The confetti has barely settled, the last echoes of celebratory cheers still lingering in the air, but on the trading floors of the Bucharest Stock Exchange (BVB), the post-election euphoria is already giving way to a more sober assessment.
For a fleeting moment, as the pro-European candidate swept to victory, the market responded with a resounding cheer.
The BET index, barometer of Romania’s most liquid stocks, surged an impressive 12% since the second round of elections, hitting a new historical record of 18,813 points.
Its total return counterpart, BET-TR, which graciously factors in reinvested dividends, climbed nearly 10%, propelling the market from one all-time high to another.
It was a classic relief rally, a collective sigh of investors momentarily shedding their most pessimistic assumptions about the nation’s economic trajectory.
As Alin Brendea, a seasoned stock market analyst at Prime Transaction, aptly put it, “We have gained the possibility of positive economic and stock market scenarios, but we are still far from being sure that these will become reality.”
Indeed, the market’s initial reaction was less a declaration of certainty and more a cautious embrace of potential.
Yet, as the trading screens flicker with new highs, the financial community is already turning its gaze from the electoral triumph to the daunting task ahead: the formation of a new government and, more critically, the Herculean effort required to rein in Romania’s runaway budget deficit.
Marcel Murgoci, operations director at Estinvest, articulated this pivot succinctly: “The euphoria related to the elections is decreasing and we are returning to other issues, perhaps equally important, namely the formation of the new government and the measures that need to be taken to reduce the deficit.”
And what a deficit it is.
Romania closed 2023 with a staggering 9.3% of GDP budget shortfall, the largest in the European Union, and faces an estimated 8.6% deficit in 2025.
The European Commission, ever the stern taskmaster, has issued a non-negotiable ultimatum: a credible reduction plan by June 30, or face the grim prospect of suspended EU funds.
This isn’t merely an administrative hurdle; it’s an existential challenge to Romania’s fiscal stability and its access to the very capital that underpins much of its development.
The choices facing the incoming government are stark and politically perilous.
Whispers from the corridors of power suggest a cocktail of painful measures: deep cuts to public spending – bonuses, personnel, even investments – alongside potential tax hikes, including increases to VAT, excise duties, and even the dividend tax.
Structural reforms, such as the digitalization of ANAF and a renewed assault on tax evasion, are also on the table, as is the contentious possibility of selling minority stakes in state-owned companies.
Alin Brendea pulls no punches in his assessment of the current economic paradigm.
“Romania has a big problem with its consumption-based economic growth model,” he argues, “It is exhausted both economically and politically.
Pumping a 9% deficit into the economy has produced anemic economic growth and the loss of elections.”
In his view, the market’s positive reaction to the election of an “apolitical president, who is far from falling into the trap of populism or superficial calculations,” signals a hope for a new economic growth model.
However, he cautions, it is “far from being a sufficient step.”
The market, he warns, will now scrutinize the blueprint of the new governing program, the composition of the cabinet, and the eventual symbiosis of the President-Parliament-Government trio.
The clock is ticking.
A draft government program is expected this week, with the prime minister’s appointment slated for mid-month, and the new government hopefully sworn in by June 30.
This tight timeline underscores the urgency of adopting fiscal measures that will satisfy Brussels.
Despite the looming fiscal storm clouds, there’s a nuanced optimism among some market participants.
Alexandru Combei, investment manager at BRD Asset Management, offers a “relatively neutral” outlook, highlighting a unique “back-stop” for the Romanian market: the substantial capital flows from pension funds, acting as “very large natural buyers.”
He notes that the post-election optimism might draw “many investors who have been waiting” back into the market.
Yet, he tempers this enthusiasm with a dose of reality: “there is also the valuation side, which is not the rosiest for our market.”
Andrei Nedelcu, investment director of Erste Asset Management, believes that the current share prices already reflect some of the anticipated deficit reduction measures.
He expresses confidence that a balance will be struck, aiming to “satisfy the European Commission and the rating agencies” without excessively harming economic activity, consumption, or the business environment.
This delicate balancing act is crucial, as Romania currently teeters on the lowest rung of the “investment-grade” category with a negative outlook, perilously close to “junk” status.
On the sectoral front, certain areas are seen as more resilient or poised for growth.
Alexandru Combei points to the utilities sector as “well positioned.”
Milan Pruşan, Country Head for Goldman Sachs Asset Management, concurs, adding financial and energy sectors to the list of beneficiaries in a long-term inflationary context.
He sees the energy sector as particularly representative for the region, especially as the conflict in Ukraine potentially nears its end.
Marcel Murgoci of Estinvest echoes this, citing strong Q1 results from energy players like Transgaz and Electrica.
He also highlights the impending liberalization of the energy market on July 1, which could be a boon for companies, though he notes a recent reduction in gas and electricity consumption.
As OMV Petrom reportedly mulls an additional dividend payout, contingent on the new government’s tax policies, the intertwining of corporate strategy and fiscal policy becomes starkly clear.
The market is not just reacting to company fundamentals; it’s trying to divine the future fiscal landscape.
In the grander scheme, Alin Brendea holds a steadfast belief: as long as Romania remains anchored to Europe, its economy is “condemned” to a path of organic, natural growth, converging towards the EU average.
This, he posits, should ensure the continued upward trajectory of the Romanian stock market.
But this long-term vision requires navigating the immediate tempest of fiscal consolidation and political horse-trading.
The post-election honeymoon is over; the real work, and the true test of Romania’s commitment to its European future, has just begun.
