Bulletin of the Transilvania University of Bra șov [619902]

Bulletin of the Transilvania University of Bra șov
Series V: Economic Sciences • Vol. 8 (57) No. 2 – 2015

The impact of joining th e European Union on the
Romanian capital market

Elena Lidia MELNIC1

Abstract: This paper approach the theme of the development of the Romanian Stock
Exchange Market (BVB) during the process of joining the European Union. The first goal is
to illustrate the stage of the BVB in the years before the acce ssion to the Union and what
were the perspectives of joining the EU at that time. The second goal is to highlight the
effects the accession had on the neighboring markets: the Polish, the Hungarian and the Czech markets who joined EU in 2004 and to analyze the correlatio n between the indexes
from these stock markets and the Romanian stock index. The last goal is to show the impact
of joining the European Union on the Romanian Stock Exchange Market.

Key-words: stock exchange market, stoc k exchange index, capitaliz ation, emergent markets

1. Introduction

Stock markets are present in all market economies, where securities are being traded
according to special procedures. Joint st ock companies can finance their activity
based on two external sources: commercial banks and stock markets . Regarding their
participation in the stock markets, the first step for the companies is to do the conversion from "closed companies" into "open companies" by making a public offer for sale of securities (stocks, bonds ) that is authorized by the National
Securities Commission. The most important objective of such a public offer is to
attract financial resources on the stock market, from investors who are interested in buying securities.
The market value for securities show s the public perception on the issuer
activity. The potential creditors of the issuer have the possibility to compare the book value per share to their market value.
By studying the evolution of the Bucharest Stock Exchange Market (BVB)
from the beginning until Romania joined th e European Union in 2007, it reveals a
number of distinct phases in its developm ent: early stage of formation (1995-1996)
led slowly to accelerated and generalized growth in the first half of 1997. In the
second half of 1997, 1998 and 1999 followed a period of regression and generalized

1 Transilvania University of Brasov, [anonimizat]

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restriction of activity. In 2000 happened an interesting phenomenon: the decrease
stopped and it started a documen ted development on long term.

2. The analysis of the Romanian Stock Market before joining the EU

In the years before joining the European Union, the Romanian Stock Exchange
Market (BVB) was following a maturation pr ocess, after long time the stock price
levels had chaotic evolution that led to spectacular gains or losses. The year 2004 is considered the best in the history of BVB after 1990, the average
earnings of listed shares led to the doubling of the investor’s money.
Since 2005 important steps have been ma de towards institutional strengthening
through the merger with the RASDAQ El ectronic Exchange. The increases in the
market have started to become more selective – the shares didn’t grow all simultaneously as it did in the previous years. Only 31 of the 65 listed shares, which
represent less than half, brought total gains a bove inflation in 2005. The situation in
previous years was completely different, for instance in 2004, 89% of the listed
shares brought gains above inflation, while 61% of the listed shares brought gains
above inflation in 2003. In 2005 this new tr end is visible through the big difference
between the performances of the stock ma rket index such as BET (+ 50.90%), BET-
C (+ 38.22%) and BET-FI (+ 175.24%), compar ed to quite close variations of the
three index in the previous year: BET (+ 100.96%), BET-C (+103.50%) and BET –
FI (+ 115.48%).
The year 2006 is remarkable for a larg e number of positive events that were
important for the BVB future development, such as:
• the completion of the merger with Rasdaq;
• the introduction of the transactions in margin for spot market (shares);
• the successful public bond issues for the World Bank and the Romanian
Commercial Bank,
• the setting of the Central Depository
• the successful listing of shares for Transelectrica, the first issuer in the
utilities listed on the Romanian Stock Exchange Market.
Only 4 of the 21 shares of Class I brought total gains over 50% in 2006, and
another 16 of them have made gains above inflation. Although after the summer of
2006 when stock market crashed and nobody bet on spectacular yields on BVB, the year 2006 brought investors good returns of over 100%. But 2006 was not anymore the year for financial investment compan ies (SIF), but for other companies, less
known to the general public. In late 2006, the entire community of investors was
ridden by the question what will happen to the stock market in 2007?

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2.1. The perspectives of the Romanian Ca pital Market after joining the EU

At the time of accession to EU, both stock market indexes: those related to capitalization as well as those related to the value of transactions, were recording
still very small levels, compared to those from the neighbor stock markets, so there
were expecting quite sudden jumps on the stock market indices.
The most hunted stock shares were expec ting to remain even after joining the
EU all SIFs, pharmaceuticals, banks and companies in the oil sector.
The perspectives on the capitalization of BVB was to triple in the coming
years, following the increase of confiden ce in the investment environment in
Romania after EU accession and as a result of increasing interest in the stock market
of large companies in Romania. The stoc k market was expecting to reach 40 and
then 60 billion Euros in the coming years, gi ven the EU integration and the changing
in the Romanian investment culture. This development was considered a necessity
as other stock exchange markets reac hed capitalization of 150 billion Euros –
Turkey, or 1.000 billion- Russia. The Romanian Stock Exchange Market didn’t have
very strong companies listed at the time of accession the EU or they had small
packages listed, leading to a little exposure.
With a total of 58 listed companies, BVB reached a market capitalization of
over 21 billion Euros, with an increase of 2.4 percent over the past three years
before joining the EU. In the same period, however, liquidity ratio (the ratio of
market capitalization and value of transac tions) had no significant progress but it
remained below 20 percent. About 75 percent of the total capitalization was owned by five companies, and public listing of companies on the market, were extremely
rare. The perspectives for the stock market were to grow as a result of EU accession, in the same way as it could be observed in countries which joined the EU in 2004. Of course, this development requires the listing of large companies or the growth of
listed packages, as well as other measures such as raising the holding limit in the
SIFs, which was currently a maximum of one per cent.
The main obstacle to increase the st ock market was considered the low
liquidity.
Also, the banking system was not very attractive for investors because the
bank shares are traded on the stock to levels of price / earnings well above the banks
in neighboring areas such as Serbia and Turkey. However, accession will give new
rise to the capital market in Romania. The president of East Capital, Elam
Hakansson, stressed that "The competition among Stock Exchange Markets in Eastern Europe is very strong. Especially in emerging markets where the
expectations of investors are very high and they look very closely both on the return
on investments, as well as the amount of time they are obtained in. I think that, from this point of view, Bucharest market is still a land worth discovering, especially for
those companies that conduct business actions in Europe and for which membership
brings business development’. Foreigners we re anticipating at that time, that with

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our integration in the European Union, we will progress more rapidly to higher
levels of living standard, so we get to consume more products and services that have
higher quality and are more expensive, so we get to spend more and more money
from which will ultimately benefit the Romani an companies that offer these services
or products. This is the reason why fore igners continued to buy shares on the
Romanian Stock Exchange Market at prices that seem slightly exaggerated from the
present point of view.

3. The impact of joining the EU on the Central and Eastern Europe (CEE)
capital markets

I present below the effects of EU accession on the stock exchanges in Poland,
Hungary and the Czech Republic, countries th at joined the Union before us, on the
1st of May 2004. The evolution of capitalization of the three exchanges (in billion
dollars) is as shown in Figure 1:

Fig. 1. The evolution of the market capitaliz ation in CEE, before and after
joining the EU

As can be seen right away from the chart, the period around accession was extremely beneficial for capitalization. In the first year after accession (2004) it was
registered the largest increase in capitalizati on of the analyzed period. Also, the first
year before accession (2003) and the second year after (2005) showed significant
increases.
Next, I performed the same analysis in terms of annual value of transactions
with shares (in billion dollars) as shown in Figure 2.

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307

Fig. 2. The evolution of stock exchange transactions in CEE, before and after
joining the EU

Again, the effects appear to be favorable in the years after accession the Union, especially the first two, when was noticed significant increases in the value of
transactions.
Finally, the third analysis which I present bellow shows in Figure 3 the
increase of the official stock market inde xes (WIG in Poland, PX in Czech Republic
and Hungary BUX):

Fig. 3. The evolution of stock market indexes in CEE, before and after joining EU

3.1 The correlation between the Romanian stock market index and the CEE
stock market indexes

Since long time the Stock Market in Ro mania was immature, but the year 2006
changed this perception of the foreign in stitutional investors, who started to
consider it as belonging to the Central and Eastern Europe area that was dominated so far by the markets from Czech Republic , Poland, Hungary. The evolution of the
Romanian capital market was correlated to a great extent with the other major
markets in the region (PX – Czech Republic, WIG – Poland, BUX – Hungary) as shown in Figure 4.

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308

Fig. 4. The correlation of stock market indexes in the CEE markets
The causes of these correlations are based on similar strategies of the strongest
institutional investors on the markets from a particular region. Thus, although the
purchase value of shares listed on the BVB from non-resident investors accounted
for only 30% of the total purchases (a proportion that has been relatively constant for many years), they ended the year with a net purchase position (buying higher than sales), while local investors ended 2006 with a net sales position. Thus, they
represent a smaller share in transactions, the non-resident investors who typically invest on longer-terms, often trigger major trends in the market to buy or sell; Local
investors that follow generally shorter term speculative investment, follow the trends
established in the market.
4. The impact of joining the European Union on the Romanian stock exchange
market

The Romanian Capital Market seem to fo llow the same pattern of evolution after
Romania joined the European Union as the ma rkets from Central Europe did, after
joining the EU in May 2004. While the local currencies of the countries that joined
the first wave of EU, recorded continuous appreciations in the first 12 months after
accession, the capital markets have reacted later, but the increases were substantial. In Romania, accession hasn’t brought immediate growth for stocks listed on the main stock exchange. The BET index of the most important companies fluctuated from January to May between 8,000 and 9,000 points. This situation was about to
change from the beginning of June when entering on a strong growth trend and
reach almost daily new historical highs. After accession, the investors had to do a
proper analysis on the market in order to take the decision to invest. They had to

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309
look on the market, on the legal aspects, on the regulatory issues so it was required a
period of time to pass. SIFs, the most liquid companies on the stock exchange, but with the higher fluctuation above the market, had lost almost 20% in value in the first three months afterwards, and later to exceed the January barely five months
after accession. Probably at first, upon accession the expectations are too high and
the market is currently applying corrections . Subsequently the foreign investors start
purchasing, but at low volumes, since they n eed to observe the market and need to
do their analysis on the market before inves ting. Later on, when the market starts to
increase, higher levels of investments are being expected.

5. Conclusions

For our neighbors, the Hungarians, the Poles and the Czechs, the first year before accession and the next two years after accession, were the most profitable on the stock exchange markets. The highest level of capitalization was recorded in the year
of accession (2004) and both the previous year, as well as the next year after
accession the Union, brought significant increase in capitalization. The same trend
could be seen for the values of transactions . Of course, all the above developments
are influenced by many factors, such as th e situation in the international markets, the
foreign investors' attitudes, the country-specific elements.
It can be said that the Bucharest Stock Exchan ge in the first year after
accession to the EU responded to international crisis as a sign of integration in the
international circuit, while political domestic crises affected the stock only to a
small extent, which was sign of maturity of Romanian investors.
The beginning of the year 2007 was marked by investor euphoria linked to
Romania's accession to the European Union, anticipating a similar development as
in previous years on companies' financial results, which brought the great
appreci ation of the BVB indexes. I n late February held the first wave of the stock
market decline, due to the indexes depreciation from China. This fall has affected
most of the international markets, incl uding the Romanian market. Depreciation was
reinforced by domestic political instability in January, taking place in Parliament on
the suspension request of the president. Towards the end of March a new general
decline occur in the US ma rket, that affected specially the banking sector (around
8% loss in the most important actions), and SIF (3- 4%).
Although BVB was affected by the intern ational situation, something that
could not be foreseen, the evolution of the main stock market was positive compared
to 2006, and very close to the National Prognosis Commission estimates on the regulated market. Another feature is that the evolution of the BVB indicators was
more uniform than in previous years, avoi ding the corrections that usually happened
in spring.

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The increasing oil prices, the losses of la rge international banks, the review of
the rating of Romania's country from "stable" to "negative" by Standard & Poor's, were so many negative elements on this b ackground that affected the capitalization.
A positive element was the IPO of Transgaz, expected with great interest by
investors. This offer has recorded the highest level of oversubscription and brought a new element for the Romanian market , namely "allocation rights" being a
particularly good target for big investors.
When we talk about emerging markets we must take into account that what
attracts strong investors is not only the relationship between the price and the fair value of shares determined based on its curre nt financial, but also the potential for
growth and the development of the business they estimate will have in the next 5-10
years. However, the situation of the majority of Romanian companies is that, upon
accession the European Union although they were correctly assessed market or even
overstated in some cases, the long-term potential of development was much higher
compared to that of large companies, w ho were operating on mature markets in
Western Europe, North America or even in some parts of Asia.
It is expected in the future as those w ho invest in the Stock Exchange Market,
considering a time horizon of 2-3 years, to ha ving more to gain (in real terms, thus
taking into account the inflation rate and / or exchange rate currency) compared to
keeping their money in a bank account for interest rate. 6. References
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