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Romania surprised Europe last week by reporting year-on-year growth of 8.8 per cent in the third quarter — 3 percentage points above expectations. Eight years after the country slashed wages and pensions as part of a crisis-era International Monetary Fund bailout, its vigorous bounceback makes it a bright prospect for foreign corporate and financial investors.
But as with neighbouring Hungary and Poland, Romania’s prospects risk being tarnished by its government.
Unlike those two countries, Romania has not shifted to a populist-nationalist government trying to return some foreign-dominated sectors to national control. But business people warn that the Social Democratic-led government that came to power in December last year has revived some controversial old practices — and taken steps that could undermine some of the significant progress made in recent years in fighting corruption and improving governance.
Chief among those raising alarms is Fondul Proprietatea, a fund created by the state in 2005 to compensate citizens whose assets were confiscated under communism.
Managed by Franklin Templeton, Fondul is one of the world’s largest listed funds with a net asset value as of September of $2.72bn and a portfolio that includes minority stakes in 19 state-controlled enterprises. These include some of Romania’s biggest businesses including Hidroelectrica, a hydro-power company earmarked for the first initial public offering of a Romanian state enterprise since 2014.
However, the fund warns that government moves could make the investment climate less attractive, deter long-awaited IPOs and delay index provider MSCI’s plans to upgrade Romania from a “frontier” to an “emerging” market, opening it to a broader range of investors.
Legislation passed by Romania as a condition of its IMF bailout is supposed to ensure that SOEs have independent directors who can ensure independent management.
But Greg Konieczny, portfolio manager for Fondul and Franklin Templeton’s chief executive for Romania, says the government has been replacing independent directors of state-owned enterprises with loyal cronies. Parliament is also considering draft legislation to allow the government to exempt state businesses from the corporate governance rules.
The implications for investors go well beyond the companies directly involved. Having healthy state-controlled companies benefits the whole economy. “A lot of the state companies are either in energy or infrastructure,” says Mr Konieczny. “If you, as a foreign direct investor, see that there’s not going to be an improvement in infrastructure like roads, or bad management means ports or airports are not going to be able to cut their fees, you won’t be investing in those sectors.”
Fondul’s restructuring efforts have played a big part in Romania’s revival, but Mr Konieczny also credits the impact of improved governance. Earnings before interest, tax, depreciation and amortisation at its 19 state companies almost doubled to 5.27bn lei ($1.33bn) by 2016 from 2.69bn lei in 2012.
Romania’s president, Klaus Iohannis, who has made fighting corruption his priority, has a right to veto the governance legislation if parliament passes it — but only once. Parliament could amend it slightly and just pass it again.
The government insists its privatisation programme remains on track. Toma Petcu, the energy minister, said last month that Hidroelectrica would be listed early next year and would send investors a “signal that the government is headed for transparency and performance in relation with state-owned companies”.
But Mr Petcu said the government would now only list 10 per cent of Hidroelectrica rather than 15 per cent as initially planned in 2014. That might leave the Bucharest market short of the liquidity needed to ensure its upgrade from frontier status.
Annoyed by lack of progress in listing Hidroelectrica, Fondul has said it is considering selling its 20 per cent stake, which accounts for one-third of its net asset value.
Romania’s government may still change tack on governance. The Social Democratic party leader Liviu Dragnea — seen as the real power behind the government — had his assets frozen on Tuesday by anti-corruption prosecutors as part of a probe into misuse of EU funds.
With central Europe re-emerging as a growth powerhouse, the last thing investors want to see is political risk spreading from Poland and Hungary to 19m-strong Romania.
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