Romania becomes 'a darling of investors' once again

With political risk receding and bonds offering better yields than in other markets in Central and Eastern Europe, Romania is now in high demand

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Investors shunned Romania before the December 9 elections, worried about the consequences on the economy of an ongoing political crisis that pitted centrist President Traian Basescu against leftist Prime Minister Victor Ponta.

But Ponta’s center-left coalition USL won a comfortable majority to form a government in the elections and since then there have been no clashes with President Basescu, boosting hopes that the two politicians can work together.

This has re-focused the markets on the country’s economic fundamentals and, some analysts say, these compare favourably with those of other countries in CEE.

Industrial output declined by 1.3% year-on-year in November, mainly because of weak foreign demand weighing on economic activity.

Despite the decline, Dan Bucsa, an economist with UniCredit, says that Romania “is proving to be quite resilient when compared with its regional peers.”

He notes that the country "remains a darling of investors amid mixed (but improving) economic data."

Industrial production slumped by 6.9% in Hungary in November and fell by 3.9% in the Czech Republic and by 2.1% in Bulgaria.

“Romania's resilience may be due to further external market diversification,” Bucsa said, pointing out that exports to the EU narrowed by 0.7% year-on-year on a 12-month rolling basis in November but those to non-EU countries increased by 2.8%.

Domestic demand seems to be recovering, with retail sales increasing by 3.1% in November, he added.

DEMAND FOR BONDS SURGES

The government raised three times the amount planned in an auction of 4-year bonds on Thursday, selling 1.8 billion RON ($545 million) at an average yield of 6.03%, significantly lower than the 6.29% in a previous similar auction.

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Increased liquidity in the international markets and investors’ renewed appetite meant total demand for the bonds amounted to 5.3 billion RON.

“The good prospects for another agreement with the IMF along with a normalization of the local political environment are the main reasons for the rally of Romanian assets,” Dumitru Dulgheru, an analyst with Erste Bank, said.

Romania currently has a stand-by agreement with the IMF which concludes in the first quarter of this year. The new government has indicated that it would like to continue the relationship with the Fund but it is not clear whether the country will enter another official accord.

Demand for RON-denominated government debt was also boosted by Barclay’s decision to include Romania in its emerging market local currency bond index from March this year and a possible similar decision by JP Morgan later, Dulgheru added.

The RON appreciated to 4.37 versus the euro, a level not seen since April last year, on the back of investor enthusiasm.

“The RON seems now to be benefitting from the appetite for frontier markets and the abundant liquidity backdrop,” Benoit Anne, a strategist at Societe Generale said.

He mentioned the possibility of a new agreement with the IMF and increased fiscal discipline among the reasons for continued investor interest in the country.

The Romanian currency is currently the most attractive among five currencies in the region (the Russian ruble, the Polish zloty, the Hungarian forint and the Czech koruna), Anne said.

From a risk-adjusted carry perspective, “the RON displays the highest carry to volatility ratio, not only in CE5, but in truth in the whole EM FX universe when the euro is used as the base currency,” Anne said.

Dulgheru forecast the RON at 4.35 against the euro for March but sees is depreciating slightly to 4.4 by September as “investors’ optimism could fade in light of stubbornly high inflation numbers.”

In December, year-on-year inflation was 4.95%, exceeding the central bank’s 3% target.