In a market like Romania, a government’s problem can be an investor’s stroke of luck: if he’s willing to be patient, and to take a few chances. When a foreign fund manager eyeing a market such as Romania tries to analyse a particular company listed on the Bucharest stock exchange (BSE), his first step is to look at the company’s results over the last five years.
No different, perhaps, to how fund managers operate elsewhere in the world. The difference in Romania is that although the data is available, (usually extracted from the company’s accounting reports), it tends to indicate sharp real-term falls in the company’s relative value. The reason is infinitely simple: for while company assets – a large portion of which are fixed assets such as land and buildings – remain constant in the national currency (lei) price, and therefore depreciate in real terms, debts grow. And debts grow because no bank will loan money at an interest rate that will not cover, with a sufficient margin, both inflation and devaluation. In other words, companies’ financial reports tend to have nothing to do with stock prices, and, not unsurprisingly perhaps, many market operators ignore them.
The only remaining active players on the stock market are therefore investors who have bought large stakes and now have no one to sell them to, or those with a high stake in a certain company who are now looking to buy up the rest of that company’s shares.
The Romanian-based company Vanguard Asset Management does what any other mutual fund around the world would do: collect money from investors and try to invest it as well as possible. According to its fund strategy, Vanguard concentrates on the money market. “We began the past two years, 1999 and 2000, from the point of view that money market investments in lei are basically more profitable than investments in a foreign currency,” Dan Marinescu, Vanguard’s general manager says. Why investments in lei are more profitable? “Because of the instability of the market.”
The government, in order to attract resources in lei, must pay a bonus exceeding the US$ co-efficiency. The bonus is calculated in accordance with the government’s necessities and according to the risk: there are no investments accepted below a certain bonus level. In 1999 for instance, when Romania had to face its highest external debt payments (more than $3bn (e3.4bn) while at the beginning of the year the state’s currency reserves stood at less than $2bn and credit ratings were decreasing almost every month) the government had to appeal to internal resources by selling T-bills in lei. In order to finance the budgetary deficit the government could not resort to foreign resources, which would have been very expensive (interest rates of almost 50%).
“In order to achieve this,” continues Marinescu, “the government had to pay very expensive bonuses: in April last year, it had to pay 190% interest on T-bills in lei. Now, imagine buying T-bills with a three-month interest rate of 190%, while the lei’s depreciation value over the whole year was just 67%. What this meant was that when the government was in serious trouble, it ironically had to pay enormous bonuses so that investors would support the national currency.”

This year, things have been slightly different, Marinescu explaines: “Romania has so far this year managed to pay its external debts and has increased its currency reserves without any help from the international financial institutions. One reason for this was that the government only had to pay $1bn in external debt, meaning that the government even managed to save some money, so that the budgetary deficit was easier to finance, something that could partially be carried out on the external market.”
That then, is why interest rates on the internal markets has this year decreased: from around 70 % for T-bills at the beginning of the year, interest rates stood at just 40 % in early autumn.
However, because it was an election year and the government had begun to take into account a pensions increase, as well as different tax exemptions and the stimulation of an economic recovery by any means, inflationary pressures re-appeared.
“So, this is our main investment: T-bills and sometimes deposits,” says Marinescu. “However, there are some new investment opportunities: we have noticed that there are many companies that cannot make investments in US$, such as regular Romanian companies that do not have export operations and must keep all their money in lei. These companies simply don’t know what to do with their money, and many of them keep it in different current accounts. That’s where a company like ours comes in.”
The largest life insurance company in Romania, Nederlanden Life Insurance Romania, is one of the few really important institutional players on the BSE. The investment fund it manages currently has nine companies in its portfolio, of which most weight is held by the aluminium producer Alro. “Our bourse policy is ‘buy and hold,’” says the company’s general manager Violeta Ciurel. “We try and steer clear of bourse speculation.” Nederlanden is the only life insurance company in Romania that manages such investments for its customers, after having launched in 1998 unit-linked life insurance policies.
These products are characterised by the fact that premiums received from customers are used for treasury bill investments, short term bank deposits and shares acquired in funds similar to mutual funds, divided in units, on which a weekly redeeming value is applied.
In essence, Nederlanden manages two funds. Fund I (T-bills) includes treasury certificates with a discount issued by the Ministry of Finance, short term bank deposits and current account liquidity. On June 30, 2000, this fund had total assets worth 110 bn lei (e5bn), having increased by 158% over the previous six months. The value of one unit increased by 31% over the same period, against an inflation rate of 19%. Fund II (Mixed) includes, beside lei-denominated T-bills, short-term bank deposits and current account liquidity, shares traded on the BSE, which account for one quarter of all assets. On June 30, the fund’s assets amounted to about 50bn lei, 113% higher that the figure registered at the beginning of the year. One unit in the fund increased in value over this six-month period by about 30%.

Nederlanden has so far invested $24m in Romania, of which $7m has been invested this year. Over the two years, the company is to invest another $8m. “On average, a life insurance company becomes profitable after seven years,” says Violeta Ciurel. “Nederlanden, however, will become profitable in 2002.”
Financial investment companies (SIFs) offer some of the best investment opportunities in Romania. On the stock exchange, the price of SIF shares is extremely low, but behind the stakes owned in these companies you’ll find insurance companies, hotels, and others., all sitting on a heap of money.
“Those who will eventually take over the SIFs will gain control of a significant part of the Romanian economy,” claimed Radu Jurcovan, a trader with the IFB Finvest brokerage company. SIF shares were awarded to all Romanians (around 19m) that participated in the mass-privatisation process carried out through the issue of ownership certificates in 1992. There are five SIFs: Moldova, Transilvania, Oltenia, Banat-Crisana and Muntenia. According to stock exchange prices, the SIFs’ values stand at Moldova – $6.8m, Oltenia – $9.6m, Muntenia – $11.3m, Banat Crisana – $11.4m. If we take into account the assessed stakes that the SIFs own in the most important banks in Romania – BCR (Romanian Commercial Bank), BRD (Romanian Development Bank) and Banc Post – just one SIF owns $60m-70m worth of stock. “Extremely high potential values bolster the SIFs,” says Marinescu, of Vanguard. “The real value of the SIFs, no matter how we calculate it, is much higher than the current level posted on the BSE,” he claims.

Since November 1999, SIF shares have been listed on the Bucharest stock exchange, ranking among the best stocks for both speculation and long-term investment. Although most capital market operators know what lies behind the SIFs, in terms of owned assets and investments, they are quite reticent when it comes to acquiring shares and risking a much higher participation quota, as there is a 0.1% ceiling for the acquisitions one shareholder is entitled to make.
This ceiling is intensely controversial, being grounded by SIF managers on the need to prevent a potential takeover, which would no longer secure protection for small shareholders. Vanguard’s Marinescu claims that SIFs have a huge growth potential which will bear fruit in time. “If they grant significant dividends at the right time, then their image and their market value will grow,” he says. “If the Government receives several hundred million dollars for the privatisation of BCR, then the stakes held by the SIFs will be worth several tens of million dollars as well. We should also wait for BRD to be listed on the stock exchange, as we will then be able to see the market values of the stakes held by the SIFs in BRD.”
Over the next couple of years, there will be a permanent struggle for the takeover of the five financial investment companies, which will also trigger many speculations on the stock exchange. Those in control of the SIFs will also be able to control many businesses in Romania, due to the stakes held by these companies in various banks.
Yet the largest amount of investment still focuses on T-bills and bank accounts, with only a few, brave investors daring to tackle the stock exchange.
However, while investment opportunities in Romania are undeniably fewer (and riskier) than those in countries that reformed their economies via the ‘short, sharp shock’ method: Hungary and Poland, the undercurrent is evident. Healthy profits and returns are simply matter of time: Romania is no place for the get rich quick crowd.
Amelia Balazs is a freelance journalist, based in Bucharest