INTERVIEW: Bucharest Stock Exchange on the cusp of a new era

INTERVIEW: Bucharest Stock Exchange on the cusp of a new era
Bucharest Stock Exchange CEO Adrian Tanase stresses the importance of developing the secondary market to increase liquidity.
By Clare Nuttall in Bucharest November 14, 2018

Romania achieved a breakthrough in its quest to achieve emerging market status this September, with stock market indexer FTSE Russell finally upgrading its liquidity criteria from ‘not met’ to ‘restricted’, putting the long sought upgrade from frontier to emerging market status within grasp. Bucharest Stock Exchange (BVB) CEO Adrian Tanase spoke with bne IntelliNews about how this was achieved and what the next steps are. 

At the end of September, the BVB announced that the Romanian capital market is just one step away from becoming an emerging market, a status already secured by its peers in the Czech Republic and Hungary, while Poland recently became the first former communist country to be elevated to developed market status

Bucharest has been aiming to exit the frontier market category for years. In FTSE Russell’s latest Annual Country Classification Review announced in September, Romania was kept on the watch list of countries for possible reclassification to secondary emerging market status. But in a critically important move, Romania’s liquidity criteria was upgraded to ‘restricted’, following an improvement in broad market liquidity. Previously, Romania’s capital market was not considered to have sufficient broad market liquidity to support sizeable global investment. The task ahead of the BVB will be to maintain liquidity at least at its current level until the next review in September 2019.

FTSE Russell’s move followed the upgrade by MSCI of three notes of Romania’s accessibility criteria — market regulation, information flow and trading — in June.

For the first time Romania has a certain perspective to be upgraded to an emerging market next year, Tanase told bne IntelliNews, adding, however, that, “We should implement projects to increase liquidity because liquidity remains the main problem of the local stock exchange.”

Long-expected IPOs of state-owned companies such as hydropower producer Hidroelectrica have still not materialised, but the BVB has seen a series of private sector IPOs starting with that of the country’s largest healthcare provider MedLife in December 2016. But new listings alone are not enough to ensure sufficient liquidity, stresses Tanase. Accordingly, while seeking new listings, the BVB is at the same time implementing various projects to improve liquidity such as developing the secondary market. 

“But to be an emerging market you can’t rely only on size. You should have an active primary market, but you should have an efficient secondary market as well. One of our main priorities is to enlarge the range of products offered by the stock exchange,” Tanase says. “The other, which is more complicated in my view, is to enlarge the individual investor community in Romania. 

“If we manage to carry out these projects, Romania will become a real alternative for any Romanian companies or regional companies to get financing to develop their businesses.”

Concerning the secondary market, currently stock lending and short selling operations are not working efficiently in Romania, and there is not yet a derivatives market, meaning Romania doesn’t offer leveraged products for investors. Addressing these areas “for sure would unlock the liquidity which at this moment is a little bit restricted by the market infrastructure,” says Tanase. 

Obstacles to short selling and stock lending operations have been resolved by the new fiscal code, and Tanase expects they will soon be available on the market. To enable derivatives trading for local stocks, a Central Counter Party (CCP) needs to be established for the local market. “We have the full support of the authorities, both the National Bank of Romania and the financial supervisory authority, but this should also be supported by private investors including the BVB as the main beneficiary from the existence of this infrastructure. We are working to construct the business case and attract possible investors into the CCP.”

Questions over IPO pipeline 
It was previously believed that the BVB wouldn’t be able to boost liquidity sufficiently to get its upgrade to emerging market status without the IPO of Hidroelectrica. While this has proved incorrect, the Hidroelectrica IPO, set to be one of the biggest ever if not the biggest on the local exchange, is still hotly anticipated. However, it isn’t expected any time soon. Next year would be the “most optimistic scenario,” says Tanase, “but this will be a government decision and we can’t influence it. All we can do is communicate to the government the need to have a decision sooner or later.” 

Complicating things are the government’s efforts to set up a new sovereign fund, which would take over the state participations in Hidroelectrica and other major state companies. “If all state participations are put into the planned sovereign fund portfolio, probably any privatisation decision would be taken by the sovereign fund going forward. My guess is the top priority for the government is to set up the sovereign fund.” 

On the other hand, the BVB has had considerable success in attracting private companies to list. While not on the scale of Hidroelectrica, two of the new listings, food service operator Sphera Franchise Group which holds the local franchises for KFC and Pizza Hut, and Purcari Wineries from neighbouring Moldova, are now part of the BVB’s blue chip BET index

The BVB has been actively trying to reach out to entrepreneurs, including through the Made in Romania programme. However, it is in something of a double bind: it doesn’t have a strong enough domestic investor community to buy smaller tickets, and it doesn’t have enough Romanian entrepreneurs who are looking to the capital market as an alternative to finance their businesses.

This brings Tanase back to the need to attract more retail investors, especially since the BVB doesn’t currently offer a large enough investor base of small-scale investors to make a listing worthwhile for smaller companies. “The BVB is a solution rather for bigger than for smaller tickets because it is dominated by institutional investors — pension funds, foreign investors — while individual investors have a very weak presence.” Similarly, development of the Aero market, which was launched in 2015 to target early stage companies, start-ups and SMEs, has been stymied by the lack of smaller investors. 

Currently there are only around 15,000 active individual accounts, which Tanase says is “very low”. The BVB is aiming to push the number up to 100,000. “When we reach that number, the BVB will really be an opportunity for entrepreneurs to place their businesses and their tickets and their stories into the market.” 

To achieve this goal, the BVB is putting a lot of emphasis on education, and Tanase believes a simple approach is best. “We should promote the idea of investing in the capital market not as a complicated game, but as a simple exercise where so long as people invest in a diversified portfolio their risks are mitigated. The population should be aware that as long as they comply with this discipline, investing in equities would bring a superior return compared to investing in bank deposits, which at this moment is their main solution.” 

Admittedly Romanians’ incomes are typically small compared to those in other EU member states, but Tanase points to the “mass” of savings in the country, with household bank deposits in the €40bn to €50bn range, and overnight deposits alone amounting to around €17bn, which is comparable to the size of the entire local capital market.

A strong growth story 
While these constraints exist, the overall story in Romania is very positive, Tanase believes, citing the fast GDP growth rate that has outstripped those of most European countries in the last couple of years. On top of this there are the high dividends paid by Romanian companies. He plays down the concerns voiced by many foreign investors about the lack of predictability in the country. “Locally, the macro indicators are looking good. We have some risks with the fiscal deficit but the GDP growth is the biggest in the EU and this is still a very attractive proposition for international investors,” Tanase says. 

On the other hand, there is considerable global uncertainty and Romania is not an isolated market, admits the BVB CEO: “Of course we are not untouchable, looking at the global context, but our protection at the moment is the very attractive dividend yields offered by the companies listed on the BVB. We have a general dividend yield for the whole market of 8%.” 

The BVB has been reporting a strong performance of its main index, the BET, throughout the year. In September, the BVB published a statement stressing that: “The Romanian capital markets are strongly in the black while investors see the international markets going deeply in the red”, comparing the BET’s increase by 4.4% US dollar-equivalent, to the sharp fall in MSCI indices for international emerging and frontier markets. The following month, the exchange announced that its total return index had surged by 17% to all-time highs in the first nine months of the year.

The performance of the BVB's main indexes. BET is the index for the most liquid 15 shares on BVB. BET-TR includes the same most liquid 15 shares, as well as the dividends the companies gave.