Fondul Proprietatea manager warns investors: Romania’s economy set for uncertain future

Johan Meyer, CEO Franklin Templeton Investments Bucharest Branch and Portfolio Manager of Fondul Proprietatea – the biggest investment fund in Romania, sends warning to investors in his analysis of Romania’s economic perspectives for 2019. “Romania’s economy is currently set for a rather uncertain future. The unexpected fiscal changes in critical sectors of the Romanian economy adopted in December 2018 present the risk to severely impact the country’s growth potential,” Meyer said in his brief. “In our view, 2019 will bring along a decrease in private consumption growth, moderate inflation, low unemployment, as well as upward pressure on interest rates. This year is also set to be the playing field for a host of rising imbalances – widened current account deficit and budget deficit, as well as rise of inflation, which should be tackled however in a transparent and consistent way. While the macro-economic indicators are still likely to be sound, much of their evolution depends on the Romanian state’s capacity to attract, facilitate and manage investments, as the need for inflows of investments – including via EU funds absorption – will become more pronounced,” he explained. According to Fondul Proprietatea’s manager, Romania’s economy was expected to decelerate even without the effects of the new taxes the Government introduced at the end of December, without any consultation with the business environment. “On the one hand, we believe the economic deceleration could be even more pronounced, on the other, more accurate predictions are hampered by the uncertainty and lack of impact studies for the measures introduced. Nonetheless, we believe the measures introduced could have dire and far-reaching effects, including for the capital market,” Meyer wrote. The capping of gas and energy prices and new taxation regime potentially put the country’s energy independence at severe risk while the tax on banks might backfire, creating a snowball effect for the entire economy, especially on the background of growing macroeconomic imbalances, according to the Fondul Proprietatea manager. “With such a measure, Romania inexplicably inflicts pain on itself and it is regular citizens who will probably have to pick up the bill eventually.” The Franklin Templeton representative expects the local capital market to remain attractive due to the (currently) high dividend yields. However, he warns that foreign investors face limited options here, with only two sectors providing enough liquidity – energy and banks, which will be most severely hit by the new fiscal measures. Moreover, the uncertainty around mandatory private pension funds (Pillar II) can have significant impact on the entire capital market, whose growth has been steadily supported by the private pension funds in the last years. The Fondul Proprietatea manager believes that Romania remains an attractive investment destination in 2019, with the economic landscape remaining fertile, but “significantly more volatile” compared to last year. “There is much potential to be tapped into, but it is crucial for the Government and lawmakers to foster a predictable, legally-stable environment that encourages and facilitates investments, in addition to carrying out sound economic policies engineered for a longer-term horizon,” he concludes. The analysis sounds more like a warning than an invitation to investors and the conclusion looks more like a wish than a belief that this will actually happen. U.S. asset management firm Franklin Templeton, which took over management of Fondul Proprietatea in September 2010, has been one of the main promoters of the Romanian capital market over the last nine years, speaking about the local economy’s growth potential and the high yield potential of the local shares. However, its messages have become less and less optimistic over the last two years, due to the many changes impacting the business environment.