gone from Lei1.2bn of net profits in 2012 to more than Lei3.7bn. And Oltenia is dragging down this number — otherwise it would have been in excess of Lei4.5bn.

So this works. We’re very encouraged by how the current government has implemented the corporate governance code in the Ministry of Economy. There have been some board selections and appointments of professional managers in companies like Salrom, which is the salt mines, a smaller company, Plafar, where we’re also a shareholder, and we really hope to see the same process being followed by the Ministry of Energy.

It has started and the outcome needs to be monitored very closely, because there we have the largest state-

owned companies. We hope to see the Ministry of Transport starting this process, because they’re very far behind.

We’re huge supporters of privatisation. Hidroelectrica is the largest holding in our portfolio, it’s almost a third of the net asset value.

We’ve already introduced investors globally, ranging from the west coast of the US to Asia, about the fact that this IPO is coming to the market. Everyone is looking forward to it; it will be the biggest IPO coming out of Romania and the largest in central and eastern Europe, so we’re very excited about it.

On top of that, Hidroelectrica will help the Romanian capital market in its upgrade from frontier to emerging market status.

One more point here on Hidroelectrica. The privatisation is a little behind schedule, but what we hope will happen very soon is to align the interests of the people on the privatisation committee of Hidroelectrica in terms of their remuneration. Right now they are paid on each meeting and we hope they will be paid on a success basis, which would help speed up the process.

Gheorghiu, PM’s Chancellery: Actually, the law relating to paying the members of the privatisation committee on a success fee is being drafted and I hope in about two weeks’ time it will pass through government.

Boldijar, Bosch: There’s no doubt reforms have been done, some of them successfully. But what we need is speed. We have to gain traction because otherwise people are losing patience.

This is also related to confidence, to trust. We are talking about education reforms, reforms in the health system, but it’s talk, talk and then it gets stuck somewhere.

Of course this government has done a lot of good things, and hasn’t had the proper time, but we hope the new government will speed up and show we’re able to do things in a decent timeframe.

Romania has to become not only competitive but also attractive. We have a lot of experts in our company asking “Should I come to Romania or not? Do I have a decent school for my children? Do I have a decent hospital? Can I have all the services I’m benefiting from in my home country?”

It’s a question mark. There is also “How easy is it to do business? Can I get my work permit on the spot, as I can in one of the very small Asian countries where you can get it an half an hour, or do I have to wait months?”

We have a lot of specialists who are keen to come here but if we can’t answer these questions to meet their expectations, we are losing them. I am confident we can attract specialists from abroad, but we have to do something in this respect.

van Groningen, Raiffeisen: We should also look at the importance of the capital markets to the country. We are often asked to finance things we can’t because there is, in many cases, a need for equity capital.

In terms of reforms, the great thing is that if there are so many things to be improved, it means there’s a great opportunity to grow. That’s why I’m always very

Enache Jiru, Department of Treasury and Public Debt




optimistic. But at times I ask myself what’s the ambi-tion level? It’s one thing to have potential, and nobody doubts the potential the country has in terms of natural resources, people, position, size.

But potential is not enough — you also need to have ambition. Where do we want to see ourselves 20 years from now? If a child gets born today, what kind of country do we offer to this person when he’s ready for the labour market?

Romania should aim for becoming the 10th economy in the EU, after Brexit the ninth, actually. That is feasible. But that ambition should be explicit. Once we make this ambition explicit a lot of things will fall into place, in terms of the prioritisation we mentioned, and doing things faster because they are important and easy to solve, for the benefit of all.

: Christian, when Paul was talking about reforms to make the government more efficient in the way it takes decisions and implements projects, is that a process you recognise other countries having done and do you have any thoughts on how best to do that?

Kraemer, KfW: One issue Paul mentioned was government efficiency, when different ministries are involved. KfW is supervised by two ministries in Berlin and is obviously dealing with other respective ministries also — you have to find the right balance if you act in this environment.

But we were heavily involved in the establishment of the public development bank in Portugal. One success factor was that there was a leading ministry, the Ministry of Finance. Of course other ministries were also involved, but we managed to focus that process to one ministry and that was a decisive factor.

: Your department at KfW is discussing with the Romanian Ministry of Finance the development of its own state-owned development bank. What benefits could the country gain from such a move?

Kraemer, KfW: What we can do is show what we have done in more than six decades in Germany, building up KfW to be the biggest national development bank in the world. We can show what we do in our domestic

finance business in Germany and in export and project finance business worldwide. Our Romanian colleagues are discussing with us what is interesting in what we do, and what could be interesting for Romania.

That was our approach in Portugal, where we selected a few points, they said that is of interest to us, and then you further discuss it. We’re not here to teach anyone, let me stress that. It’s just an exchange of experience we have gained over six decades.

Jiru, Treasury: We started about a year ago, with two possible solutions. One is to create a new bank. That means time, expenditures, you have to put capital, which means a budget impact. The other is to transform something which exists.

We said it’s much easier in time and cost to transform EximBank. We have two state-owned banks; EximBank is the single one which acts on behalf of the government. We continue to see this option as the best one. And we are in close contact with KfW and thank them for their help.

We will meet next month for open exchanges. You cannot just copy and paste, you have to see what’s appropriate for Romania, to adapt and learn about the instruments.

We also want to make sure we have done all the normal pieces to make sure our decision is a good one. So we are now selecting an independent consultant to do the analysis to demonstrate the need for the bank, to identify the gaps in the economy and where the bank should intervene to fill them.

: A very important factor, of course, is the banking sector and the availability of credit to the economy. Liviu, how healthy are the banks in Romania and what, if any, needs or challenges do they have?

Voinea, National Bank: Just a few indicators that I think speak for themselves. The solvency ratio is 19.1% as of June this year, so way above any threshold. Profitability, return on equity, was 12.3%, also at mid-year.

The non-performing loan ratio is 11% according to the European Banking Authority’s definition, which is very comprehensive. That’s halved in two years, from 21.5% in September 2014.

While the NPL ratio might seem high and it is indeed sixth, I think, in the EU, the coverage ratio, 62.5%, is actually the highest in the EU.

This high coverage ratio was a reason why in 2014 the banking sector reported losses, but they were more than compensated for by the profits in 2015 and the first half of ’16.

The liquidity ratio is 225%. The share of loans that are in local currency is now 56%, up from 42% five years ago and one third only before the crisis, which means resilience or less contagion risk.

van Groningen, Raiffeisen: My shareholders are very happy investors in Romania, in fact our bank’s operation is probably one of the most successful investments ever made in Romania.

Banking is aligned with the sort of long term investors we need in Romania. We give mortgage loans

Steven van Groningen, Raiffeisen Bank Romania




and it takes 25 or 30 years for people to pay them back. When you invest in a production facility and it takes you five or 10 years to get your investment back, you obviously have a different approach than when you are selling a truckload of chocolates and you have about a 30 day exposure to the country.

It’s therefore extremely important that we create an environment that is predictable. When legislation changes all the time, and the process through which legislation is being changed isn’t effective, then you are building barriers for foreign investors.

It’s not that difficult. We would like to understand, foreign investors would like to understand, what are the areas where you have opportunities in Romania, and maybe the areas where there is government support.

And when you see legislative changes, you want to understand them and that they fit into this overall strategy. You would like to understand this process and be part of it. There should be a real dialogue about those changes, with a real impact analysis, about how all stakeholders are impacted, including foreign investors.

Often this is not taking place. Then when laws are implemented, they should be clear and simple to understand, which in many cases is, unfortunately, not the case.

You would like to have a reasonable timetable to implement laws, especially things that have an impact on annual budgets. You would expect to know, let’s say, on 30 June what was going to change on 1 January, so you have reasonable time to implement it and have it in your plans.

That’s not too much to ask for, but there should be more attention to this, to stability, to predictability, and less to whether taxes should be higher or lower or there’s a lot of bureaucracy. That is a very important aspect.

Access to finance, in my view, is absolutely not an issue. There is so much liquidity in the banking system. What is an issue is that many Romanian companies are not capitalised well enough, which makes it very difficult for them to be financed by banks.

But these sorts of things are not debated in society and there are, unfortunately, a lot of Romanian entrepreneurs who seem to think banks are somehow obliged to give them a loan. They probably learned this from some of the politicians who shout off the rooftops that banks should be doing this or that, without ever speaking to a bank or asking.

However, I’m more concerned about the costs of financing. Obviously, the lower the cost, the better it is for the economy. I never lose an opportunity to point out that if the systemic costs in a country are higher, I’m not going to pay for this. It’s the clients that pay for this and that is not always understood.

So if my recovery rate from insolvency is very low, that simply means in the future I will give fewer loans, or will ask for more collateral.

It’s a process; we are moving in a certain direction. I think we could do it faster if we had a little more debate about these things. I honestly hope we will see more and more investment and more and more people, irrespective of nationality, will be attracted to become entrepreneurs and help to develop the potential the country undoubtedly has.

Boldijar, Bosch: I can tell you what we see and what we feel. The entire investment framework is better than in the past, definitely it’s much easier and the govern-ment is more supportive through the state aid scheme and other things. Of course, there are hurdles and bureaucracy we have to fight with, but definitely also this is something we have to work on together.

But what we feel is that FDI and national investments are too polarised in a certain part of the country. This leads to economic and social differences which I don’t know where they will lead in our future.

In a big portion of the country, the western part, it has become very difficult to keep costs in a certain frame, because if you have a lot of investors, it’s a race for associates willing to work in your factories. We don’t want to invest and see the factories in a couple of years empty because people are going away.

So we should find measures which can raise also the investments in other regions or make them attractive for investors.

Because otherwise we will be stuck in the west and have a problem in the long run, because the fixed cost will rise and we will lose on competitiveness.

Of course everybody is going there because of the infrastructure. But the government should find solutions to raise up the south and north-eastern parts of Romania.

Gheorghiu, PM’s Chancellery: Just one idea: this year in the government state aid scheme, I think it was the first year when we gave extra points for investment in less developed areas, so we’re trying to correct imbalances.

van Groningen, Raiffeisen: It’s worth mentioning this new mortgage walk-away law [which allows a homeowner to surrender a mortgaged property to the bank and be free of the debt].

A bank now finances an asset and not a person. That means there are two important things: the volatility of that asset and the liquidity of that market. I can guarantee you that in most of the areas we’re talking about they are less favourable.

Any area outside the top 10 or 20 cities in this country, there is no liquidity in those markets. That means people who want to take a mortgage loan in these so-called less favoured areas will have to come up

Mihai Boldijar, Robert Bosch




with a down payment of, let’s say, 50%. I can tell you they don’t have the money.

This happens when you make legislation and you refuse to do an impact analysis or don’t care about some parts of the country. This is the sort of stuff that is happening. When you look at what is really happening in legislation, it doesn’t look that healthy.

: Marius, what are your hopes for the Romanian stockmarket and equity financing... is the path ahead a good one?

Dan, Fondul Proprietatea: Definitely. Romania, because of the macro backdrop, is very interesting for foreign institutional investors because of the high liquidity within Romania. There is a lot of money coming from retail investors, from pension funds that can be invested in the market.

Pension funds are growing at more than €1.5bn per year and it would be a shame for that money to be lost and be invested abroad, like in Lithuania, where more than 80% of the pension fund assets are invested outside the country.

The upgrade to emerging market status can only come with more IPOs and those IPOs are of the state-owned companies. That’s where we have the largest companies. Hidroelectrica we’ve talked about, but also the Bucharest airport, the Constanţa Port, Salrom, as well as the post office are companies we are a shareholder of. We’ve worked very hard with the boards and management of those companies to make them more efficient, more profitable and they are at a stage where they could eas-ily be listed.

Some of them, like the airport, could have investment projects that need financing, given that traffic is growing by more than 17% in Romania. So there are quite a few options.

But we’ve had an encouraging step from FTSE, which put Romania on its review list to be upgraded to emerging market status. But some countries can stay on the review list for five or six years, so it’s a small step.

The big move would be for MSCI to, first of all, put Romania on the review list and then upgrade it to an emerging market, because we have there $1.2tr of active money and $200bn of ETF funds, and part of them could come to Romania.

But Romania would have only a very small weighting in the index, so only very little funds would be attracted. So what we’re also working on is to increase companies’ valuations, because that will give Romania a bigger weight and attract more funds from institutional investors.

The environment is definitely supportive for capital market growth. There is a lot of liquidity that can come to the market, as we’ve seen from the stake sales we’ve done. They’ve all been oversubscribed. All we need now is for Hidroelectrica to be listed as well as formal decisions from the government which would hopefully be followed through by the next government, about moving forward with IPOs.

Peter Botoucharov, T Rowe Price (speaker from audience): From a fixed income point of view, Romania is considered an emerging market. But as soon as it enters the Barclays Aggregate or Citi or JP Morgan

global indices, it could hopefully enter into the global fixed income universe of investors. And this would put borrowing costs lower, both for corporates and for the state.

: Yes, Steve, would you be able to characterise the way Romania is seen by investors? Do they pigeonhole it as a certain type of borrower, and does that affect what it’s able to do in the debt markets? And what steps are open to the country to improve that?

Jefferies, JP Morgan: Romania has become, from where it was 10 years ago, which was a much more illiquid market, one where it’s comparable with the other central European markets: Poland, Hungary and the Czech Republic. That is quite a big jump. In 2005, 2006, just before EU entry, Romania was still quite illiquid. The currency only became convertible at around that time, and the country’s played catch-up pretty quickly. However, there is still a yield difference between the Romania 10 year and the 10 years of the three other countries — 100bp in some cases, only 30bp in Poland’s case.

But the funding cost in Romania is much lower, so the curve is still very steep relative to the other countries, which does reflect the fact that there is a liquidity premium. People haven’t traded Romania as actively as they’ve traded Poland or Hungary for the last 15 years, so there needs to be more time for people to become accustomed to Romania.

The Swiss mortgage law was a problem for Poland and Hungary; in Romania it’s less of a problem. The recent underperformance has been caused by that and we’ll get through it.

Getting through the election will also be quite useful. But getting back to the liquidity point, the addition of more international banks to the market should help. Hopefully JP Morgan will be a bit more involved next year, but we’ve already been quite well involved recently.

Romania was put into the JP Morgan benchmark emerging market bond index around two years ago, which helped access to the market, helped liquidity. But there still is further to go. I wouldn’t classify Romania as a Turkey or South Africa or Russia —it’s probably more with Hungary and Poland, but not quite there yet.

Marius Dan, Fondul Proprietatea, Franklin Templeton




: Are you worried about what could happen to the debt dynamics when interest rates rise, which we must expect to happen at some point?

Jefferies, JP Morgan: It’s quite well priced that the Fed will hike in December. It’s likely to be accompanied with very dovish commentary to assure the markets that the Fed is not worried about overheating.

For next year there is only really half a Fed hike priced in for the whole year, which is pretty low, given there is some bounce in inflation or the disinflation trend we’ve seen.

So there could be some risks if the Fed is a bit behind the curve. I think they want to be behind the curve, but that could steepen up yield curves, which could cause issues across the globe.

In 2013, when the taper tantrum happened, emerging markets were quite heavily hit and that reverberated for a couple of years. We’re in a better place now because the outflows from the end of ’13, and in ’14 and ’15, have meant that the technical position in the market is a lot healthier.

In the early part of this decade we had huge investment into local currency debt, but a lot of the tourists have moved out of that market in the last couple of years. This year, local currency EM debt has been one of the best performing markets around, which no one really predicted at the start of the year.

But the inflows have really not been huge, so there is still more potential to go. Assuming there isn’t some big inflation shock and the Fed are able to hike once or even twice next year, we’ll be OK.

: Liviu, the debt market always has shocks — are you ready for one?

Voinea, National Bank: Our financing gap has shrunk since 2012. It’s now below 10% of GDP on an annual basis. Part of this has been the strategy to extend maturity, which has been very successful, in both local and foreign currency.

Total public debt has actually declined in the last two years and non-resident holdings are lower than two years ago. Our international reserves are at historically high levels, way above €30bn.

So there are many reasons why we should be able to withstand the next crisis, whenever it comes.

We have all the monetary policy tools still available. In other countries monetary policy is overstretched, but we still have an interest rate which is, at 1.75%, low in a Romanian context, but there is still room for cuts.

Then the corridor around the interest rate is 150bp in each direction. Banks get 0.25% for keeping their money in the bank and they get financed at 3.25%, in case of liquidity problems. Now it’s a symmetrical corridor; it can become asymmetrical, or shrink.

Also, minimum reserve requirements have been on a downward path. They are still 8% in local currency and 10% in foreign currency, above the best practice of the ECB, where we strive to get to in the medium term.

So there are lots of policy tools still available to us. We recently decided to publish the minutes of our

monetary policy meetings, starting in October. The first one is available in English, as well. One of the reasons was to show that, though we decided for the 11th consecutive time to hold rates, it’s not because we are stuck. There are arguments, pros and cons, and we think now it’s the best choice.

Also, regarding debt sustainability, we published, and it’s also available in English, our financial stability report from last year. There is a whole section dedicated to the sustainability of public debt, with analysis of what is the early warning level. We are not there yet.

Jiru, Treasury: I don’t remember ever thinking that we had only certainties in front of us. In financial markets you have only uncertainties.

We just have to manage and face all these risks. And if what we don’t want to happen happens, the country must be prepared to manage the situation.

I would say Romania is prepared. We took measures starting three, four, five years ago. We have a very clear strategy on the public debt.

I’m a borrower, so my strongest fear is to go into the market and not find the money. Demand will not disappear in the market, even for a short period. There is demand, but it will be a matter of cost.

Voinea, National Bank: Even though the interbank rate is way below the policy rate.

Jiru, Treasury: Yes. I remember in 1994 when the Federal Reserve did a jump of interest rates, starting the year at 3% and ending at 5.5%. Three times they had a hike of 50bp or more at one committee meeting. So we have to be prepared for a scenario with all the worst ingredients. We have created a hard currency buffer at the Treasury to cover at least four months of gross financing needs. We can stop tomorrow issuing any debt and we can finance all our needs for the next four months.

At the same time, our strategy is to increase the duration of the debt, to make it much more affordable to go into the market.

Next year, even if we have a fiscal deficit like this year, we’ll have a lower need for financing, because we have succeeded in expanding the duration of the portfolio.

Gheorghiu, PM’s Chancellery: We have a more simplistic view. The lower the interest rates on bonds are, the better. We’re just trying to shape things in a way which makes life easier for the people from the finance ministry to finance our country at lower rates.

To do this, as we have already discussed, these are the conclusions. We need to increase the efficiency and pace with which the government takes decisions and passes true reforms. We need to improve predictability. We need to improve stability. These are the prerequisites for having very good interest rates in the bond markets. And we’re working on all these aspects. I know Steven is very unhappy with some of the laws passed through Parliament recently, but life is very different after elections, so I’m hoping that next year we’ll have a huge improvement in the stability and predictability of the legal framework and things will cool down in this respect. s


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THE VOICE OF THE MARKETS ROMANIA IN THE CAPITAL … · nities in the present European Union. Romania has advanced well eco-nomically, after making it through the recession and economic