BR INTERVIEW. Leonardo Badea (ASF): Romanian capital market needs “fresh blood”, new IPOs

Sorin Melenciuc 29/07/2019 | 16:48

Leonardo Badea, the president of the Financial Supervisory Authority (ASF), told Business Review that the local capital market overcame the turbulence registered at the end of last year and registered during the first half of this year a robust growth rate sustained mainly by the higher dividends and improved financial results. 

However, Badea points out that the local capital market needs “fresh blood” under the form of new IPOs of state-owned and private companies, arguing that without big issuers and educated investors, we cannot talk about sustainable capital market development.

How do you appreciate the contribution of the ASF to the Presidency of the Council of the European Union exercised by Romania between January and June 2019?

This is a first important aspect that highlights the good collaboration relationships that the ASF has had with the government representatives who coordinated this activity. As you all know, on June 30th, the six-month period in which Romania exercised the Presidency of the Council of the EU ended.

During this period, the Romanian representatives did a good job, so that, at the end of the Romanian Presidency, Donald Tusk, the President of the European Council, appreciated the adoption of 90 legislative dossiers as “impressive”.

For the non-banking financial area under the auspices of the ASF, 12 dossiers were approved (ie 9 dossiers by political agreement, 1 dossier by general agreement and 2 dossiers through negotiation).

Thus, about 15 percent of the total number of dossiers approved during the 6 months of the Romanian Presidency concerned areas under the competence of the ASF. As a result of the debates and the agreements concluded on these subjects, 17 legislative acts resulted.

Among the most important cases where the authority was involved in reaching an agreement, I mention the one for the Pan-European Private Pensions Product, SME Financing on the Capital Market, and Cross-border Distribution of Investment Funds.

How do you comment on the European and local Macroeconomic framework?

When looking at the current economic model of Romania, we notice that it is characterized by the return of positive territory investments and the relative intensification of private consumption, the main determinant of economic expansion, amid an increase in the external deficit.

It is noted that the EU and the euro area economies, the annual growth rate stood at 1.5 percent and 1.2 percent respectively in Q1 2019, but the quarter-on-quarter rate accelerated (0.5 percent and 0.4 percent), figures over the market expectations.

The European Commission’s winter economic forecasts indicate continued sustainable growth in the EU and the eurozone, but a slight slowdown in 2019 amid the influence of international trade tensions as well as the uncertainties created by Brexit and the new legislative elections in the current year.

If we look at the figures for Romania, the economic growth in the first quarter of 2019 was confirmed at 5 percent, but the value of GDP was downwardly revised by RON 2.46 billion, mainly due to revaluation of net taxes on product, according to INS.

Moreover, macroeconomic balances are safe in the medium term, according to the latest forecasts, but there is a need to curb deficits.

In this respect, the sustainability of the indebtedness rate is ensured in the medium term, the share of external debt in GDP (50.7 percent – April 2019) following a decreasing trend over the last 12 months (51.8 percent – April 2018).

The European capital market is currently less affected by the US-China trade war and is more concerned with the Brexit. In the case of a hard Brexit, the effects on foreign markets will diminish the capitalization of the Romanian capital market as foreign investors will withdraw from riskier markets. The trend of the STOXX600 index continued to increase in June, while the index is at a balanced level.

How has the capital market evolved in Romania at the end of 2018 and this year?

At the end of last year, the Bucharest Stock Exchange went through a brief moment of convulsions, but it went back on track. In the first quarter of 2019, stock market indices showed significant increases in returns over the previous quarter.

All the Romanian stock market indices registered positive evolutions in the first quarter of 2019 as compared to December 31, 2018. The BET index, a benchmark measuring the most traded companies on the regulated market of the BSE, registered a 9 percent increase at March 31, 2019, compared to the end of 2018.

The BET-NG index, which reflects the evolution of the listed energy and utilities companies on the regulated market of BSE, ended the first quarter of 2019 with the highest increase, of 14 percent.

The capital market grew strongly in the first half of the year, mainly due to two reasons: the dividends and the results of the Romanian companies.

At the same time, Romania has rallied to the upward trend registered on international markets, which has contributed to this growth. At international level, all the indices analyzed also recorded increases.

Moreover, the daily volatility on the Romanian stock market remained low compared to the one recorded in December, as it is also influenced by the fact that even in the case of developed markets (eg the USA) there is a decrease in volatility.

A proxy for the interest of the population in the capital market can be considered as open-end investment funds, which are an alternative to the banking market.

The net asset value of open-ended equity funds has steadily increased over the last period amid the search for yields higher than bank deposits and continued to grow and in July 2019 to RON 1.303 billion. In June 2019, the total assets of open private equity funds increased by about 2.9 percent over the previous month.

If we look at how much the investors pay for the expected next year compared to another market, which can be understood in relation to the quest for return on different markets (this convergence of the indicator – relative P/E ratio) it is observed that in June 2019, the ratio was still lower than 1, indicating that the Romanian capital market was more attractive compared to other East European countries.

What is happening with the life insurance segment in Romania?

The insurers accumulated gross premiums written in the first quarter of 2019 worth RON 2.71 billion, up 7.4 percent against March 31, 2018. The consolidating trend in the life insurance segment continued to intensify during the first three months of 2019 (increase rate of 8.75 percent over the same period of last year).

The value of gross premiums written for non-life insurance business increased by 7 percent in the first quarter of 2019 compared to the same period of the previous year, while the value of premiums for life insurance activity increased by 8.75 percent. However, the non-life insurance market remains dominated by car insurance.

A change especially during the last two years (2017-2018) is the consolidation of the life insurance segment, which rose by over 4 percent in 2018 compared to the previous year.

In the first quarter of 2019, the positive dynamics of this sector continued and the volume of gross premiums written remained at the highest level in the last period.

A comparative analysis of the situation recorded on 31 March 2019 and that existing on 31 March 2018 indicates a slight increase in the Solvency Capital Requirement (SCR) of around 2,96 percent, similar to the trend seen in Minimum Capital Requirement (MCR), rising by about 1.71 percent. The amount of own funds eligible to cover the SCR was at RON 5.13 billion at 31 March 2019.

How do you appreciate the evolution of the private pension system in Romania?

On March 31, 2019, the value of the total assets under management at the level of the entire private pension system reached RON 53.21 billion (EUR 11.17 billion), up 7.28 percent as compared to December 2018. The value of the total assets on 31 March, 2019, accounted for 5.5 percent of GDP.

7.31 million participants were registered in the privately managed pension scheme at the end of March 2019, with an advance of 0.81 percent as compared to the end of 2018.

In the first quarter of 2019, there were 60 thousand new participants in the system, down 14,75 percent compared with the first quarter of 2018 (70 thousand people).

479,700 participants were registered in the voluntary pension scheme on 31 March 2019, up 1,25 percent as compared to the end of 2018. In the first quarter of 2019 there were 9,455 new participants in the system, 8,88 percent more than in the first quarter of 2018 (8,675 people).

An important aspect for the private pension system was the issuance of the Emergency Decree no. 38 to amend of Government Emergency Decree no. 28/2013 approving the National Program of Local Development and amending and completing the Law no. 411/2004 on privately managed pension funds, which amended the minimum social capital requirements for the administration of a pension fund.

In addition to the abovementioned amendments, by Emergency Decree no. 38/2019 allows pension fund administrators to invest the assets of the private pension fund in the following new financial instruments:

– shares and bonds issued by the project companies set up under Government Emergency Decree no. 39/2018 regarding the public-private partnership, with subsequent modifications and additions, or infrastructure funds specialized in infrastructure, up to 15 percent of the total value of the assets of the pension fund;

– securities traded on regulated and supervised markets issued by funds or companies performing real estate development and promotion, purchase and sale of own real estate, renting and leasing of own real estate, real estate management, up to 3 percent of the value total assets of the pension fund;

– private equity investments in the form of shares and bonds in companies from Romania, from European Union or European Economic Area, or from private equity investment funds in Romania, from EU Member States or from countries belonging to the Area European Economic Area, up to 10 percent of the total assets of the pension fund.

All of these changes broaden the spectrum of investments available to private pension fund managers, contributing to their development and at the same time ensuring a high level of safety for participants.

On March 31, 2019, the portfolio of privately managed pension funds was structured as follows: government securities – 61.30 percent, shares – 18.32 percent and other assets – 20.38 percent.

Compared to December 2018, the share of fixed income instruments in privately managed pension funds’ portfolios decreased.

At the same time, portfolios of privately managed pension funds recorded an increase in share allocation. Weighted average return rate on all privately managed pension funds was 2.8758 percent.

In a period of increasing maturity of the system, the age-related ratio changed between March 2018 and March 2019 in favor of participants aged over 35. Thus, compared to December 2018, there was a decrease of 0.34 percentage points for those under the age of 35 for privately managed pension funds, when the ratio was 44.39 percent/ 55.61 percent, respectively an increase of 0.08 percentage points versus December 2018 for voluntary pension funds, when the ratio was 17.47 percent/ 82.53 percent.

What are, in your opinion, the main factors that could boost the capital market transactions in Romania?

The idea is simple: we need new IPOs. And I mean here both state-owned companies and private companies. Undoubtedly, the BSE needs fresh blood. The capital market can be an important source of financing for the business of companies.

With strong issuers in the stock market, I am convinced that there will be both strategic and retail investors who will be eager to invest in the Romanian capital market.

At the same time, we must continue our financial education campaigns at full speed in order to be sure that people realize that the stock market can be a viable alternative to investing.

Without big issuers and educated investors, we cannot talk about sustainable capital market development. Also, the creation of new institutions – such as the CCP project that we support – can greatly contribute to the stability and evolution of this market.

For a long time, we have been talking about the great potential of the insurance market in Romania. When will we talk about its maturity?

I would say that at this moment the insurance market in Romania is in balance.

At the end of December 2018, all insurance companies met both the Solvency Capital Requirement and the Minimum Capital Requirements.

Even though car insurance currently has a significant share in the total market, the health insurance segment has grown significantly over the past two years.

For example, last year gross premiums written for this category amounted to approximately RON 335 million, up by approximately 60 percent over the previous year.

These developments indicate that things are starting to move. It is true that the growth rate of non-compulsory insurance is relatively slow, but I think the trend is clear.

In order to achieve maturity, concerted effort is needed from all the actors in this market. Mentalities need to be changed, the way insurance companies and brokers are working, the degree of financial education of the population needs to be improved.

Both our Authority and the entities in the market have responsibilities in this regard. I hope that in the coming years we will have an improved picture of the insurance market and we will talk about a market whose dependence on compulsory insurance will drop significantly.

Finally, I would like to ask you how was the year 2018 for ASF?

Last year we celebrated the five-year anniversary of the establishment of the ASF. Throughout this period, the Authority has gone through the natural steps of a newly established institution. We have crossed construction and reconstruction periods, but we have always sought to meet market needs and protect consumers’ rights and interests as effectively as possible.

I believe that 2018 was a year of stability, a year in which we were able to decode the results of the sustained work we have submitted with my colleagues, members of the Council and employees of the Authority.

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