Romanian stocks, in the broader spectrum of emerging Europe, have outperformed in YTD 2017. The MSCI Romania Index is up over 25% this year and a shade under 20% in the 12 months ending September 20.
The graph below plots the movement in the Bucharest Stock Exchange’s BET Index.
The BET Index in celebrating two decades in September. It was launched in September 1997 and was originally composed of 10 stocks with a market cap of 443 million Romanian leu ($600 million or 473 million euros at the time).
At present, the Index is made up of 13 stocks and has grown to a market cap of 35 billion leu ($9 billion/7.6 billion euros).
In 20 years, the Index has risen nearly eight times its original value.
Investment fund Fondul Proprietatea SA and Banca Transilvania SA form nearly a fifth of the Index each, and the top five stocks form three-fourths of the Index. Meanwhile, energy majors OMV Petrom SA and ROMGAZ SA are the largest stocks by market cap, in that order.
While Romanian stocks have been gaining, the country’s bonds have been declining.
The graph above, which plots the 10-year government bond yield in the past one year, has a clear uptrend through the period.
It is the sharp movement in both of the above two graphs though, which make for an interesting study.
Political issues and government decision-making
Romania has been politically challenged in the recent past. The present government is the country’s third in the past year, and is a major reason why fiscal policy has not delivered and investment in the country has dwindled.
On a positive note, President Klaus Iohannis has been leading an anti-corruption campaign which aims to clean the system. However, senior politicians have tried to neutralize those efforts by trying to push through laws which serve their interests. Public outcry has ensured that such decrees have not seen light of day.
Markets seem to have reacted positively to the public anger. A major such incident occurred in February when mass protests were witnessed after the government tried to legalize practices which many viewed as corrupt. While stocks surged in the face of this public dissent, bond yields declined as can be seen from the graphs above.
On the flipside, the government has shown a pattern of taking decisions and then rolling them back, thus sending markets into volatile periods.
In June, the government had made public a pension reform and a higher band of income tax, among other measures, but had taken them back after an uproar, especially from the business community. This led to a decline in stocks and a noticeable rise in bond yields.
The macro determinants of financial markets
Fitch Ratings expects economic growth in Romania to slow post-2017 which recently stated that “wages outpace productivity growth” in the country. Though it raised growth expectations for 2017 from 4.8% to 5.1% in its latest forecast, it expects the pace to slow down to 3.4% in 2018.
The state of public finances, as has been discussed in the previous article, remains a cause of concern as well, and can negatively impact financial markets. The country is expected to breach its European Union-set budget deficit limit of 3% even though Prime Minister Mihai Tudose believes otherwise.
The other issue which will continue impact financial markets is political stability and the fight against corruption.
As recently as August, the government proposed measures which were aimed at clamping down on the powers of the President as well as restraining the judicial branch. Romanian stocks had dropped after these proposals while the European Commission had warned that “the irreversibility of the progress achieved by Romania in the fight against corruption in the last 10 years is essential for the Commission”.
It is these aspects, and the changes therein, that will continue to control the state of the Romanian stock and bond markets over the medium-term.