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Cablegate: Romanian Stock Market Searches for a Competitive Edge

VZCZCXRO4358
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBM #0507/01 1721415
ZNR UUUUU ZZH
P 201415Z JUN 08
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 8418
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 BUCHAREST 000507

STATE FOR EUR/NCE - AJENSEN, EB/IFD
TREASURY FOR LKOHLER
USDOC FOR ITA/NAJDI

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON EIND RO
SUBJECT: ROMANIAN STOCK MARKET SEARCHES FOR A COMPETITIVE EDGE

1. (U) Summary: Battered by the same negative forces affecting
stock markets worldwide, the Bucharest Stock Exchange (Bursa de
Valori Bucuresti, or BVB) is struggling to capitalize on Romania's
strong economic growth in order to maintain a competitive position.
To boost investor confidence, BVB management is cutting fees,
drafting a corporate governance code for listed companies, and
launching new financial products. Holding on to foreign portfolio
investors will be crucial for offsetting a 20% drop in the main
index last year. Despite overall profitability for the companies
listed on the exchange (net aggregated profit was up 75% against the
first quarter 2007), global market uncertainty has increased
competitive pressures on the BVB and forced it to expand into new
areas. End summary.

DESPITE MARKET CHALLENGES, REASONS FOR OPTIMISM

2. (U) Overall, Romania's capital market has weathered recent
international turmoil in reasonably good shape. Despite a fall in
the BET index (the ten most frequently traded stocks on the
exchange) of 20.8% in the first quarter of 2008, other indexes
posted less severe declines. The BET-C index (all the stocks minus
five investment funds) fell by a more modest 16.9%, while the RASDAQ
(which covers the Over the Counter (OTC) market) was down only 5.5%.
(Note: The OTC market provides a mechanism for trading unlisted
stocks in public companies. End Note.) A leading factor in the
indices' decline was the mood of international portfolio investors,
who despite Romania's robust economic growth are skittish over
rising inflation and current account imbalances. In the first
quarter of 2008, net flows were negative by 42.9 million dollars,
compared to plus 246.7 million dollars during the first quarter,
2007. At the same time, the value of foreign portfolio investors'
net buys totaled only 89.3 million dollars, down substantially from
363.5 million in the first quarter of last year. Still, stimulated
by strong growth in domestic companies, the BVB's market
capitalization managed to rise by a third (compared to Q1 2007) by
the end of the first quarter to 53.4 billion dollars.

3. (U) Other measures of activity were mixed. The number of equity
issuers on the BVB rose from 59 at the end of 2007 to 64 at the end
of April 2008, while the number of issuers on the RASDAQ index fell
from 2,019 to 1,872. Yet, in spite of the fact that many BVB-listed
firms posted positive financial results, the average
price-to-earnings ratio fell 22% compared to first quarter 2007.
Out of the 63 BVB issuers, only 16 reported losses at the end of the
first quarter 2008, while the aggregate net profit was up 75%
against the same period last year. The firms reporting losses were
in the chemicals, materials and equipment sectors. In contrast to
leading world indexes, banking stocks in Romania have experienced a
good period; all of the banks listed on BVB reported net profits up
at least 50%.

MORE TRANSPARENCY NEEDED TO BOOST INVESTOR CONFIDENCE

4. (U) In a June 9 meeting with econoffs, BVB President Stere
Farmache said that the BVB management wants to increase corporate
transparency, especially for firms on the RASDAQ index. Additional
business may be generated by the BVB's intention to place 400-500
firms in a new "RASDAQ-Start" category. These companies will be
considered "traded but not listed" for up to nine months, during
which time they will receive assistance from the BVB to meet the
listing and transparency requirements in place for other listed
companies. The expectation is that by offering help and
demonstrating the benefits of being listed, BVB will succeed in
getting many of the companies fully listed by the end of the period.
Another initiative to boost transparency on the primary market is
to require listed companies to adhere to a Corporate Governance Code
based on either on a model code drafted by the BVB, or on any other
model code in use in the EU.

OTHER REGIONAL EXCHANGES POSE STIFF COMPETITION

5. (U) The BVB must diversify offerings, attract new issuers, and
upgrade the trading platform (the new platform, Arena Gateway, will
improve data flow between brokers and the exchange) in order to
remain competitive with other stock exchanges in the region.
Competition stems from the ability of Romanian brokers to trade
directly on the Frankfurt Futures Market (EUREX) and the Vienna
stock exchange. In response, BVB management has cut trading fees by
10% and IPO fees by 75%. They have also increased the length of the
daily trading session. Liquidity will be enhanced through the
addition of two new indexes, an energy and utility index (BET-NG)
and an "extended" index (BET-XT), which will feature the same stocks
as the BET plus five large, state-chartered investment companies
(SIFs).

6. (U) Plans are in place to expand the BVB through additional
offerings. Romanian treasury bills will be listed on the exchange

BUCHAREST 00000507 002 OF 002


by the end of this year. Another large equity listing anticipated
in 2008 will be for a minority share of Bucharest's Otopeni
International Airport. Finally, the newly-established Property Fund
will list on the exchange in 2009, and is expected to provide a
significant liquidity boost. (Comment: Shares in the Property Fund
are distributed to all persons who were entitled to restitution of
property seized in the Communist period, but whose property cannot
be restored to them for various reasons. The Fund contains shares
of many of the major state-owned company privatizations in Romania,
including "blue chips" like Romtelecom and Petrom. End Comment.)

7. (U) Another area of BVB expansion launched last September is
derivatives trading. The first derivatives available were those on
indexes, but they proved unpopular, attracting only 41 transactions
and 64 contracts, reaching a total value of USD $227,115 by the end
of 2007. In order to revive this market, the BVB in April 2008 cut
fees and launched futures contracts linked to select listed shares
and currencies (both EUR/RON and USD/RON). With these changes, the
futures exchange has posted 264 trades and 4,034 contracts, for a
total of USD $1.8 million this year.

COMMENT

8. (U) Despite the instability so far this year stemming from
international market woes, BVB management appears to have a good
plan in place to succeed in a competitive marketplace. Romania's
rapidly growing domestic economy has afforded the BVB a cushion,
enabling it to ride out the current turmoil even if not remaining
immune from its negative effects. BVB's plans for expansion seem
reasonable and coherent, and expectations are that the exchange will
remain profitable. Still, the competitive threat is real. With
capital able to move freely across EU borders, the exchange will
have to stay nimble to keep Romanian "blue chip" companies from
listing on other European exchanges.

TAUBMAN

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