Bucharest Stock Exchange – the rising star of Romania
Foreward by Andrew Chilvers
During the past two decades the key nations of Central and Eastern European (CEE) have grown significantly following moves to liberalise their economies. On average Poland, the Czech Republic, Hungary, Bulgaria and Romania, to name a few, increased their per capita GDP by 115% between 2004-2020. Employment was at its lowest ever at a mere 4.6% and productivity levels were catching up with the developed states of the EU.
In CEE countries growth has been the result of several factors such as the prosperity of the traditional industries, competitive exports and foreign investment, as well as the significant inflow of various funds from the EU and others.
However, this growth ground to an abrupt halt last year with the onset of the Covid-19 pandemic. As elsewhere, the pandemic hit the CEE region on several fronts, with disruptions to the regional services sector and global supply chains – this was particularly damaging to those countries with large vehicle manufacturing sectors. Nevertheless, the CEE economies are known for their economic resilience and many believe they are better positioned to cope with the aftermath of the Covid-19 crisis than their West European counterparts.
Indeed, many analysts predict that the next year or so will be only a temporary setback as CEE economies quickly find their feet again. With this gradual re-opening, the economies in the region are forecast to grow by a healthy 4.1% in 2021 from what was a severe 5.1% contraction last year, according to Moody’s Investors Services.
Overall, economic growth is expected to be more robust in the region compared with countries to the West due to the regional economies’ reliance on traditional manufacturing and heavy industry, with less exposure to hospitality and tourism. The collapse of the latter sectors has had devastating effects on countries such as Croatia and Greece but has spared the majority of CEE countries.
Bucharest Stock Exchange – the rising star of Romania
The Bucharest Stock Exchange milestone
Investing in the right opportunity is not a gamble, but the result of efforts to understand global political, economic, financial and technological developments and assess each region and country’s specific capital market conditions.
Within the EU, there’s been a gradual market growth and sophistication in the CEE region that has encouraged investment in the past few years.
To understand the potential for capital market growth on the larger European stage and the particular CEE region, it is worth noting that while in the US about 80% of companies’ funding is through capital markets, in Europe it is the other way around. Only 20% of overall funding comes from capital markets in Europe, while 80% is by other means such as loans.
As part of the CEE region, the Romanian capital market should be seen from a national and regional aspect, and also from the perspective of the country’s EU membership. This involves the integration of European legislation including the supervisory convergence under the umbrella of the European Securities and Markets Authority (ESMA).
The constant rise in listings and investments as well as various improvements in market mechanisms in recent years (including increased transparency to foreign investors) have resulted in the Romanian market reaching a new level of maturity. On September 21, 2020 Romania was promoted to Emerging Market status by the FTSE Russell (one of the three global capital market index providers alongside S&P Dow Jones and MSCI). This milestone was hailed by the Bucharest Stock Exchange (BSE) President as “from the economic standpoint of capital markets, the equivalent of the country’s admission to the European Union.”
This was undeniably a historic moment that resounded across CEE financial markets and also had a huge significance for the business community in Romania.
The immediate effects of the accession showed a volume of BSE transactions exceeding half a billion euro in September 2020, more than three times higher than in August 2020 (euro154 million).
In other words, Romania became a safer destination on the investors’ map, highlighting the positive evolution of the BSE, increasing its visibility and opening the Romanian market to a new category of investors.
Success Stories
One of the most remarkable success stories on the Romanian capital market has been Banca Transilvania (the largest bank in Romania by assets and by profit as of Q3 2020), which has made full use of the regulated market’s financing mechanisms.
Contributions of Banca Transilvania (the most traded company on the BSE) were crucial for the recent accession along with those of state-controlled Nuclearelectrica (the sole producer of nuclear energy in Romania). The emerging market status portrays an economy that is developing rapidly, has strengthened its middle class, is better integrated into the global system, is more attractive for much larger investment funds and has a continuously improving standard of living.
Keeping in mind that in Romania financing from professional lenders is not always easy to access and involves costs that are significantly higher than in other EU member states, we believe that in the coming years financing through the debt or equity capital market will be preferred by many companies that previously used to look only at traditional ways of financing. The market is now well equipped to accommodate such demands and efforts are on the way to improve the market infrastructure even more.
One of the next steps is to boost the market liquidity by making a (BSE-established) counterparty clearing house with advice and technological assistance from Cassa di Compensazione e Garanzia SpA (part of London Stock Exchange Group). It’s a project that will open the way for transactions with derivatives on the BSE.
The BSE is regulated and supervised by the Financial Supervisory Authority. Currently, BSE operates a regulated market (BVB main market) and a multilateral (alternative) trading system (AeRO) as a “semiregulated” market.
BVB main market focusses on mature companies that have submitted financial statements for the past three years, have equity or anticipated capitalisation of at least euro 1 million and at least 25% free floating shares. AeRO is dedicated to financing SMEs or start-ups that do not meet the size and seniority criteria for listing on the BVB, but which have high growth and potential rates (anticipated capitalization or equity of at least €250,000, at least 10% free floating shares or at least 30 shareholders) or even larger companies that could be eligible for the regulated market but are not willing to assume the stricter regulatory framework. In all cases AeRO also serves as a preparatory platform to the regulated market.
January-February 2021 showed an increase of 16.4% compared to the same period in 2020, total transactions of 2.25 billion lei being carried out on the BVB regulated market, while on the AeRO in the first two months the cumulative value of transactions reached 187 million lei compared to a level of 42 million lei in 2020, which is an increase of 343%.
One impressive listing that showcases both the energy and the potential of the AeRO market is that of Safetech Innovations, the first cybersecurity company on the BSE. After only 90 minutes in the first trading session its shares were quoted more than four times higher than the value that closed the company’s private placement in October 2020. This also demonstrates investors’ appetite for the IT sector.