How does 2016 look for Romania’s economy through the eyes of the biggest local fund’s manager?

Romania may experience a growth rate of over 5% this year, driven by higher domestic consumption, foreign direct investments should increase, and IT and agriculture might be the star sectors of the economy, according to Polish fund manager Greg Konieczny, Executive Vice President of Templeton Emerging Markets Group and CEO of Fondul Proprietatea, Romania’s biggest investment fund. Romania has been one of the best-performing economies in the European Union in 2015, with a GDP growth rate for the whole year estimated at close to 4%, and its performances may continue to improve this year, due to tax cuts and salary increases, which may further boost domestic consumption and may bring new investors to the country, Konieczny thinks. “We expect further acceleration for 2016, backed by the expansion of domestic consumption, investments supported by improved absorption of EU funds and low level of interest rates. Domestic consumption has picked up significantly in 2015 (nearly 5% growth) and it should further accelerate this year as a result of lower value added tax (VAT) and of salary increases in the public sector. As a result, the growth rate might even exceed 5% this year,” Fondul Proprietatea’s manager writes in an outlook piece. He points out that Romania’s economy is in good shape after the agreements it had with the International Monetary Fund since early 2009: the debt is less than 40% of the GDP, the budget deficit has been under control for several years, the current account deficit for the first time in 25 years is less than 1% of GDP and inflation is, as well, at record lows. “The high rate of the economic growth, along with the strong fundamentals and the positive perspectives should result in an improvement in foreign direct investments flow, which should also be helped by the trend of production capacities relocation from Western Europe. Moreover, Romania’s attractiveness for investors should also be boosted by fiscal improvements, such as the reduction of VAT from 24% to 20%, which entered into force at the beginning of this year, and the further cut to 19% starting 2017, the reduction of dividend withholding tax from 16% to 5% and the elimination of the special constructions tax starting 2017,” Konieczny explains. However, he also mentions the two electoral campaigns programmed for this year (one of the local elections and one for the parliamentary elections), which may generate some volatility and impact investors’ decisions in the short term. “It is also important for the fight against corruption to continue, as it should lead to improvement of governance and increased efficiency of state institutions, which are the backbone to economic activity.” The sectors that show the biggest growth potential are energy, transport, IT, banking, constructions, agriculture, and healthcare, according to the fund manager. “The IT and agriculture, for example, have an increasing share in the GDP - the IT industry accounts for 6%, but, in our view, it has the potential to reach at least 10% of GDP in the coming years due to the strong networking infrastructure, low costs and the labor skills base. Also, the agriculture sector’s huge potential is still waiting to be unlocked, with the most important opportunity for large players in this sector remaining the absorption of EU funds.” Konieczny also sees potential for the local capital market to further develop provided that new initial public offerings (IPOs) will occur. Romania’s capital market is still one of the least developed in the region, despite its efforts to develop and become more visible. However, this may also come as an opportunity for investors. “An important point of attraction for investors is the fact that Romania's market is undervalued. However, in light of strong economic growth and very positive perspectives, the gap between perceived valuations and fundamentals will start to close. Therefore, we think that now is the right time for investors to consider buying Romanian equities,” the Franklin Templeton executive concludes. Fondul Proprietatea, which Konieczny has been managing since September 2010, is currently the most traded company on the Bucharest Stock Exchange (BVB). The fund has EUR 2.61 billion worth of net assets and a market capitalization of EUR 1.92 billion and is still trading at a discount of more than 30% (the difference between the share price and the net asset value per share). The fund has attracted the biggest portfolio investments on the Bucharest Stock Exchange since its listing, in January 2011, and last year is carried out a secondary listing on the London Stock Exchange to attract new investors. The fund holds significant stakes in several big Romanian companies in the energy and transport sectors, but most of them are still unlisted despite the numerous promises from the Romanian authorities that they would bring these companies to the stock market, which is the main explanation for the high discount at which the fund’s shares are trading.