Premier's Exit Spells Relief for Bond Investors Eyeing Romania

Updated on
  • SEB says Ponta was a hindrance for economic-policy changes
  • Commerzbank says case for investing in country remains robust

The departure of Romania’s Prime Minister Victor Ponta removes the biggest hurdle for bond investors looking for gains in eastern Europe’s second fastest-growing economy.

Months of political wrangling and street protests culminated in a government shake-up Wednesday, ousting a politician who battled allegations of corruption and held up a backstop loan agreement with the International Monetary Fund. Analysts at banks including SEB AB and Commerzbank AG say a Romania without political chaos will entice investors.

Among its attractions are gross domestic product projected to grow by the most in seven years and the fourth-lowest debt burden in the European Union.

“Ponta has been a bottleneck,” Per Hammarlund, the chief emerging-markets strategist at SEB in Stockholm, said in an e-mail. “Given the political winds now blowing, chances are that the next prime minister will be more market-friendly. A crackdown on corruption would naturally also help.”

Even before the deaths of 32 people in last week’s night-club fire sealed Ponta’s political fate, the credentials of the former Communist nation had been shot by allegations of forgery, money-laundering and complicity in tax fraud against the prime minister. A government distracted from tackling the budget deficit or ushering in business-friendly policies made the most bullish investors nervous. Nomura International Plc sold its Eurobond holdings in June and Danish fund manager Global Evolution SA held back any additions until the political climate cleared up. 

With the premier gone, investors can now turn their attention to the economy. Further market moves will be determined by the country’s fiscal outlook, which won’t worsen because of the change in government, according to Simon Quijano-Evans, the chief emerging-markets strategist at Commerzbank in London.

“The macro story remains robust and markets have become used to this political noise,” he said. “So I remain overweight on bonds, local and foreign.”

The yield on Romania’s euro-denominated bond maturing October 2025 rose three basis points to 2.67 percent by 3:49 p.m. in Bucharest, extending a four basis point increase on Wednesday to the highest since the note was sold two weeks ago. That compares with a 1 basis-point decline in two days on similar-maturity Polish notes.

The leu, which is managed by the National Bank of Romania, slid 0.1 percent to 4.4508 per euro to the weakest in more than two months. Policy makers kept the benchmark interest rate unchanged at 1.75 percent at a meeting on Thursday. While political unrest adds to uncertainties, the economy remains stable and the central bank has the ammunition to counter any crisis that may arise, Governor Mugur Isarescu told reporters after the meeting.

‘Overdue’ Change

“Today’s developments do not represent a credit negative event,” Roxana Hulea, a London-based economist at Societe Generale SA, said by e-mail Wednesday. “Over the long term, we would downplay the implications of an overdue shake-up of the political scene.”

Romania’s foreign-currency bonds have given investors a 3.2 percent return this year, the worst performance in eastern Europe, according to the Bloomberg Emerging Market Sovereign Bond Index. The notes were the region’s best last year, handing investors a 15.6 percent return.

Ponta’s government was at odds with the IMF after a 4 billion-euro ($4.5 billion) precautionary loan went off track last year because of disagreements over a reduction to social contributions and delays in deregulating natural-gas prices. The Washington-based lender last month cautioned the nation about an “expansionary fiscal stance” and said a “lack of progress in structural reforms is a key obstacle to long-term growth prospects.”

While investors await a new regime to fix Ponta’s legacy, the ruling coalition led by Ponta’s Social Democrats rejected opposition calls for early elections and said it plans to nominate a successor. President Klaus Iohannis has the power to appoint an interim premier and will start talks with the parties on Thursday.

“People had to die for this resignation to happen,” said Iohannis, who as head of state had frequently urged Ponta to step aside.

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