FACULTY OF ECONOMICS AND BUSINESS ADMINSTRATION ECONOMICS AND INTERNATIONAL BUSINESS BACHELOR ’S DEGREE THESIS SCIENTIFIC COORDINATOR: ASIST. UNIV…. [608265]

UNIVERSITY OF CRAIOVA
FACULTY OF ECONOMICS AND BUSINESS ADMINSTRATION
ECONOMICS AND INTERNATIONAL BUSINESS

BACHELOR ’S DEGREE THESIS

SCIENTIFIC COORDINATOR:
ASIST. UNIV. DR. BOGDAN BUDIC Ă
GRADUATE STUDENT: [anonimizat]
2019

2
UNIVERSITY OF CRAIOVA
FACULTY OF ECONOMICS AND BUSINESS ADMINSTRATION
ECONOMICS AND INTERNATIONAL BUSINESS

THE EVOLUTION OF THE ROMANIAN CAPITAL
MARKET.
CHALLENGES AND PERSPECTIVES

Scientific coordinator:
ASIST. UNIV. DR. BOGDAN BUDIC Ă
Graduate student: [anonimizat]
2019

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Contents

INTRODUCTION …………………………………………………………………………………………………………… 4
CHAPTER 1. THE GLOBAL CAPITAL MARKET. WHERE IT STANDS . PERSPECTIVES …. 6
1.1. Financial crisis of 2007-2008 …………………………………………………………………………………… 6
1.2. Economic outlook of capital markets in the wor ld …………………………………………………….. 13
CHAPTER 2. THE EVOLUTION OF THE ROMANIAN CAPITAL MARK ET. CHALLENGES
AND PERSPECTIVES ………………………………………………………………………………………………….. 18
2.1. The Bucharest Stock Exchange. An insight into its evolution. …………………………………….. 18
2.2. The capital market in Romania – one step closer to becoming an emerging market. ………. 25
CONCLUSION …………………………………………………………………………………………………………….. 38
BIBLIOGRAPHY …………………………………………………………………………………………………………. 40

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INTRODUCTION

This thesis presents the concept of capital markets in the context of the continuous
development and integration of the financial markets, the capital market gaining inc reasing
importance within the contemporary financial systems. The global financi al markets are
going through the globalization process, which has also had an important effec t on the
Romanian financial system, leading to the consolidation of the existing legislation in the
field and the creation and development of a viable financial marke t that allows the trading
of modern financial instruments.
I chose this topic for the final paper as I have always been keen on l earning about
the capital market. For many, it is an unknown concept as the way the capital market
functions, is complex.
The first chapter presents how the financial crisis of 2008 took place and what the
consequences were in different regions. The same chapter deals also wi th the economic
outlook of capital markets in the world. Humans are optimistic beings with a strong tendency
to overestimate their own abilities. This explains why such a posit ive self-assessment is very
helpful in coping with life's misfortunes but, it can be dangerous in the fi nancial markets.
The financial system has become more and more obscure. Following to this trend towards
greater complexity, a move towards less transparency has taken place. Through this paper,
the main markets that are affected by the economic crisis, starting with the real estate
market, the auto market and others, are highlighted.
The capital market has seen an ascendant course since its in ception, registering a
qualitative leap after Romania's accession to the European Union. Thi s was an important
moment in the evolution of the capital market, both in terms of openne ss to foreign
investors, and especially by the application of European standards by all regulated market-
specific entities. Through the capital market, the money-flow circuit i s assured in the saving-
investing process, transforming short-term financial assets into long-term capital a vailable.
Issuers attract available capital through market operations, respecti ng specific standards and
practices. In turn, investors, who are exposed to capital, benefit from transpa rency and
protection of their own investments. In spite of the low performances of the Rom anian
capital market compared to the performance of the developed European capita l markets, the
Romanian capital market has nevertheless enjoyed a favorable dynamic in recent ye ars.
When the USA is affected, the rest of the world gets some scratches too. What began
as a few unwise lending decisions in the US has spread globally in tim es of global financial
systems and threatened to sink the globe into another major depression.
The benefits of the single EU framework combined with skills, industry di versity
and low labor costs make Romania a very attractive investment de stination and export
destination. However, foreign traders should be aware that certain service s, as the ones in
the public domain, do not meet the usual standards.
The second chapter presents the Bucharest Stock Exchange Market, its evolut ion
and how it can be characterized nowadays. Above all, it must be me ntioned that, political
burdens usually lead to even greater fluctuations on the capital market s. Solid corporate
earnings and favorable valuations could nevertheless provide a good environment for
moderately rising stock prices. Technology as the largest sector worldw ide is be critical to
market development.

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Starting from the complex problem of the strategic orientation of global investments,
in the context of the existence of an excess of capital resources, this paper highlights some
aspects regarding the emerging markets as a predominant destination of capit al.
Emerging economies are those countries that are traditionally stil l considered as
developing countries but no longer have their typical characteristics; But in the foreseea ble
future, they will be able to reach and maintain the level of development of the industrialized
countries. Romania is considered to be an emerging market.
Investors are looking for emerging markets for the prospect of big gains, as they
have more long-term growth due to their strong economic growth. Investments in emerging
markets, however, come at risk, due to political instability, internal i nfrastructure problems,
currency volatility and limited opportunities on the capital market, as many large companies
could still be run by the state. However, emerging markets are much more attractive than
border ones, which can be easily noticed in figures and in the following paper w e will see
the reasons.

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CHAPTER 1. THE GLOBAL CAPITAL MARKET. WHERE IT
STANDS. PERSPECTIVES

1.1. Financial crisis of 2007-2008

The globalization of the financial economy has produced a larger, faster and m ore
international financial system. Total assets held by the world's largest banks almost doubled
from 2003 to 2008, with UK bank borrowing. Black Monday on the Wall Street happened
as the stock prices rush ed into the basement. With the collapse of the investment bank
"Lehman Brothers" on 15 September 2008, the financial crisis reached its peak as thousands
of employees have to evacuate the world's fourth largest investment bank. Banks and Stock
Exchange in South America, Belgium, Tokyo, Frankfurt, London, Paris, Luxembourg,
Dublin have gone through a difficult time short after that.
In July, IndyMac Bancorp, one of the largest US mortgage lenders, went ba nkrupt.
Bankruptcy struck Fannie Mae and FreddieMac mortgage banks, which fund about 40
percent of US mortgages, but both were sold by the Federal Reserve Bank (F ED), under
federal control. The saving of the two banks involved the US government' s injection of a
sum of about $ 200 billion. US bank Merrill Lynch was picked up in mid-September by
Bank of America with a $ 50 billion deal. Other two major American fi nancial groups,
Goldman Sachs and Morgan Stanley, were transformed by the American Central Bank. Not
just as fortunate was Lehman Brothers, one of the largest bankers in the bankrupt cy that the
bank failed to save.
With the bankruptcy of Lehmann a stock market crash was triggered, both insurance
companies and banks had to be rescued with state aid programs: the US alone spent $ 700
billion, the German government spanned a rescue package of 500 billion euros. Ice land
subsequently had to warn against national bankruptcy and put domestic banks under
government supervision. In the wake of the financial crisis of 2008 as part of the global
economic crisis, the major economies are sliding into a deep recession, the economy had to
be supported by massive economic stimulus programs. Central banks reduced interest rates
to a minimum, which was not only a further burden on investors already affected b y the
insolvency of some large investment companies.
In February 2007, the upcoming global crisis seemed to be more of an American
financial problem. And that's because more and more US customers have not pa id their
high-risk mortgage loans, which caused the first bankruptcies of specialize d banking
institutions. In August of that same year, US stock markets started dec lining and the central
banks in the liquidity markets. Many of the new homeowners could no longer pa y off or
refinance the mortgages they now had. The crisis could have been limi ted to the US real
estate owners. Unfortunately, the banks and lenders had resold these loans. The debt has
been split and sold to other investors and banks around the world, in complicated fina ncial
packages that seemingly few people really understood. In 2007, nearly 1.3 mill ion US
properties were foreclosed, up 79 percent from 2006. Panic spread throughout the global
financial system. For no one seemed to know who owned the now 'worthless' de bt. Suddenly
banks were no longer willing to lend each other money and caused a credit c runch due to
the lack of fresh capital. By July 2008, major banks and financial institut ions around the
world were accumulating losses of approximately $ 435 billion. The Ameri can financial

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problems continued in 2008, the year when the financial crisis made its presence felt in
Europe and implicitly Romania.
Many international banks have created a $ 70 billion liquidity fund to addre ss urgent
needs, while central banks have relaxed lending. The measures have not preve nted,
however, significant declines in international capital markets.
The year 2008 started with a downward trend of the world's main stock exchanges
in America, but neither the Bucharest Stock Exchange remained neutral to the fluctuations
and decreases of the international stock exchanges, and even lost much even if it was not
directly affected.
As a result of the financial crisis in 2008, the interest rates in the European Monetary
Community were at an extremely low level. For the economically weak member countries,
such as Greece, Portugal or Spain, the opportunity opened up for cheap credit as a new crisis
set in. At the same time, however, the financial crisis in 2008 had sha rpened the risk
awareness of many creditors, and even the rating agencies, which had come under criticism,
now assessed the situation more cautiously. As the EU member state s had not found a
common solution to the banking crisis but had initiated national instrum ents, public debt
rose to a record level. All the savings efforts undertaken by the individual countries were
unable to remedy the resulting imbalances: the debt levels had deve loped independently of
the economic strength. In particular, Greece had to struggle in the wake of the financial
crisis in 2008 with sharply rising interest rates on government bonds and coul d no longer
self-refinance.
What culminated in the financial crisis of 2008 triggered tremendous losse s for
investors of all sizes: The central banks' monetary policy measures have not only obscured
the real risks, and thus contributed to the upheaval of the entire banking sys tem. Th e
resulting extremely low interest rates, which drive up inflation and make debt servicing
sustainable, still cost savings. Life insurance companies are not the only ones to suffer from
this situation, as they can only barely guarantee the guaranteed inter est rates; the stock
markets are inflated by the high liquidity beyond the actual economic s trength as new
bubbles are threatening.
The most important undesirable developments in the financial system can be clearly
identified from today's perspective. For example, overly complex financia l products,
insufficient transparency of financial structures, poor risk management, inade quate
regulation and oversight, and ultimately excessive and ultimately irre sponsible investor risk
appetite have masked the scale and distribution of risks in the financi al system for years. At
macroeconomic level, this development benefited from abundant global liquidi ty and
current account imbalances at the global and euro area levels. Wit hout these encouraging
factors, households' massive debt growth and inflation of real estate prices in the US and
some Eurozone countries would have been impossible. Finally, when the coll apse of the real
estate market in the US revealed the fragility of the financi al system, market participants
quickly lost confidence. As a result, the financial meltdown sparked the worst global
economic crisis since the 1930s: world trade collapsed towards the end of 2008, eur o area
economic output fell 4% in 2009.
In the euro area, the open public finance crisis followed the crisis i n the financial
markets with a certain delay. A hidden public finance crisis has be en around for a long time.
For example, the central framework of the Stability and Growth Pact, whic h is central to the
euro area, has not been complied with sufficiently. Finally, in 2005, the rules were largely
accepted, against the ECB's open and strong criticisms, with the result that the fiscal
consolidation that was necessary in many countries could no longer be bindi ngly demanded.
The financial crisis has dramatically worsened this already fragi le budget situation, not only
in the euro area, but in almost all industrialized countries. For exa mple, in Japan and the

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UK, the annual share of new debt in economic output exceeds 8% for the entire period from
2009 to 2011.
It should be said that during the crisis, the euro has proved to be a shield for all
countries. But let it be added that before the outbreak of the public finance c risis, the
protective function of the euro, combined with an under-implemented and, from today' s
perspective, incomplete set of rules, contributed to the development of significant
imbalances in some countries. It should be remembered only that the alm ost complete
leveling of risk premiums on sovereign debt of member countries before the onset of the
crisis. The reassessment of the situation by the financial markets has put governments under
considerable consolidation pressure. In essence, this re-evaluation, and the di sciplining of
public spending behavior by the markets, is to be welcomed, as long as it adequately reflects
the fundamentals of public finances and avoids exaggerations.
Financial transactions have long-term consequences. The markets used to be
dominated by hedge funds and intensive transaction based trading firms, w hich calculated
their investment horizon in short periods. This form of right in time funding turned out to
be highly destabilizing, increasing both the speed and extent of the cri sis's impa ct on the
system. The overall picture with implications such as the Interne t and information age, made
the financial system became even more difficult to understand: with c omplex and
unregulated derivatives markets in combination with off-balance sheet st ructures and an
increasing number of tax havens, market participants introduced several obscure levels. This
lack of transparency made it possible for them to build up barely understood exces sive risks
in the system and hide them from the eyes of the regulatory authorities. The combination of
unregulated financial market players, opaque products, and lack of transparency an d legal
certainty has significantly increased the risks to the financial sys tem and made the functions
of the entire financial system in the event of a major disaster paralyzed. The only problem
is that without financial transactions, the entire economy comes to a still point. Transparency
is the foundation of a well-functioning financial system. Regulators not only ne ed to know
what is going on within financial institutions, but also what is going on throughout the
financial system. Reforms of the financial system must therefore begi n with opaque
derivatives, prevent off-balance sheet transactions, and permeate the secrecy of t ax havens.
At the same time, efforts must be made to achieve better transpar ency in the financial
relationships of the counterparties in financial transactions. This contributes to keeping
financial institutions in confidence.
Traders and bankers took a lot of risks bec ause they knew they could get significant
bonuses. If their bets went up, they could pocket such rewards. The worst thi ng that could
happen to them was being fired if they lost the bet. However, in ti mes of boom, such traders
had little trouble finding another job. The personal risk was minimal if they took excessive
risk, but the possibility of a generous reward was very high. Driven by t he incentives of
their employees, financial institutions have taken up more and more debt and started to take
on ever greater liquidity risk through ever shorter-dated bonds and long-term lending. The
increasing use of leverage by financial institutions enabled their managers to generate higher
and higher returns. This increased the risk of a system crash. The high profits meant that too
many players played recklessly. It was only a matter of time befor e there was a major
collapse. The incentives for employees were undoubtedly disproportionate. But t he
shareholders also had incentives to take excessive risks. Limited li ability means that the
return on stockholders is at least theoretically unlimited. In their quest for profits in a
financial system characterized by high access barriers, shareholders too moved too fas t and
enjoyed a return on. But the systemic risk they helped with their beha vior erupted in the
form of the financial crisis, sweeping away much of their wealth.

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Incentives that led to inappropriate behavior have become an increasi ngly problem
in the run up to the crisis: loans were issued to borrowers who did not meet the usual credit
standards, the bankers secured them and the rating agencies rated them a ll they were paid
depending on the volume of business. They focused on generating volume, jeopardizing
quality. Thus, the US sector was the trigger of the crisis. Solving the problem of incentives
in the financial system must be an urgent part of the reform efforts. It would already make
a big difference if bankers who threatened other institutions and threatened the stability of
the system would be less rewarded.
Before the crisis emerged, the communication and exchange of information betw een
international regulators simply could not keep up with the reality of much higher cross-
border financial flows. Also, tax havens had specialized in hiding informati on from other
countries' authorities, so the extent of the threat to the financial system went unnoticed and
there was little possibility of coordination and no more confidence, as th e disaster arrived.
Financial institutions were often checked in detail when the home country was primarily
responsible for the regulation. Most of them took care of what the big cross-borde r
institutions that regulated them did in their home market. At best, foreig n subsidiaries,
branches and other aspects of doing business were of secondary importance to them.
Banks may include very different institutions such as commercial ba nks, investment
banks or development banks. A problem in the period before the crisis was that banks tried
to be like hedge funds. And hedge funds began to behave like banks. They ma de the system
more susceptible to accidents. Savers want to be able to recl aim their money at any time,
while investors want long-term funding to make longer-term investments . By putting the
bank between savers and investors, the bank enables productivity based investment.
The financial sector is systemic. This principle can not be t ransferred from the real
economy to the financial sector. If one out of three major banks fails, this ca n trigger a rush
to the other banks. If one bank goes down, that is not necessarily positive for the other banks.
Financial institutions are significantly intertwined. Because banks are contractual partners
in most financial transactions, everything is different for them. They can give each other
great losses. Because confidence is what counts in the financial industry, the failure of a
bank can make confidence in the system crumble. If other banks have a sim ilar business
model as the failed ones, confidence in them may perish. When real e state prices rise, people
are not simply reacting to lower demand. Financial institutions increasingly res orted to off-
balance sheet financing, so that investors, analysts, counterparties and re gulators were
finding it increasingly difficult to determine their true value.
The banks are at the center of the financial system. Without banking infrast ructure,
capital markets, insurance companies and asset managers can not function. The rapid growth
of the non-bank segment of the financial system, including the "shadow ba nks", had taken
away the attention from the banks. The financial crisis that has hit banking systems around
the world has brought the central role of banks back into the public eye. The complexity of
products such as asset-backed securitization bonds, the lack of transparency of deri vatives,
the high-risk shadow banking system and countless other issues are considere d immediate
causes of the financial crisis.
If the overall risk assumed is too large or distributed in such a way that individual
financial market players assume risks for which they are less prepared, the stability of the
entire system is jeopardized. If the banking system as a whole face s massive losses, the risk
is systemic and needs to be addressed at the level of the banki ng system, as in the current
crisis. Such a systemic risk involves the values of the assets of ba nks. The banking system
in most developed countries needed massive capital adjustments from government s. As the
crisis has clearly shown, regulators had few opportunities to address this ri sk. As a result,
central banks and governments have had to intervene in numerous countries in an action to

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prevent the banking system from collapsing. This has led to the expansion of the safety nets
for the banking sector, so that now liquidity, deposit and capital protection are a part of the
safety net.
Even if each individual institution is safe, the system as a whole c an be susceptible
to one another due to the institutions' connections. Shocks of a part of the sy stem can spread
quickly in the system and bring this domino-like collapse. Since bank sust ainability depends
crucially on savers' confidence in getting their money back, maintaining that trust is crucial
to the survival of individual banks and the stability of the banking system. Unlike other
sectors where a competitor's default is usually good for business, in the banking sector bank
failure can trigger a serious crisis of confidence in other banks and have an impact on the
whole system. Because banks often have large liabilities to ot her banks, the failure of one
bank can cause large losses for other banks. Because banks often use simila r systems and
operate in similar markets, a bank failure can lead to the expectat ion that other banks will
have the same problem. Banks have become more similar than ever, so tha t this similarity
can increase the risk of contagion and become the source of systemic ri sk. Banks are
increasingly involved in the financial markets. The failure of a bank c an depress the markets
it operates on because it is forced to sell assets and collateral. In the current cri sis, this took
place on a massive scale when the securities backed by mortgages , which banks had invested
globally, depreciated and triggered a wave of forced sales and losses.
Financial experts and regulators believe that investment portfolios of asset managers
and banks have become increasingly diversified, significantly reducing their risk of loss on
a particular financial market or asset class. This type of risk, whi ch can be interpreted as a
risk of loss or interruption when problems occur in a particular market segment or fi nancial
institution, is considered to be a firm-specific risk. Globalization has contributed to reducing
this risk. As the natural diversity of financial institutions continued t o decline, institutions
became more vulnerable to similar risk factors. In the past, capital controls, market
segmentation, and strict limits on the types of investments compani es could make have
ensured that there were different markets that were loosely connected. Th is has changed in
the course of technological and economic globalization. The controls by capi tal control were
reduced. Market segments have been opened to all types of investors. Dereg ulation and
advances in information technology have given financial institutions fa r more freedom of
action. Institutes merged and became larger, leaving their mark on virt ually every asset class
and global financial market in the quest for diversification.
Advances in electronic data processing enabled financial institutions to create
increasingly complex derivatives. Initially, these were designed t o hedge against risk, but
soon they were preferred financial instruments of speculators. The originally relatively
small derivatives markets swelled to more than 50 times the global gross domestic product
within just three decades. In parallel with the increase in mutual l iabilities of financial
institutions and the intermingling of formerly different financial markets, the spread of the
Internet has ensured that financial transactions and flows were much fast er. The days of
ticker quotations and calculators were over, transactions on the stock market are now
performed automatically by computers in nanoseconds. The financial sys tem has thus grown
very rapidly recently, transactions have accelerated significantly and the complexity of the
instruments has increased significantly.
If the market price of an asset threatens to fall, then any bank tha t cares about its
solidness is wise to sell it as quickly as possible. However, i t will continue to depress the
market price, which will result in losses to other banks that run the s ame asset, which in turn
will force them to sell other assets to bring their overall ris k under control. Decisions that
are reasonable for individual banks can have devastating consequences for the system.
Therefore, it may be necessary to separate the links between indiv idual institutions and to

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take policy measures to ensure the soundness of the institutions and the sy stem. Each bank
seeks diversification so as to lend money to different borrowers in different se ctors and
regions. With the globalization of the financial industry, the potential i nvestment
opportunities have become much larger, giving banks a more diversified offer than e ver
before. he pursuit of diversification has led to standardization and made the banking system
highly vulnerable, as disruptions in an asset class or problems in an ins titution can now
spread very rapidly in markets and institutions. More and more banks today ha ve similar
business models and similar investment portfolios; they are subject to similar regulation and
use similar risk management systems, reducing diversity within the system. The
securitization, which combines loans and converts them into marketable securities, has
important consequences. In particular, many of the major banks bear similar risk s.
Banks are increasingly interdependent and interconnected by reciprocal debt, in
particular via the interbank market for refinancing, so that one bank's failure can lead to high
losses for the other. These short-term sources of financing became more and m ore important
in the run-up to the crisis. Information has become cheaper and technology mor e
sophisticated. Nowadays, all banks have access to the same standa rd credit valuation
procedures and often make the same decisions. That too has reduced the divers ity of the
financial system.
The fact that financial transactions have long-term consequences, depend on trust,
are cyclical and uncertain make the financial system unstable by itself. Therefore, while we
can talk about stabilizing the financial system or reducing the fre quency of crises, we can
never completely eliminate them. Crises have accompanied the finan cial system since
earliest times and will continue in the future. That does not mean tha t we are completely
helpless. Much can be done to mediate the nature of the financial sector and the severity of
financial crises.
Short-term bonds are cheaper than long-term ones. This is simply beca use the risk
of loss increases as the loan matures. As liquidity on the bond markets increased, banks
moved to increasingly short-dated bonds to increase profits while cutting c osts. In 2007, for
example, British banks financed 25 per cent of their lending business with short- term bonds.
The financial system moves in liquidity cycles. In order to reduce the susceptibility of the
system to failure, it is therefore necessary to create buffers for ti mes when the liquidity
conditions on the market are not ideal. The recent banking crisis, althoug h far from being
the first, has left the financial market regulators largely unprepared, both in terms of the
scale of the crisis and the intensity of the collapse. The more compl icated a product, the
greater the differences in understanding between the selling instit ution and a non-financial
buyer. This difference in understanding and information allows financial ins titutions to
make bigger profits. It is known that make financial products more complicated are usually
sold to inexperienced investors.
In Romania, since early 2008, the national currency has lost 4.5% against the euro,
in the backdrop of the National Bank of Romania and the Ministry of Economy and Finance.
The trend of depreciation in the region and the deepening of the current ac count deficit were
stronger than the efforts of the National Bank and the Ministry of Finance to stabilize the
course. Since the beginning of the year, the National Bank has attracted almost 30 billion
lei from the market, hoping to temper the national currency. The most affec ted areas were
the automotive, manufacturing and textile industries, construction and wood industry . There
have been many dismissals, quitting, temporary employment contracts, technical
unemployment references. Thus, industrial production decreased by 0.7% in October 2008
compared to the previous month, while compared to the same month of 2007, i t decreased
by 3%, due to the 4.6% compression of the manufacturing industry. Real estate transactions
have begun to shrink since the summer of 2008, due to the uncertain outcome of

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international prices. In October, however, the market was almost blurred, as the financial
blockade at the international level was doubled by the new measures to limit the credit
imposed by the National Bank of Romania. On the other hand, the slowdown in construct ion
and land prices, especially in Bucharest, was expected after the acc elerated rises in the last
five years. Thus, many real estate developers have stopped their proj ects hoping for a return
of prices, and some started after a while to cut profit margins in order to try to sell some
products further. New car sales have been affected in recent months by t he massive import
of second-hand cars, the devaluation of the national currency and the change of the credit
standards imposed by the National Bank of Romania, which has led to a sign ificant
reduction in credit.
The causes of the economic and financial crisis are based on a complex mi x of
mistakes that have built up over the past decade. At the core, howe ver we are confronted
with a double crisis that presents itself as a crisis of the fina ncial system and public finances.
This combination makes crisis management extremely demanding.
The financial system is inherently unstable. In the run-up to the financial crisis, t his
feature was again significantly strengthened. Technological progress, the liberalization of
capital flows and the deregulation of financial markets allowed bankers and other financial
professionals to use more and more leverage in the pursuit of profits; to issue more
complicated and poorly designed securities; to increase dependence on short -term
financing; and to act hectically with ever greater speed. As a result, the financial sector has
been able to achieve ever higher returns. The employees, who had clear ince ntives to take
high risks for high returns, optimal for the individual but socially destructiv e, put the biggest
part of them into their own pockets. The financial sector has evolved int o a system of highly
indebted, short-term, complex, opaque and conflict-driven institutions and markets that are
highly interdependent and operate with little appreciable capital and liquidity margins.
When part of this system was shattered, this situation meant that the shockwaves had spread
to other institutions and nearly brought down the whole system had it not b een saved by
unprecedented support from governments.
The evolution of the financial system has led to the creation of a hug e systemic risk.
Ever-larger financial institutions, ever-faster transactions, eve r-increasing involvement, all
this has significantly increased the likelihood of the system collaps ing. Therefore, the crisis
was not so much a sudden earthquake as it was a slowly developing tsunam i wave that
anyone who had taken the trouble to look more closely could have foreseen in good time.
But as long as everything seemed to go well, there was littl e interest in worrying about the
stability of the financial system. Those who were part of the sy stem successfully sold the
world a fairy tale of a new era in which technology and innovation enabled re warding
financial transactions without risk. Lucky for their familiar ones achie ving record profits,
regulators believed the fairy tale and did not stubbornly ask where the risk ultimately
remained. Even if the authorities had wanted them, they would not have bee n able to get a
clear picture of it, since the financial system was increasingl y infused with obscure
derivatives held off balance sheet, sometimes in legal structures s et up in tax havens.
Citizens all too easily dismissed them as "too complicated to unders tand" and did not bother
to hold the sector accountable.
The current approach works from the local and national lower levels. This system
must be supplemented by international regulators working from top to bottom and l ooking
at the whole system. Changing the structure of the financial system is a must: institutes that
are too large, too intertwined and too complex to fail must be restru ctured. Change of
regulation is in order so that capital and liquidity cushion can be built up and systemic risk
can be prevented. Solving the problems of false incentives in the financi al sector that
encourage excessive risk is also to be dealt with.

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When these changes are made, it remains the question of what kind of financial
system we need to support the real economy. Not only must our changes to the financial
system be a response to the crisis, but it must also be proactive and anticipate and meet t he
needs of the 21st century economy. A serious omission is that proposals to establish global
financial supervision are lacking. While the International Monetary Fund (I MF) and the
Financial Stability Board (FSB) are expected to exercise some fin ancial supervision, a
global financial system also needs a global regulator. In the European U nion and in the US,
the establishment of regulatory bodies that address systemic risk from top to bottom and are
progressing. But the effort will probably not go far enough. Although there is a worldwide
consensus that controlling systemic risk is the new feature, far too little is done to tackle the
root of the problem. It is rare to seriously consider splitting the instituti ons that are too big
to fail even though their economic benefits have not been proven but their cont ribution to
systemic risk has been widely recognized. The problem of being too intertwin ed can not be
solved by limiting the scope of a firm's activity, but only by int roducing a rule on the
settlement of derivatives through clearing houses. This would solve only part of the
problem.

1.2. Economic outlook of capital markets in the world

The capital market is the sub-market of the financial market on which t he medium
and long-term capital requirements meet the capital supply. Short-term transactions take
place on the money market. Market participants are all economic entit ies, private
households, companies, the state with its subdivisions (such as public admini stration) and
state enterprises or municipal companies. The capital market differs from the money market
primarily by the maturity of the trading objects. The capital market is often narrowed to the
securities market, which includes both equity securities, such as equities, and fixed inc ome
securities, such as bonds. The capital offer comes from investors willi ng to make their
capital available for long-term financial investment purposes. Capital markets reflect the
economic and political situation of a country, even natural catastrophes are reflected in the
share prices. For many, however, capital markets are a rather abstract entity.
The capital market is an intermediary market, the link between i ssuers and investors
is not direct, being achieved through financial investment companies and credit i nstitutions
carrying out direct capital brokerage activity. Intermediaries, in turn, prov ide financial
investment services only if capital requirements are met in accord ance with EU directives.
They have the obligation to observe the rules of prudence and conduct, as well as capital
adequacy requirements, in accordance with certain laws. Financial instruments are traded
on regulated markets, on multilateral trading platforms or on alternative trading systems.
The evolution of the capital market is determined by legislative changes that can be
considered as a continuous process of adaptation to the requirements of the European single
market as well as the diversification of financial products, types of operat ions, number of
investors and issuers, value transactions and modalities of market access.
The importance of economic growth is that it helps to achieve macroec onomic goals
such as poverty reduction, reduces of the unemployment rate, improves public s ervices
(higher economic growth leads to higher tax revenues, even if tax rates rem ain the same).
This is measured by a small number of indicators including: Gross Domest ic Product, gross
national product, national income, and so on.
The capital market also has an important role in the economy. Thi s market ensures
the movement of capital from those who save money to those seeking funds for

14
development. Through it, the transfer of financial instruments and their transformation into
liquidities is done and, last but not least, it has a non-inflationary role because it attracts
available capital.
An analysis of the evolution of European and US scholarships in 2018 indicate s that,
in general, insurance and banking companies have been linked to market trends as a whole ,
but also allow for the identification of particularities. Thus, although in g eneral the price
evolutions were oscillating and the variations compared to the beginning of the year were
predominantly negative, during the first months, most of the indices of the s ectors recorded
better performances than the general index of the European Stock Exchange, indicating a
more favorable perception of the investors.
During January and the first part of February 2018, a gradual trend emerged from
the low-yield area, both for corporate bond and government bond markets. The second
quarter marks increases in these yields based on political uncertainti es, with higher volatility
in Italy, Portugal and Spain.
A regulatory framework of the European Commission was created and it create s a
harmonized regime throughout Europe for the management and sale of mutual funds. Thi s
framework is named The Undertakings for the Collective Investment in Trans ferable
Securities (UCITS). In the case of the European investment fund industry, ov erall positive
developments were also observed in 2018, evidenced by increases in net asse ts accumulated
both of undertakings for collective investment in transferable securiti es (UCITS ). The same
year was also characterized by a contraction in the net sale s value of European investment
funds.
The world in which we live is a world in which many of the major economies hav e
passed the peak of growth, as well as an increasing uncertainty. While economic features
are likely to slow down in the Eurozone, but also in many emerging markets, markets are
reacting sensitively to political pressures. In Europe, the budgetary confl ict with Italy and
worries about an unregulated Brexit continue to accompany the economical env ironment.
Although it is not known for sure if an exit treaty between Great Britain and the European
Union will be certain, there is no time for relief. Italy is cl inging to a budget that is not
allowed under EU regulations. This threatens the rating of the country and thus the stability
of the entire Eurozone.
In addition, there is a global trade dispute, especially between the USA and China.
This trade conflict is assumed to be increasingly a struggle for economic and technologic al
leadership. If in 2019 an increase in inflation will be recorded, central banks (above all the
US Fed and the European Central Bank), are expected to tighten their expansi onary
monetary policy. Higher interest rates would be the result.
If in 1990 the NYSE stock market capitalization was nearly 2,700 billion US dollars,
at the end of 2010 its stock market capitalization reached almost 13,400 bil lion dollars, as
the maximum reached by this market is found in the year 2007 to the level of 15.600 billion
dollars. In 20 years, the NYSE stock market capitalization has increased by almost 400%.
The second stock-market stock exchange stock is NASDAQ OMX, whose market
capitalization was approximately US $ 310 billion in the early 1990s, t o reach $ 3,900 billion
at the end of 2010 dollars. Unlike the NYSE, Nasdaq reached its peak i n 1999 when the
stock was worth about $ 5.200 billion.
The TSX Group is the third stock market based in America's stock market
capitalization. If at the beginning of the 1990s its market capitaliz ation reached just over
240 billion US dollars, at the end of 2010, the capitalization reached al most 2,200 billion
dollars, which is about 815% higher.

15
Figure 1.0. The NYSE stock market capitalization

Source: Data processing from www.nyse.com

While the US economy remains at full steam, growth rates in most other major
economic regions in 2019 are likely to slow compared to the previous year.
Despite political challenges, the Eurozone economy will maintain it s growth trend
in 2019. There is a slight tightening of monetary policy in the euro area.
The outlook for the US economy remains positive as it should grow at the s ame rate
as in the previous year. The main drivers are the impact of the US ta x reform and higher
government spending. High private consumption and solid overall investme nt supported the
trend.
The dominance of the US dollar persists in the global capital market s. But the sum
of budget deficit and current account deficit of the United States coul d burden the future.
For a rising euro, all doubts about the continued existence of the European M onetary Union
would have disappeared. As long as political risks persist in Europe, the euro should remain
under pressure. Strength could only be expected from advances in topics such as Brexit and
the Italian budget debate.
For bond investors, the situation is unlikely to improve. On the contrary: in the US
and the Eurozone, bond interest rates are expected to continue to rise in t he course of an
overall positive economic trend. Thus, until September 2019, interest rate s on US
government bonds should continue to rise above all maturities. Only then should it fall
slightly again at the end of the year due to the impending economic sl owdown. Rising capital
market rates not only in the US, but also in the Eurozone are present in fore casts. The
environment remains difficult. Return on bonds is risky. Emerging economies, for e xample,
continue to offer relatively high interest rates, but are particularly vul nerable to currency
fluctuations. Bonds with a low maturity or variable interest rate are preferred.
Stocks are presented as good in the US, cheap in Europe, good and cheap in A sia.
The nervousness of investors in 2018 increased on the stock market. Despite good overall
corporate figures, the prices were at times significantly lower. After y ears of rising prices,
market participants are becoming more sensitive, especially t o political news. Investors 02,0004,0006,0008,00010,00012,00014,00016,00018,000NYSE Stock Market Captalization
NYSE Stock Market

16
consider using the valuations that have fallen as a result of the loss es. The deciding factors
for an investment are the profit expectations of the companies and the interesting valu ation
level. However, investors adjust to persistent price volatility, regul arly review and actively
manage their portfolios due to increasing market nervousness. In the case of a long-term
investment horizon, it is important not to be unsettled by short-term market events.
American companies benefit from the strength of the US economy and the T rump
government's fiscal measures. US companies generate the majority of their sales in the
domestic market. As booming domestic consumption has a positive effect on the
consolidated results. An important stock market driver is share buybacks, whi ch played a
much bigger role in the US than in Europe. These so-called buy-backs s upport the prices.
US equities remain interesting, even though they are not cheap by international standards.
In Europe, valuations are especially interesting for investors. European stoc ks are
cheap and as soon as the situation eases, such as during Brexit or the Ital ian conflict,
investors could regain confidence and access the market. In Europe, stocks from the
materials, construction and materials, financial services and oil and gas sectors are
particularly interesting.
On the Asian stock markets, especially the trade dispute between China and the US
caused a bad mood and dropped prices. Overall, high earnings expectations and
comparatively low valuations increase stock prices in Asian emergi ng markets this year,
making it attractive to investors. Much of this depends on the economic dev elopment in
China, which is fundamentally positive. The monetary and fiscal support of the government
further stabilizes growth and thus the capital markets.
Technology determines the trend and performance of the markets. The tech se ctor,
has become increasingly important over the past few years. For exampl e, technology
companies already account for 25 to 35 percent of market capitalization i n US and Asian
equity markets. Companies today generate high margins and profits. After ye ars of recovery,
technology is driving the trend in the economy and in the markets. Overal l, however, the
tech stocks should not perform as well as the market as a whole. Tech fi rms are now in the
technology (hardware manufacturers), consumer discretionary (e-commerce) sectors and in
the newly created sector of communications service providers (entertainm ent and software
services companies). There will have to be much more detailed discuss ions about
technology stocks, and investors would need to look more closely at the ind ividual business
models. Many tech companies are highly diversified and have areas of online trading, cloud
computing and artificial intelligence simultaneously active. The economic potential of
innovation in these areas is huge.
Scarce housing, capacity utilization in the construction industry, moderate mortgage
debt, in particular the metropolitan areas and large metropolitan areas, w here too little is
still built to meet the high demand are building a solid economic si tuation also in
commercial real estate.
Although oil and industrial metals are indispensable for the economic de velopment
of the world, their prices are influenced by different factors. Prices are mainly driven by
emerging market consumption, especially in China. Given the expected s olid econom ic
situation in the US and in the Eurozone, the price of oil could rise. The productio n side,
however, remains a political issue, which is why an increased forecas t uncertainty exists
here in particular. Gold is also skeptical. Gold, for many, has at least lost its s tatus as a safe
haven in uncertain times.
The experts are less fortunate in Italy, where economic growth remain ed unstable as
the debt ratio is at 140 percent of gross domestic product settle. B ehavior is also the outlook
for France, where, however, there is currently little clarity about the future course. By

17
comparison, the outlook for Spain is much more optimistic. Domestic demand and e xports
grew by 1.8 per cent in 2018, the highest level on the Iberian peninsula.
Decisive for the further development of the world economy and the capital markets
is undoubtedly the world's leading economy, the USA. It is there that de cides how interest
rates will develop and when they will rise. And that is precisely what will have a significant
impact on the capital markets in the coming years.
In order to be prosperous, there must be a process of savings and capital
accumulation in any society, thereby supporting investment, increasi ng labor productivity
and increasing revenue.
Saving is a revenue surplus on consumption or, more precisely, the fraction of
income that is not affected by consumption. From a financial point of view, in a determined
spatial and temporal context, the surplus of income on consumption can be conside red
accumulated money capital.
All economic subjects (commercial companies, public administrations, households)
can become active participants in saving and investing in the economy respectiv ely.
Economic activity is a complex process that reflects the facts, ac ts, behaviors and
decisions of people that attract and use resources to produce goods and servi ces to meet
economic needs and interests.

18

CHAPTER 2. THE EVOLUTION OF THE ROMANIAN
CAPITAL MARKET. CHALLENGES AND PERSPECTIVES

2.1. The Bucharest Stock Exchange. An insight into its evolution.

The official inauguration of of the Bucharest Stock Exchange took place on
December 1, 1882, and in a week, appeared also, the share of the stock exchange. However,
the volume of transactions was low and the official listing disappea red within a few days,
as intermediaries and some banks preferred to work outside the quota, directly w ith
customers.
Nowadays, the Bucharest Stock Exchange presents on its web pages i n a concise
manner current trends in the stock market as well as annual report s and other important
analyzes from which developments can be read. W ell-founded information about the
Significant Financial Players in Romania can be found here. Important i n this wealth of
information,, for example on The Site Map, which can be access ed on the left bar.
The Law on Trade Marks of May 9, 1904 brought a new organization of commerce
stock exchange. At the base of the trade exchanges reform in 1904, was th e principle of
freedom transactions in the stock market. If, on the basis of the 1881 law, the exchange
operations could not be made directly, but only through official intermediaries , the law of
1904 allowed the right to carry out such operations directly among the members of the
corporation's exchange, but only for own-account operations, not for intermediation.
The activity of the stock exchange is affected by the social and poli tical events of
the time. During 1907, the course of some values marks a decline. The Wa r of 1912 -1913
leads to massive course losses, but recovered later. During the Firs t World War, the stock
market remains closed. It reopens and is particularly active in Oct ober 1918: courses are on
the rise; the stock exchange is becoming inconceivable, and att racts the world to speculation
As early as 1926, the declines in shares began to begin, first slow, then precipitated.
After seven years of growing markets, another seven years of disastrous declines follow .
The 1929 law defines ready for money operations as all negotiations that ar e
liquidated on the day when they were concluded, or at the latest on the se cond day of the
exchange, and for which the parties have deposited with their negotiating order their cash
or effects.
With the economic recovery, after the economic crisis of 1929-1933, the Stock
Exchange in Bucharest, had an ascendant course culminating in 1939, whe n there were 56
titles in banking, transport and social security.
The end of the Second World War, with the entire political turnaround for Romania,
meant the end of the capital market and the stock market. For this extremely dynamic
economic sector, the blow to grace was the process of nationalization of t he economy in
June 1948, which made the disappearance of the specific products: the shares, t he corporate
bonds, the domestic and foreign state titles.
On April 21, 1995, the Bucharest Stock Exchange (BVB) was established by the
National Securities Commission decision, with the status of a public institution, carrying
out its activity as a legal person according to the principle of self-financing.
With the opening of the Bucharest Stock Exchange, the legal, organizational and
functional framework for manifesting the complex processes that define the c apital market
was created. The role that the Bucharest Stock Exchange will hav e in monitoring capital

19
flows between investors and users will grow at the next stage at an accelerated pace. The
needed features for transforming the stock exchange into an institution whose import ance
will become vital to the Romanian economy consist in at least three processes.
First of all, the completion of the current privatization stage will lead to the
emergence of a number of thousands of securities, for which the competitive bi dding process
begins in the official listing on the Bucharest Stock Exchange. Secondly, t he transformation
of Private Equity Funds into mutual funds together with other existing invest ment funds will
have a major impact on institutional investors, but especially on the population. Thirdly, the
sudden emergence of millions of securities holders with a low level of knowl edge of stock
market mechanisms will require considerable training, education and informa tion efforts as
priority objectives for stock market shareholders.
The financial market also named the capital market offers countles s winning
opportunities for their players, but also generate risks for all categories of participants.
While we are tempted to buy a stock that everyone is talking about , our rational side
may realize that it is overvalued and keeps us from joining the herd. A difference between
the world of finance and the real economy is that financial products differ from products in
other industries. Any product sold today by a bank, investment bank or fund manage r could,
at least theoretically, be offered by a competitor the very next day . Once the competition
begins, the profit margins of the products shrink.
The stock market is a market, a place where different assets, share s, bonds or other
financial instruments are sold and purchased, in compliance with the capit al market specific
regulations. The Stock Exchange, as a market operator, has the role of fac ilitating money
flows between investors (those who save capital and want to invest i t) and equity issuers
(those who need capital for investment to develop their business their). When the investor
thinks that a company has development potential, it buys its shares prim arily to participate
in the business and only then, to sell them more expensive by the unwritten capital market.
Investors can buy new issued shares, an operation whereby the company obtains the
necessary cash flow for investments that increase its value, respec tively, buying shares
available for trading, cash going to the shareholder.
Transactions on the Bucharest Stock Exchange are carried out through a m echanism
that ensures the direct and continuous access of the intermediaries (brokers) to the price
information and to the reports provided by the listed issuers, thus offering the clients the
opportunity to make the investment decision.
On the Stock Exchange, the buyer does not actually meet the seller, but the
transaction is through an authorized broker, called intermediary market partici pant. Thus,
the client gives the broker the purchase or sale order, the broker enters the orde r in the
exchange system where other orders are met, and after the negotiation of t he price, the
transaction takes place. The Exchange then submits to the broker the c onfirmation of the
transaction, and the Central Depositary registers data for the clearing a nd settlement of the
transaction. The Central Depository subsequently realizes the transfer of ow nership of the
shares against the bill, between the accounts between which the trans actions were made.
Money or shares enter into the broker's account, which then distributes them to the customer
for whom he brokered the transaction.
The transaction involves two flows between the buyer and seller: the m oney transfer
flow and the cash flow transfer of the financial instruments by transcribing t he new holder
into the shareholders' register. The transaction is completed within tw o business days of the
transaction date. Thus, on the second business day of the transaction, the buye r has in his
portfolio the purchased instruments, and the seller gets the money earned for the instruments
sold.

20
Usually, the personal savings of an entrepreneur and, if necessary, contributions
from people from the social surroundings are the source of funds for starting a new bus iness.
For a big project, however, as the need for financing is higher, companies wil l need credit,
but they will go even further. Thus, capital availability is one of the most important as pects
in the establishment or expansion of a large-scale business. There is a way to attrac t capital
beyond the circle close to friends and relatives. This involves attrac ting capital from the
audience across the country by selling the company's shares for the first time, an operation
also known as listing. The process is usually called Initial Public Offering or IPO.
For this, the company must invite investors through a bid document that incl udes
full details of the company's history, project, business model, profitabilit y estimates, and so
on. When someone finds this investment opportunity convincing, he can subscribe to the
public offering, and after allocation of a certain amount, he or she become s a shareholder of
the company. That is why, by aggregation, even small amounts from a l arge number of
people become a capital usable for corporations. The mechanism by whic h companies draw
money from the public is called the primary market.
The Bucharest Stock Exchange is a market and system operator authori zed by the
Financial Supervisory Authority, which manages a regulated market a nd an alternative
trading system compatible with European standards. The Bucharest Stock Exchang e, in its
capacity as market operator, aims to facilitate money flows betw een investors, those who
have capital and want to invest, and issuers, those who need capital for i nvestment, in order
to develop their business.
As a shareholder, a person is the co-owner of the company and entitled to be nefit
from all property rights, including dividends: the profit distributed by the compa ny to the
owners. Over the years if a company performs well, other investors will w ant to become the
owners of such a company by buying the company's shares. The good results of the issuing
company (profits, growth, dividends) lead to an increase in the demand for th ese shares,
which leads to an increase in the share price. Thus, an opportunity to sell shares at a higher
price than the bought ones. In this way, a person can increase wealth, if g ood choices have
been made from the very beginning when shares in the right company w ere bought. The
reverse is equally valid. For this reason it is important for an investor t o be informed when
making a choice.
The beginnings of the Bucharest Stock Exchange date back to 1882, when exchan ge
at the stock market level was founded by the Bucharest Chamber of Comm erce. At that time
there were 21 securities, including 6 stocks and the stock market was als o used for trading
of other simple financial services.
Trading activity was relatively low until 1916, the year of Romanian entry into the
First World War. After the war, the stock market reopened and trading and m arket
capitalization rose rapidly. The strong growth was first carried by tra nsport and banking
stocks, from 1925 onwards by shares of the oil companies, which accounted for more th an
75% of the trading turnover.
With the onset of the Great Depression in 1929, equities fell, reaching their lowest
levels in 1932. From 1933 the stock market recovered and in 1939 reached the highes t level
of the interwar period in terms of prices and trading volume. During the Sec ond World War,
the stock market remained open, sales even rose.
The seizure of power by the Communist Party in Romania in 1945 nationalized t he
entire financial sector and abolished the stock exchange system.
On April 21, 1995, the stock exchange was re-established in the building of the Bank
of Romania.
2005 was well under way for most of the capital markets in the region, where there
were growing trading values and very good course evolutions for the main tra ded

21
companies. Under this last aspect, the domestic capital market ha s excelled, and is also part
of the other scholarships.
After an excellent year 2004, when the Romanian scholarship on a general leve l
experienced a doubling of the courses, the trend continued in January 2005, as did the other
markets.
The Bucharest Stock Exchange made positive developments by diversifyi ng the
financial instruments traded, by operating types, by attracting issue rs with medium and long-
term development potential, by creating a flexible organizational s tructure including several
segments and market types, by perfecting the trading system so that it becomes com patible
with that of the developed scholarships and providing foreign investors with t rading
conditions similar to those in other markets. The evolution of the stock marke t is
characterized by the stock market capitalization.
The main purpose of the stock exchanges is to mobilize capital in an e conomy and
to distribute capital to the most profitable areas. It can be said that the stock exchange is the
best place to look for information, whatever the origin of the information is ,
macroeconomic, from the national level or referring to the issuers. Base d on all this
information available in the market, various analyzes are made to ant icipate the future
evolution of the economy and, in particular, the stock market. The stock exc hange is the
most suitable place for the formation of financial crises and specula tive features, the
consequences which can be reflected in the real economy and which can have a significant
impact on the global economy as a whole.
In June 2019, trading in shares on the Bucharest Stock Exchange started quite
cautiously. Only 7.6 million euros were converted on in one single day with s hares. The
interest in Romanian shares are supported mainly by the shares of the oil company OMV
and Petrom, which accounted for half percent of daily turnover. On a weekly not e, the run
for the shares expected well. They are trading just below the all-tim e high of 0.388 lei per
share. On a weekly basis, 50.58 million euros were traded in just four days, down just 6.3
percent from the 5-day week earlier. The Banca Transilvania dropped to four th place,
accounting for only 10 percent of weekly sales. These equities were also up 3.3 percent.
The main indices on the stock exchange all performed well. The avera ge was 2.26
percent, above that the market index BET with its plus of 2.8 percent. As no negative events
of trading in June affect ed the stock market, this should be one of the best months of the
year. The indices are already 6 percent above the May level on average.
The Romanian leu was able to hold its own against the euro and, above all, the US
dollar in June. The European common currency made a sideways movement aga inst the
Leu. Although the euro became more expensive, inflation was only 0.0005 lei or 0.01
percent, which is hardly significant. The US dollar developed differently. H e lost 0.01 lei to
the Leu.
The Bucharest Stock Exchange closed 2017 with price losses. Major issuers
contributed with their heavy losses: Banca Transilvania recorded a fal l of minus 1.87
percent, Digi lost two percent and OMV Petrom 0.71 percent. On a weekly basis, Digi was
able to turn into positive territory, the other listed issuers closed with losses.
Nevertheless, last weeks of 2017 were not bad for all issuers. Surprisingl y, the major
shareholder of Zentiva, Sanofi, announced that they wanted to buy the some remai ning
shares in the market. Among the 18 issuers with gains, the armature manufac turer Armătura
rose 25.27 percent and the newcomer Sphera Franchise Group gained 15.7 percent out. This
contrasted with 54 issuers, which had to accept losses. The hardest hit was the engineering
firm Uztel which lost 28 percent.
Two news hit the brokerage market last week. Surprisingly enough, Intercapit al
Invest withdrew from the market in the middle of the year, and Raiffeis en bank's investment

22
division Raiffeisen Capital & Investment has decided not to invest in investment services
for private investors. Services for premium and private banking will conti nue to be offered
and the investment funds managed by Raiffeisen Asset Management will also be
maintained. This is the third exit of a broker from the Romanian stock market following the
withdrawal of SSIF Romintrade in July 2017. Raiffeisen is the third largest broker in
Romania. No less surprising was the announcement that ING Bank will soon re-enter as a
broker. The Romanian subsidiary of the Dutch bank had withdrawn in 2012 from the
Romanian stock market. With an average daily turnover of less than 10 mill ion euros, the
business is hardly worth it for many brokers. Out of more than 70 brokers before the
economic and financial crisis of 2008, only fewer than 40 brokers remain.
BET is the first index developed by BVB and is the benchmark of the loc al capital
market. BET reflects the evolution of the most traded 13 companies on the BVB Regula ted
Market, excluding financial investment companies (SIFs). It is a weighted price ind ex with
the capitalization of the free float. The main selection criterion for com panies in the index
is liquidity. Starting with 2015, criteria for transparency of issuers and t he quality of their
reporting and communication with investors are also applied.
The Bucharest Stock Exchange closed in 2015 and 2018 stock exchange years with
a price loss. This amounted to almost 5 percent for 2018, with the main index Romania
Stock Market (BET) moving between extremes. For example, for the first tim e in ten years,
it passed the 9000-point mark and also saw the biggest drop in prices si nce 2011. For a time,
the Bucharest stock market outperformed the stock exchanges in the region, but a new
governmental order, including new ones Bank and energy taxes provided, brought the
market shortly before the winter holidays to collapse. As a result of this decree, BVB (Bursa
de Valor i București or The Bucharest Stock Exchange) experienced the largest drop in value
in the last two years.
BET index component shares are owned by:
 SC Fondul Proprietatea SA – București ;
 OMV Petrom S.A.;
 Banca Transilvania S.A.;
 S.N.G.N. Romgaz S.A.;
 BRD – Groupe Societe Generale S.A;
 Electrica S.A.;
 S.N.T.G.N. Transgaz S.A.;
 C.N.T.E.E. Transelectrica;
 S.N. Nuclearelectrica S.A.;
 SC Bursa de Valori București SA ;
 S.C. MedLife S.A.;
 Digi Communications N.V.;
 S.C. CONPET S.A.
At EU level, only five countries had main censuses in late Novembe r 2018. In
addition, Romania is the only market that recorded a two-digit advanc e. The Romanian
capital market has managed to keep away from the international turmoil that has affected
most of Europe's capital markets. Romania recorded the highest growth in the European
Union, and this is not a coincidence because most listed companies reported good financial
results and consistent dividends have generated an increase in the B ET-TR index by 21%
since the beginning of the year.
The BET-TR, which includes dividends from BET companies, advanced 21.2
percent. At the same time, the average daily value of stock transac tions exceeded EUR 8.8
million at the end of 2018, when investors traded shares of EUR 2 billion.

23
The stock market capitalization of Romanian companies exceeded 21 b illion euros.
At the same time, the capitalization of all listed companies on the regulated m arket of BSE
was over 36 billion euros, at the last trading session of November.
On 29 December 2018 an official document was released. It provides informa tion
for a taxation of banks on the basis of their assets, but also an increase i n the capital
requirements for pension fund managers and new taxes in the energy, telecommunications,
tobacco and gambling industries. The latter should be inflationary. Industry a nd finance
officials of all stripes expressed strong doubts and concerns about the uncertai nties
surrounding the implementation of this urgent feature.
Especially hard hit the stock market banks. Erste Group Bank lost 12 per cent at the
end of last year. Worse still were the Romanian-registered banks of Germa ny and
Transilvania Bank, both of which lost more than 23 percent in value e ach. The exact impact
of the episode on listed companies is not yet known because it is uncert ain how the economy
will develop in 2019, how high the lending will be and what external fact ors will play a role,
according to financial experts. A recession this year cannot be ruled out. In any case, the
Romanian capital market has suffered a sharp loss of image, as instituti onal investors in
particular have been painfully aware of how uncertain this market is.
Exposure to strong macroeconomic performance is provided by the country's fastest –
growing bank, Banca Transilvania, which also has the strongest balanc e among Romanian
banks.

Figure. 2.0 – Stock market evolution of Transilvania Bank – Closing price

Source: Data processing from www.bvb.ro

24
Figure. 2.1. – Stock market evolution of Transilvania Bank – Closing price

Source: Data processing from www.bvb.ro

Nevertheless, the stock market started the new year nicely. Afte r the first day of
trading, eight of the nine indexes were on the rise, with the main index BET gaining 1.18
percent. Only the financials index BET-FI lost its share on the first trading day of the new
year. On the second day of trading, the market consolidated its gains, BET added another
2.6% and climbed well above 7500 points. Above all, the energy index was able to catch up
thanks to an increase of 3.56 percent.
Market capitalization also recovered, having lost 16.7 percent in the las t full trading
week of 2018. Of previously 136.8 billion Lei, the value of all traded shares climbed back
to last Friday of the year on 150.11 billion Lei, which corresponds to a weekl y increase of
9.7 percent.
Of the shares, the Bermas brewery, the former chemical giant Oltchi m and the hotel
operator SIF Hoteluri, with daily gains of more than 14 percent each. The day before, the
textile company Conted scored a plus of 21 percent. The losses of other issue rs were limited.
For the Romanian leu, 2018 was a year of high pressure from both of the key
currencies, the US dollar and the euro. At times, the Romanian national currency could
prevail against both a little, but had to give in. Not infrequently, the Leu passed historic
highs against both the euro and the US dollar. The Leu felt pressure main ly from politics,
which brought a high degree of uncertainty. However, the Leu has largel y spared major
fluctuations, as seen on the stock market, as far as possible. Here, the central bank BNR has
ensured calm. So it happens that the euro at the beginning of January 2019 cos ts only 0.6
percent more than a year ago. The US dollar, on the other hand, achieved a leverage gain of
6.3 percent compared to the first trading.

25
The existence of the stock exchange indirectly assures the exis tence and
development of the primary market and useful information for the issuer and inv estors i n
the primary financial market.
The statement that the scholarship is a public market aims to diffe rentiate between
markets that may arise as a result of direct negotiations, betwee n individuals holding
securities or between banks and big investors.
From these it can be concluded that stock exchanges are specific markets ,
mechanisms of concentration of supply and demand for certain categories of com modities
or values, in order to carry out transactions in an organized and operative fra mework, in
conditions of free competition.

2.2. The capital market in Romania – one step closer to becoming
an emerging market.

An emerging market is a state that is traditionally still c onsidered a developing
country, but no longer has its typical characteristics. Therefore, such a country is
conceptually separated from developing countries. There is no complete definition for the
concept of emerging market. Since the 1970s, there have been many attempts to define
emerging countries conceptually. Depending on the cognitive interest, the degree of
industrialization, socioeconomic development, global economic integration or geopolitical
importance, the emerging market concept was delimitated. The result ing emerging market
lists vary in length and contain some surprising associations in the ex-post analy sis. A look
back at the emerging market discourses of recent decades makes it clear that it is
indispensable for economics to pursue the concept of emerging markets.
There is no binding list of emerging economies. It can be discussed th at Argentina,
Brazil, Chile, Mexico, Trinidad & Tobago, Uruguay, China, India, Malaysia, T hailand,
Mauritius, and South Africa, which are now considered to be newly industrial izing
countries, could be found mostly in the beginning or in the middle of the ninetie s labelled
as emerging countries. In 1999, a forum of finance ministers and central bank governors of
the world's major industrial and emerging economies took place. Its goal wa s an informal
dialogue on issues of international economic and monetary policy. Its m embers were: the
G8 (Germany, France, Great Britain, Italy, Japan, Canada, the USA and Russia), Aust ralia,
as well as Argentina, Brazil, China, India, Indonesia, South Korea, Mexico, S audi Arabia,
South Africa and Turkey.
In the 1980s, the OECD, World Bank, IMF and UNCTAD created lists of emerging
economies. Brazil, Mexico, Hong Kong, Singapore, South Korea, Taiwan were lis ted. The
countries Greece, Spain, Portugal, Poland, Romania, Hungary, Turkey, Israel, Mexic o, India
were only represented on some of the lists.
In recent times, besides the emerging market concept, the conce pt of "embryonic
market" or "pioneering market" has emerged, designating an economy in which the process
of transition to free market forms has not fully triggered and irreversible, the levels at which
it is assumed that there will be rises even lower than those of eme rging markets. Under the
conditions of significant capital flows flowing to emerging countries, aggre ssive investors
are looking for new investment destinations, which are often obscure and wi th an
underdeveloped degree. If at one point it was enough to invest the capital in the most
promising titles of an emerging market, massive capital inflows that flooded these weakly
liquid markets, leading very rapidly to a generalized increase in quot ations have now ceased
this trend. In the last period it became increasingly difficult to obtain positive returns without

26
assuming higher correlated risks. Therefore, investments tend to be i ncreasingly pronounced
risk, often setting as economies that are not considered as reasonable i nvestment
destinations for various reasons such as lack of transparency relative to financial reporting,
low liquidity in the market, political regimes that can take an adv erse position when
discussing investors, and so on. Under such circumstances, the capital inv ested raises risks
that are not directly related to the viability of the invested companies.
By making a distinction between the concepts of "emerging market" and "embryo
market", are listed the main features that lead to the discovery of these special markets.
Further emphasizing the arguments that recommend investment in emerging markets as well
as the preconceived ideas that often accompany them, the evolution of these markets is
analyzed and in terms of capital flows is viewed both as a means of a nticipating ne w
investment destinations and as a macroeconomic lever in hand local g overnment. These are
features that make attractiveness of a stock market developing t he aspect of the offer of
financial securities (shares) through the initial public offerings on the oc casion of the
privatization of the big state-owned companies.
Brazil, Russia, India, China are considered to be well established emerging
economies. Poland, the Czech Republic, Slovakia, Slovenia, Hungary, Latvi a, Lithuania,
Estonia, Chile, Mexico, Indonesia, Malaysia, Philippines, Thailand are we ll-established
emerging economies with slighter less potential. Romania, Bulgaria, Croatia, Serbia,
Turkey, Peru, Colombia are emerging economies with potential. Montenegro, Sri Lanka,
Vietnam, Bangladesh, Egypt, Morocco, Tunisia, Ghana, Zambia, Kenya, Jordan, Qa tar,
Kuwait are high-potential emerging countries while, Mongolia, Angola, Azerbaijan, Laos,
Cambodia are pioneering developing countries. The developing countries with an unclear
turnaround status are Cuba, North Korea and Myanmar.

Tabel 1 – Emerging markets of the world

Well established emerging economies Brazil, Russia, India, China
Well-established emerging economies with
slighter less potential Poland, the Czech Republic, Slovakia,
Slovenia, Hungary, Latvia, Lithuania,
Estonia, Chile, Mexico, Indonesia,
Malaysia, Philippines, Thailand
Emerging economies with potential Romania, Bulgaria, Croatia, Serbia,
Turkey, Peru, Colombia
High-potential emerging countries Montenegro, Sri Lanka, Vietnam,
Bangladesh, Egypt, Morocco, Tunisia,
Ghana, Zambia, Kenya, Jordan, Qatar,
Kuwait
Pioneering developing countries Mongolia, Angola, Azerbaijan, Laos,
Cambodia
Developing countries with an unclear
turnaround status Cuba, North Korea, Myanmar

Source: D ata processing from www.data.europa.eu

Since it is not clear from the various listings, when a developing c ountry has become
a newly industrialized or newly industrializing country, and the definition of an emerging
market is not uniform, the World Bank is referencing a classification of the individual
countries of the world. The years of the change of the respective category are marked by the
World Bank.

27
Many of these emerging countries suffered painful falls within this pha se of
adaptation to the new rules of the game. But so many began to reform their economies,
privatize large state-owned companies or move to the International M onetary Fund to
restructure debt service. This has led to the situation where almost every country in the
world has a market-oriented economy and is involved in the capital competition. If we are
to get a global picture of these emerging markets, we will notice that they account for 70%
of the surface area and 85% of the world's population, their consumer market being by far
the highest while their gross domestic product is only 20 % of the gross global product.
An emerging market is at the beginning or in an advanced process of
industrialization measured by economic development indicators. At this st age, a newly
industrialized country is characterized by a far-reaching restructuring of i ts economic
structures, leading from agriculture to industrialization. Emerging countries are usually
characterized by a strong contrast between rich and poor. Differences betw een conservative
forces and parties seeking to modernize often lead to tensions. Emerging countri es are those
whose economies are in a rapid growth process, respectively in the tra nsition to a market
economy. They have a greater capacity than developed countries to give investors
opportunities to make more profits.
An emerging market generally has the following economic successes:
 Above-average growth rates are achieved, which in some cases exc eed the growth
rates of the Organization for Economic Cooperation and Development (OECD)
countries.
 At least in some segments, countries are developing the depth of the manufacturing
industry, up to the production of capital goods, and by means of targeted investm ents
in physical and social infrastructure, especially in human capital educ ation, they are
setting the stage for development leaps.
 There is a comparable labor productivity with the OECD countries but wit h
significantly lower wage levels.
 Emerging countries rely on the export of finished goods, but often also of raw
materials. Depending on the definition, some predominantly oil-exporting countries
such as Saudi Arabia are also counted among the emerging markets.
 The average per capita income is growing strongly. A broad middle cl ass is forming.
In most cases, emerging markets overcome the established countries ' performance,
although no growth tendency is constantly evolving without corrective per iods, with the
indication that they are usually exceeded over a relatively short peri od of time, putting the
basis of new appreciations;
As a rule, the correlations of emerging markets with developed market s are low,
indicating that the movements in these markets are not directly related to t he movements in
developed markets. Although this is a rare case, this correlation coeffici ent may be negative,
which means that the direction recorded in a market has a reverse di rection. Thus, as
emerging markets are growing by their own development, introducing titles from these
markets in international portfolios is an effective way to reduce t he risk of this portfolio, but
also to increase its profitability. A study showed that portfolio of 20% of capit al invested in
emerging markets managed to achieve a yearly profitability 2.1% higher than a portfolio
made up exclusively of shares listed on mature markets, where the risk of the first portfol io
was lower.
Due to the strong correlation between the growth process and the profitabilit y of the
stock market, strong growth rates and robust fundamentals justify optimistic expectations
of a good evolution of quotes in emerging markets over a 5-10 year period.

28
Investment funds are continuously increasing their participation in emerg ing
markets, accounting for about one quarter of public or private pension funds worldwide
intending to increase the share of investment in emerging markets.
The vast majority of financial institutions invest in the shares of the largest
companies in emerging markets, a large number of high growth potential comp anies being
excluded as investment destinations simply because they are not big enough to attract the
attention of these investors. Without their interest, these small com panies are often
underestimated, creating good buying opportunities for more aggressive investors.
Accessibility of emerging market shares is growing as these mark ets are increasingly
open to investors through tight regulation of transaction security or the attra ctiveness of
markets. Often, some investment experiments lead to the formation of a s eries of
preconceived ideas about quoted financial stocks in emerging markets. Thus, many
investors believe that investment in emerging markets is ris ky due in particular to a high
degree of uncertainty.
Due to the massive speculative capital flows, stock market s hares in the emerging
markets tend to reach very high levels, thus inducing an excessive ov ervaluation. This is
only partially true, as apparently high levels of valuation are justifi ed in some cases by
higher growth rates registered by issuers, as well as structural cuts in the inte rest rate in the
economy.
It is very important to analyze the nature of these capital flows as well as their
destination. This is because large capital volumes may be moving to an emerging reg ion or
country due to temporary circumstances such as interest rate hike, and not structural
improvements in the economy of that country. As to the destination of these capital, it is
also essential how they are used, whether they are used to pay debt s, to finance real economy
investments, to import consumer goods, and so on. It is essential that government authorities
take steps to ensure that these capital flows finance medium to long -term investments to
stimulate output and do not lead to an artificial appreciation of the local currency or the
spread of inflation.
As a large influx of capital can lead to a stronger appreciation of the m arket, also the
outflow of funds on this market may cause massive stock price declines. As a rule, strategic
flows can be anticipated if macroeconomic factors are taken into account, such as
unsatisfactory economic and fiscal policies or reforms, significant changes in both
directions, as well as external debt restructuring, major changes in the real interest rate level,
legislative instability in especially with regard to property in the case of non-residents, and
so on. With a view to achieving optimal conditions for attracting forei gn investors, the stock
exchanges of emerging countries must pursue the fulfillment of several cri teria, criteria that
can be structured as follows:
 Clearly defining the financial system, its basic structure by highlig hting the role of
banks, brokerage, depository and settlement companies and the qualifications of
authorized agents to provide these services.
 Essential for the success of a stock market is gaining investor c onfidence, trust that
is achieved by ensuring fair trading procedures, and high transparency in term s of
the economic and financial situation of each issuer. As a rule, these g oals are
achieved with the establishment of a Securities Commission supported b y an
appropriate legislative framework.
 As accounting principles and reporting formats differ from one region to another, it
is necessary to standardize them in such a way that the financial statements allow
for uniform information for investors without the need to perform complex balance
conversions. It is also likely that financial statements are usuall y presented in the
form in which major investors present in a market at a given moment demand it.

29

 A very strict legal environment to ensure compliance with contrac ts between
economic agents, as any reversion to an important contract can brutally affect the
profitability of investments based on information based on the evolution of such
contracts. In this respect, it is necessary to add an effective banking legislative
package as well as operability in the judicial mechanism.
 Considering that taxation is an unpleasant aspect for investors, it is advisable to use
those tax combinations to stimulate capital investment by abandoning usual national
practices that aim at excessive taxation of non-residents willing to condu ct business
locally.
 Very important for an emerging country stock market is the offer of financ ial
securities or derivatives that allow for the normal absorption of the capita l for the
investments. In this direction it is recommended to carry out a large process of new
listing on the stock exchange, especially of the large state-owned companies, whic h
through their size, stability and strategic importance contribute to the accelerated
maturing of the stock market.
The privatization of strategic state-owned companies represents a pole of intere st in
the capital market for both investors willing to invest in the shares of companies with huge
market shares generating huge revenues, as well as for the intermedia ries initial public bids,
interested in the substantial commissions resulting from such operations. History emerg ing
markets shows that, as a rule, after the completion of a public offering orig inal for such
companies, the price has tended to increase over the average marke t short term because
these markets stock only few of societies of large capitalization that would absorb
significant capital. In addition, such strategic companies become al most mandatory
components of portfolios of specialized financial institutions, and for investment funds t hat
have a passive strategy, the acquisition of such securities is esse ntial because they will have
to replicate stock market indices, which will contain them and these strategic companies.
An additional factor that leads to appreciation of the quotation of the newly lis ted company
may also be the fact that the process of privatization is aimed at transforming giants into
dynamic and flexible companies by establishing an efficient manag ement which will be
recognized on the market as prestigious. Local investors will inves t primarily in well-known
companies, which, through their history and strategic importance, firstly provide the safet y
of obtaining constant financial results over time.
When it comes to the formation of a portfolio of financial assets, the cl assic selection
rules are maintained in the case of emerging markets, stating that certain a mendments need
to be made to the criteria set on mature stock markets. Thus, it should be noted that emerging
markets are less efficient in terms of information or at least peri ods of information efficiency
alternate with those exhibiting autocorrelation or dependencies and oft en hide unconscious
opportunities due to insufficient transparency regarding the issuer's financial statements.
Therefore, research to detect significant valuing among listed compani es may lead to results
that justify the effort made. Subsequently, volatility of securities is higher in emerging
markets, which can be viewed in two angles, one that is pessimistic , highlighting a high risk,
and another optimistic, which sees in this volatility as the possibility of generating more buy
or sell signals.
In the case of Romania, the profitability offered has continuously increase d from
28% in 1997-2000 to 24% and 53% respectively between 2002 and 2004. In this last period,
Romania provided the highest profitability of all countries included in the st udy. Of course,
the profitability level can be redefined when considering the influence of infl ation on the
rise in quotations.

30
Starting from the classic criteria for selecting the securities t o be included in the
portfolio and not adapting them to the emerging markets' own realities, i t is possible to
create a series of errors that can affect an investor both in terms of profitability through the
amount of research effort made to achieve this effect. In this respect it is known that
specialists should not filter emerging listed companies according to all the classic criteria
(Price / Sales, Price / Cash-flow, and so on), but to choose the one that best describes
performance and value, both in the local sense.
Another common mistake is the issue of liquidity, which tends to be minim ized by
inappropriate misappropriation of principles according to which liquidity is crea ted through
the action of each investor. This is true, but usually there is a ne ed for active action on the
market of a larger number of actors, which may not always be the case. E ven if the best
titles are selected, this does not automatically imply the formati on of an optimal portfolio
because an excessive concentration of titles in a particular sector of t he economy or even on
a single market can lead to the missing essential goal of training portfolios, risk miti gation.
Analysts who face the task of evaluating the shares of listed compani es in an emerging
market are often struck by the lack of a history of the economic and fina ncial characteristics
of the companies. Automatically, there is a shift away from fundamental analysis to ols and
an approach to graphical analysis techniques that, due to often unsatisfa ctory liquidity, can
ultimately inhibit, through repeated failures, bending to sound market analysis tools, leaving
the analyst or the investor in doubt, or making decisions based on instincts , intuition, or
rumor.
There are a number of financial analysts studying the dynamics of g lobal capital
flows to trace your favorite investment target at one point. It is ve ry true that when there is
a significant capital inflow to a certain region, it is expected that the profitability of the
region's markets will increase as a result of the increase in demand for securities. Thus , the
financial strength of investors can easily replace the argument of issue rs' profits, making
money the main factor in sustaining an upward trend.
Sometimes emerging markets refer to a whole economy or even the whole of the
economies of all emerging economies. Characteristics of the emerging markets, however,
are the high growth dynamics due to catching up industrialization and /or hi gh raw material
exports, high returns and high investments. This investment boom and the catchi ng-up
industrialization of the emerging markets dampened the consequences of the fi nancial crisis
for the real economy in the USA and Europe in the crisis of 2008. In 2014 it bec ame apparent
that this dynamic has its limits and, above all, that China no longer serves as a l eader of the
global economy in the long run.
It is possible that the most important aspect related to the evol ution of world stock
markets is that of innovations and financial engineering. However, part of the guilt of the
financial crisis lies with financial innovations. These have been c reated and developed by
investors or financial institutions to meet the most diverse needs rega rding risk minimizing .
In connection with the emergence of markets in emerging countries, fina ncial innovation
has created new tools for investors so that the investment process ca n achieve the transfer
of risk between different market participants.
In the emerging countries check, a selected country is examined using various
macroeconomic indicators. These indicators are grouped into the following four bl ocks:
Economic Situation, Growth Financing, Growth Resources and Economic Relations.
The indicators are used to analyze how well the country performs within the peer
group. The peer group includes Brazil, China, India, Indonesia, Mexico, Russia, South
Africa and Turkey. For classification within the country group, the quantile rank is used.
The capital market in Romania includes the financial instruments mark ets and their
specific institutions (financial services companies, and so on), operati ons (financial

31
investment services, public offers), as well as collective investm ent institutions ( investment
funds), establishing an appropriate framework for regulating and supervising inves tments
in financial instruments. The capital market is divided in the primar y and secondary markets.
The primary market is that segment of the capital market where new issues of financial
instruments are made available to investors. Companies, government or public sector
institutions can get financing by selling new financial instruments. T he secondary market is
the market where the already issued financial instruments are traded.
Since joining the European Union in 2007 and until 2013, Romania has had
European funds of around 20 billion euros available. It made it difficult to spend a little
more than half of that. Thus, the country has an absorption rate of 55%, one of the l owest at
Union level. Between 1 January 2007 and 31 December 2018, Romania received € 50.13
billion of non- reimbursable EU funding and contributed € 17 billion to the EU budget.
According to data centralized at the Romanian Ministry of Finance, the c ountry has an
increase of 33.17 billion euros, the positive balance in the relationship wi th the European
Union in 12 years of belonging to the community bloc.
The absorbed money includes post-accession European funds, from the
programming periods 2007-2013 and 2014-2020, as well as fossils allocated during the pre-
accession period but which were transferred by the European Commission afte r Romania
joined the EU.
Problems arise from Structural and Investment European Funds (FESI), that i s, the
money that the country receives for investment projects, from roads and motorwa ys to re-
training courses for the unemployed or small private businesses. This mon ey is absorbed by
Romania through 8 national programs managed by managing authorities subordinate d to 3
ministries: the Ministry of Agriculture, the Ministry of European Funds a nd the Ministry of
Regional Development.
In the 2014-2020 programming period, Romania has allocated FESI of 30.88 billion
euros, of which it actually received 7.9 billion euros, meaning an absorption rat e of 25.56%
below the EU average of 27% according to the situation centralized by t he Ministry of
European Funds.
The establishment and development of a capital market in our country a re
indissolubly linked to the privatization process of state-owned enterprises in various fields
of activity: industry, agriculture, commerce, tourism, public catering, and s o on. At the same
time, the emergence of new private equity firms, with or without foreign pa rticipation, is
conducive to accelerating the process of creating a genuine capital m arket and, as a direct
consequence, of the stock exchange.
The activity of promoting an investment policy by attracting foreign c apital is one
of the important ways to create the private property sector and to shorten the period of
transition to the market economy.
Many international investors are aware that they cannot get the sa me profits by
investing in mature markets as in investment in emerging deve loping countries. They want
higher returns, of course, assuming additional risks such as volatility, liquidity or exchange
rate risks, which are significantly higher than in developed markets.
Emerging economies have massive natural reserves both in terms of v olume and
diversity, competitiveness is more visible in the industrial and ag ricultural sectors, and
consumer markets are robust. Factories with factors of production in abundance or the
preponderance of different sectors in the national economy is a mandatory feature.
The share of manufacturing is slowly declining, but Romania's economy is
becoming more service and innovation-oriented. In the last 10 years, the num ber of patent
and trademark applications has increased by nearly 100%.

32
Romania supplies about 20% of its exports to Germany and receives about 20% of
its imports from there. This makes Germany by far Romania's most import ant trading
partner. From a German point of view, Romania is number five of the Eastern European
trading partners, behind Poland, the Czech Republic, Hungary and Slovakia.
The investment climate of Romania is an attractive investme nt location for
companies due to its EU membership, balanced economic structure, high level of expertise
in industrial production and low labor costs. The large domestic market wi th 20 million
inhabitants also makes Romania an interesting export destination. Industri al tradition is
paired up with a competitive service sector, especially in the I T sector. The biggest
impediments to investment are the lack of transport infrastructure and inef ficient
administrative structures.
The equipment, especially roads, but also railways is no longer compet itive and is
far behind the usual patterns for the Eastern European countries standard. The Romani an
government has recognized the problem and massive investments are planned. The s uccess
is depending on Romania's ability to improve the absorption of EU funds.
The road and rail network expansion was neglected. Measured by all governm ent
expenditure in Romania, those for transport infrastructure are still not particular ly low,
accounting for around 10 % as of 2013. Although expansion has been stagnating for years
in both Romania and the rest of EU-Eastern Europe, it has been at a much lower level in
Romania. Not surprisingly, the Romanian transport infrastructure receives ve ry poor ratings
both in the context of the Global Competitiveness Index and in company surveys.
The problem is known, now the solution has to be tackled. EU members wishing to
use EU Structural Funds to improve their infrastructure must have a Genera l Transport
Master Plan (GTMP), which summarizes strategic transport infrastructure development by
2030. Romania also presented a GTMP in 2014, which identifies a total investm ent
requirement of around EUR 45 billion. Of this amount, around EUR 25 billion is s pent on
the road sector and EUR 14 billion on the rail sector. The plan prefers the expressway over
the highway. In the railway sector, no new buildings are planned, but only refurbi shment
and electrification projects. However, the financing of this investment needs has not yet
been definitively secured. In the 2014-2020 EU financial framework, Romania will receive
about € 30 billion from Structural Funds, of which some € 6 billion will go to the
infrastructure as a whole. In addition to the ability to raise the remai nder of the investment
itself, implementation will be groundbreaking in how far Romania succeeds in i mproving
the absorption of EU funds.
According to an IMF estimate, GDP growth would be half a percentage point higher
in the medium term if the available EU funds were fully utilized. I n other words, if Romania
improves its absorption rate and solves its traffic infrastructure problem, the location will
gain significantly in terms of quality and growth in thrust. Romania receives attenti on with
a diversified economic structure and well-trained specialists. Romani a is a traditional
industrial location. In the manufacturing industry including Construction, the me chanical
and plant engineering, the automotive industry, the textile industry, the c hemical industry
and the oil production dominate. This development goes hand in hand with very we ll trained
specialists.
Together with the low wage levels and increased by the EU membe rship, legal
certainty arise very good investment opportunities. Romania, the larg est economy in
Southeastern Europe with a single market of 20 million inhabitants, is an attractive
destination for exporters. Beyond the industrial base, Romania has developed into a
structure of modern economy with a high proportion of. The service sector, including
services as the IT industry, is slowly turning into an innovation-base d growth driver. IBM ,
SAP or Ubisoft are international IT companies in Romania. Expressing the fundamentally

33
good entrepreneurial perspectives, compared to the Emerging Europe region, rea l GDP
growth is slightly above average in the past years.
In the infrastructural area, the inadequate transport infrastructure is by far t he largest
location problem. There is also a lot of catching up to do in the field of wastewater and
environment waste. The telecommunication, but also the energy infrastructure mostly
reache modern standards. The partial lack in the infrastructure sector is pa rt of a general
weakness in investment in Romania, which developed after the financ ial and economic
crisis of 2008. Another major challenge is to improve the efficiency of public administration
and, in this context, the fight against corruption. The National Anti-Corruption A uthority
has succeeded in significantly reducing corruption. In turn, higher administrati ve efficiency
creates the conditions for better use of EU funds. The absorption rate of EU funds is one of
the lowest in the EU and represents one reason why investment growth has been weak for a
long time.
Romania has been suffering from a pronounced investment weakness since the
financial and economic crisis. Although investments have picked up ove r the last years, the
accumulated investment gap has not yet been closed. The overall econo mic investment rate
is currently significantly lower than in 2009/2010 at the end of the financial and economic
crisis. It has stabilized at this level as a result of the increased invest ment over the past two
years. Part of the explanation for this investment development is natural ly in the area of
public finances: the government spending ratio is on a downward trend after 2010, a result
of the noticeable consolidation of the state budget in recent years.
At the beginning of 2014, the Bucharest Stock Exchange, with the support of
stakeholders in the capital market and authorities, initiated an ambiti ous reform aimed at
improving the capital market rating by global index providers, from the Border M arket
status to the Emerging Market. It was considered a natural way for a c ountry classified at
the level of "Investment grade", such as Romania, to be able to bene fit from an effective
leverage for economic growth provided by an "Investment grade" of the domest ic capital
market. Important steps have been taken in this direction, including: new and improved
market mechanisms, easy access to the market for investors, favorable fiscal environment
for institutional investors, transparent and qualitative corporate reporting by issuers,
availability of information on the capital market and English legisla tion, a competitive
trading framework, improved corporate governance for listed companies and bond issues.
Romania's capital market development projects will continue as a resul t of a
permanent dialogue with Romanian and foreign investors, BSE supports. Efforts to improve
tax regulation on giving foreign investors access to the leverage mechanism of financial
instruments and stimulating individual investors to invest lightly in listed instruments,
assessing the best Central Counterparty for the Internal Market with a vi ew to launching the
derivatives market, the attraction of private IPOs and the expansion of fi nancial education
programs are the main projects that the Bucharest Stock Exchange is curre ntly focusing on.
In the context of a constantly changing world economy due to permanent
innovations, especially in the field of financial investments, stock e xchanges have the role
of providing the premises for financial stability. This stability can be built as long as the
stock exchange offers credibility to the participants. Generally seen, cre dibility is a very
simple phrase, but in order for it to be associated with the stock market, a number of
conditions must be met, respected by a multitude of rules and regulations , and more than
anything, every actor in the stock market must show a special mora lity. Only in these
circumstances will the stock exchange offer credibility to the parti cipants. Derived from this
is the market players' confidence in the stock market, and this is bes t seen in the trading
volumes of each stock exchange.

34
Romania may be the fastest growing economy in Europe. There are severa l factors
currently making the country especially attractive for investors. One of the biggest success
stories in the frontier market universe is in Europe.
The causes of success are many. Together with Bulgaria, Romania is st ill one of the
poorest countries in the EU. The primary cause of the strong performance is the many
reforms that have taken place since joining the EU in 2007. Without a solid macroeconomic
background, the loose budgetary exchange rate would hardly be possible without
jeopardizing the stability of the currency.
Rigorous anti-corruption, flexible but strong currency, relatively well-developed
infrastructure as Internet speed is the highest in Eu rope, a strong mathematics and science-
focused education system, and low costs attract international companie s looking for
outsourcing destinations are all features of Romania. According to the European Digital
City Index, about 170 start-up companies are now based in Bucharest.

Figure 3.0. – Average Internet Connection Speeds in Selected Emerging Markets

Source: Data processing from www.akamai.com

At the end of 2015, the emerging markets were 24.2 percent below their annual
highs. At -24.4 percent, its decline was almost identical at the end of 2018. The
industrialized nations suffered less during those years. These asymmetric a nd exaggerated
reactions pushed relative emerging market valuations to levels clos e to those of earlier
severe crises. However, considering the evolution of fundamentals, current val uations
appear increasingly attractive. This is particularly the case i n the technology sector, where
valuations are even lower today than they were on average in the three largest emerging
market crises (1997/98, 2001/02 and 2008/09).

35
After numerous state-owned enterprises have been privatized in recent yea rs, an
active capital market has formed. Several companies have billions in market ca pitalization.
Now, representatives of the Romanian capital market worked hand in hand with g overnment
officials to upgrade the country.
In addition to improving corporate governance, reducing the tax on dividend income
represents an accelerating point. The goal was to emerge from the lea gue of frontier markets
into the emerging markets universe within a few years.
Another highlight, which is almost an anomaly in today's world of negative interest
rates, is the high, sometimes double-digit dividend yields of the Romania n well-funded
energy sector.
The Sibiu Stock Exchange must be mentioned also. It was launched in 1997 as a
market on which derivative financial instruments are traded. It is curre ntly licensed and
operates both as spot and on-time regulated market and as an alternativ e trading system
operator. The activity of stock exchanges that began operating in 1997 is positive. It show s
that the Romanian capital market system is active but also ab le to receive retouches in the
sense that the volume of transactions needs to increase, market surv eillance must be
adequate and the capitalization in gross domestic product is slightly higher, as is the case in
other countries as are Hungary, the Czech Republic, Bulgaria, or especiall y Poland, which
assures a GDP capitalization of around 30%. Structured products on the capital mar ket are
also analyzed, with the result that there is a positive trend with growth tendencies in
subsequent periods.
In fixed income markets in Romania, yield increases during the first six months of
2018 were mainly driven by an upward adjustment in inflation estimates. The formation and
development of the capital market in Romania and the establishment of the stock excha nge
are the essential components of the process of restructuring the economic system in our
country and of creating the mechanisms and institutions specific to a ma rket economy .
Romania is still at an early stage of this process, showing a si gnificant gap between the
reform projects and some measures undertaken in the economic, financial, banki ng and
stock market, on the one hand, and the level of developed market econom ies on the one
hand other side.
The transition to an emerging market status would generate significa nt opportunities
for Romania in terms of capital appreciation, with passive index investors getting expos ure
to the Romanian market, and active investors recognizing the improved ma rket conditions
certified by MSCI classification, MSCI being a global provider of equity, fixed income,
hedge fund stock market indexes, and multi-asset portfolio analysis tools. Als o, gaining
emerging market status, companies' access to finance through the capi tal markets will be
improved, and the prices of Romanian assets, both listed and unlisted, could also be
improved. According to the MSCI methodology, there are both qualitative criter ia and
quantitative criteria to be met. The good news is that Romania alrea dy meets the qualitative
criteria at large and is very close to reaching the three key quantitative criteri a under which
MSCI is doing the classification.
The first criterion is the Company Size, which requires a capitalizati on of at least $
1.26 billion. The second is the Company's Free-Float (which represents the proporti on of
shares of a company held by public investors, as opposed to the shares hel d by promoters,
company directors, majority shareholders, or government), which must be the one at least
630 million USD. The third criterion is liquidity, the annualized value of t he traded value
(trading activity index of the company's shares), which must be at lea st 94.5 million USD
(15%). Thus, if these criteria are met by three listed companies, considera tion of emerging
market status may be considered. Banca Transilvania, Romgaz and Petrom already meet
these criteria, but there is a need for a fourth company to ensure the irrevers ibility of the

36
situation and the company that could make Romania's emerging market status is
Hidroelectrica. After listing Hidroelectrica, Romania should also meet t he irreversibility
criterion needed to move to the Emerging Market Border Market.
Romania was added to the monitoring list in September 2016. According to the
FTSE Russell report, in September 2018, the FTSE Russell Country Classificat ion Advisory
Committee approved the following changes to the rating criteria:
• "Liquidity – Sufficient market liquidity to support significant global investments"
– improved from "Not fulfilled" to "Restricted" as a result of improving market liquidity.
• "OTC Transactions Allowed" – updated from "Unfulfilled" to "Restricted".
The local capital market fulfills all the criteria necessary for promotion in the upper
category, with one exception – the liquidity criterion.
The Russell FTSE analysis marks the fulfillment by the Romanian cap ital market of
a new requirement to become an emerging market – the one for trading cos ts, which must
be competitive and reasonable.
Romania has met eight of the nine criteria required to promote FTSE -Secondary
Emerging. This announcement is a major success that puts us a step a way from being
included on the Watch List by the international assessment institution.
The only criterion that remains to be met, that of liquidity, involves the exis tence of
large enough transactions in the market to allow large international investments.
The state is still in the best position to help, and the wise and natural decision would
be Hidroelectrica's listing as soon as possible so that the MSCI criteria are met. Without
State aid, it may take many years for the private sector to plac e the capital market in a
position worthy of a status promotion. Moreover, the State could take advantag e of local,
regional and global market conditions, which could support the successful listing of
Hidroelectrica. In conclusion, with support and will from the Government, a d ecisive step
towards joining this club can be done in a short time. The government has an extraordinary
opportunity to contribute to the review of the capital market status ten y ears after joining
the EU, demonstrating its strong commitment to listing Hidroelectri ca and other state-
owned companies. By doing so, the State will create a lasting leg acy, which will increase
the country's wealth for all Romanians, for many years now.
Globalization has increased prosperity in the developed world over the last two
decades. By contrast, emerging and developing countries benefited comparatively littl e. So
far, the convergence of the world has in no way led to the prosperity between i ndustrialized
countries such as Finland, Denmark or Japan.
In order for the emerging economies to catch up economically with the indus trialized
nations, the experts recommend promoting the integration of emerging econom ies into the
global economy more strongly. Developed countries should open their markets to products
from less developed countries, reduce their subsidies on agricultural products, financ e
necessary education, infrastructure and production facilities, including t he necessary
technologies.
For the year 2019, the International Monetary Fund (IMF) forecasts stable econom ic
growth of 4.7 percent in the emerging markets and a slowdown in growth from 2.4 percent
to 2.1 percent in the industrialized countries. Emerging markets are lik ely to outperform
even beyond 2019, and even more so. As a result, the gap between emerging-marke t
earnings growth and that in the US should also narrow in favor of emerging m arkets. In the
Emerging Markets, earnings growth of 10.5 percent is expected in 2019, compared wi th
only 7.5 percent in the USA.
In view of these fundamentals, the price reductions observed in emerging marke t
stocks in 2018 are not justified. Even if forecasts worsen, the current disc repancy between

37
the fundamental position and the current valuations is enough to outperform eme rging
markets.
The trade dispute between the US and China undoubtedly made a significant
contribution to the poor performance of the emerging markets in 2018. However, the rel ative
importance of developed countries to the emerging markets' trade balance is waning, as
more and more of their exports go to other emerging.
For Beijing, which is currently working on the debt reduction, the tariffs
undoubtedly came to a very unfavorable moment. However, the Chinese authorities have
already started to stimulate the economy with monetary and fiscal m easures, just as they did
at the end of 2015.
Media-driven turmoil in individual countries such as Turkey, Argentina and
Venezuela has fueled skepticism about emerging markets. However, thes e countries
represent only a small part of the extremely diverse investment univers e, so that there is
hardly any risk of wider contagion.
Last but not least, dollar strength played a not insignificant role i n 2018. However,
the factors responsible for the strong greenback, strong economic growth in t he US,
concomitant upward pressure on interest rates as well as capital rep atriations from abroad
due to regulatory changes, have now passed their zenith, so that a deva luation of the dollar
against the emerging market currencies this year is very likely.
Emerging market s and economies in transition from centralized to free market
liberalized markets are in a situation where refusal, whether justifi ed or not, is inappropriate,
reimbursement of loans, as a result of which they have to play according t o rules and
conditions investors and creditors. Emerging countries have suffered many painful moments
in the process of adapting to the new conditions of the "game" of the world e conomy and in
the process of globalization. In this way, emerging market countries would have to react i n
the only rational way they could do it, promote indigenous producers, penetrate f oreign
markets with high-quality products at a suitable price.

38

CONCLUSION

What is to be remembered from the crisis is that the bursting real estate bubble is
considered the trigger of the financial crisis and the global economic c risis. In response to
the recession, central banks reduced interest rates to a minimum. The l ow interest rates were
used by economically weak countries such as Greece, which led to a rene wed crisis. The
crisis culminated in the European debt crisis
The financial crisis still has negative effects for investors, sa vers and stock
marketsThe first signs of financial institution speeding should alert and increase the
authority to enforce the rules. If these initial measures fail to ma terialize and the institute
issues a hazard message at the next stage, special measures could automat ically be taken to
isolate the institution in the financial system, so that its failure does not lead to a total
breakdown.
The financial instruments market has expanded, including not only the financ ial
instruments that are traditionally traded on the stock market, but al so the money market-
specific instruments. The development of the international market, the financial market
crisis phenomena, the diversification of risks are all the reasons t hat have led to the
introduction of new financial instruments on the capital market of Romania, s uch as:
derivatives having stock indices, contracts for difference, binary options, structured
products, and more.
After the crisis, for the salvation of the financial sector, trillions of dollars were spent
worldwide. The Bank of England estimates that the actual cost of the crisis in terms of
damage to economies is several tens, if not hundreds of billions of dollars. The world can
not afford a second crisis of this magnitude. The financial system has to be reformed from
scratch. Early warning systems for threats affecting the whole syst em, such as the excessive
use of leverage or maturity mismatches, should trigger corrective ac tion in the form of
reduced speed limits. This can be achieved, for example, by higher ca pital requirements or
cash reserves.
Traders often credit successful trades to their own superior ability, while often
declaring bad trades in unfavorable market conditions. Self-confidence is strengthened
asymmetrically – profits are attributed to one's own ability, while losses are attributed to
factors beyond their control. This unfounded belief in one's abilities leads m any financial
market participants to take greater risks.
Over the last two decades, risk has become a growing part of the overa ll credit of
financial firms. An increasing internationalization of the financial sector and the widesprea d
use of tax havens by financial institutions to reduce their tax debt fo llowed. The combination
of non-transparent products, increasing use of off-balance sheet instruments a nd the growth
of subsidiaries in tax havens has reduced the transparency of the financial system. We have
a volatile financial system, whose instability has been enhanced b y recent changes such as
increasing complexity and non-transparency. We must always be aware of this vulnerability
to the financial system if we are to reform the financial markets. Society needs to restructure
its social contract with banks in a much stricter way. These include stricter regulation and
greater bank involvement in the cost of hedging.
The capital market as a regulated market is important for the co mplex evolution of
a free market economy. The National Bank and the Financial Supervisory Authority are two
important entities that ensure control in order for the capital market not t o break out of

39
stabilization, and when such prospects appear to act with precision to avoid some deviations
in the financial and non-financial market.
The Stock Exchange is an institution with legal personality, whose mai n purpose is
to trade securities continuously, transparently and equitably through appropriate systems,
mechanisms and procedures.
It is easy to see that the Romanian market offers conditions for an unint errupted
expansion of the capital market, namely the reserves of the Romanian trading companies on
the bond market, as well as the central and local public administrat ion authorities, as well
as the attraction of the investment companies in the capital market.
It can be said that emerging markets have brought more interest t o the financial
market from investors, and IMF forecasts will encourage trading on these m arkets as long
as growth is the main forecast for these economies.
Although Romania is a member of the European Union, it still remains an emerging
market. However, its economy is already well developed, with a p articular focus on
mechanical engineering, the textile industry and the technology sector. Strong economic
reforms at the turn of the millennium, which among other things introduced a uni form tax
rate on income and corporate profits, make Romania one of the most liberal m arket
economies in the world. The uniform tax rate also makes Romania an attractive desti nation
for foreign investors.
The stock exchange in Bucharest has a particularly high efficiency for an emerging
market exchange and has a close cooperation with the stock exchange in V ienna, with which
it shares various infrastructures. Due to its membership in the EU and c lose contacts with
other EU countries, Romania is characterized as a relatively low- risk emerging economy. It
is presumed that the Romanian capital market, now classified as a bord er market, will
accede, within five years, to the category of emerging ones.

40

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