Executive summary

All sectors of the Romanian economy can benefit from a well-functioning capital market that allocates capital towards productive uses and supports the recovery from the COVID-19 crisis. When properly designed, capital markets can help companies and entrepreneurs access the funding they need to invest and expand, and strengthen the resilience of the corporate sector to possible future shocks. They also offer households a way to channel their savings and thereby take part in corporate wealth creation. With these overarching goals in mind, this Review provides policy recommendations to improve the framework and general functioning of Romania’s capital market. These recommendations are intended to guide the development of a Romanian national capital market strategy.

Following a period of stagnation and a relatively lengthy recovery following the 2008 financial crisis, the Romanian economy saw a period of reasonably high growth between 2015 and 2019. This led to convergence of per capita income levels towards those in more advanced European economies, and a significant reduction in unemployment. However, the COVID-19 crisis, which significantly impacted the Romanian economy, exposed structural vulnerabilities and threatens this progress. Efficient allocation of capital in the economy will be particularly important in the recovery from the COVID-19 crisis.

The Romanian corporate sector is over-reliant on bank financing and a large share of firms remain credit-constrained. Market-based financing can help fill the financing gap while increasing financial resilience in the corporate sector by supporting viable businesses and reducing the period needed for recovery. A well-functioning capital market will ensure access to different sources of financing which will be essential to foster sustainable economic development in Romania.

The Romanian capital market is currently undersized. The country’s share in the European Union’s total stock market capitalisation is well below its share in the EU’s GDP. In addition, since 2008, 45 companies have delisted from the Main Market of the Bucharest Stock Exchange, compared to only 16 new listings. No capital has been raised through IPOs since 2017, and up until 2020 SPO activity was also non-existent. Credit access, particularly market-based credit, is deficient. Even though 99% of Romanian companies’ debt financing is made up of bank loans, total bank loans to GDP represent only one-third of the EU average. Market-based financing, meanwhile, represents only one-eighth of average EU levels. Moreover, SMEs in Romania have low levels of capitalisation and a significant share of companies are credit-constrained. Despite having implemented a funded private pension system, the limited development of the domestic securities market is preventing pension funds from diversifying their portfolios towards a more effective balancing of risk and return.

In order to rekindle economic progress of the pre-COVID years and, more importantly, to ensure that it is sustainable in the long-term, productivity-enhancing investment in both physical and human capital needs to increase. This requires providing Romanian companies with channels through which they can access risk-willing, long-term market-based financing. By rewarding savers that supply the capital with a share in the corporate sector’s wealth creation, capital markets also create an important link between businesses and households.

The recommendations provided in this Review are intended to help Romanian authorities improve the legal, regulatory and institutional framework for capital markets and ultimately prepare a national capital market strategy. This process will necessarily involve the collaboration of different government and supervisory authorities as well as private sector entities, notably the Bucharest Stock Exchange. The recommendations are organised under six main areas:

Improving conditions for stock market listing by: reviewing the capital raising procedure from a regulatory perspective, both with regard to initial and secondary public offerings; improving corporate governance standards by promoting increased transparency and disclosure of audit committee activities; listing financially significant SOEs and ensuring they adhere to the highest corporate governance standards; developing a national public-private campaign to encourage companies to use market-based financing; and, prioritising the authorisation and establishment of a Central Clearing Counterparty.

Increasing secondary stock market liquidity by: establishing a mechanism that provides independent quantitative research on smaller companies to market participants at no cost or subsidise brokerage companies for providing such research to the market; creating a country-wide campaign to reach out to inactive shareholders for the liquidation of the shares linked to the privatisation programme of the 1990s; reducing the trading fee charged by the ASF; simplifying the capital gains tax declaration and payment methods to boost investor participation in the stock market; increasing free-float levels of already listed companies; and, improving the efficiency of collateral management in Romania to support the development of securities lending and borrowing, and derivatives market operations.

Nurturing a vibrant SME growth market by: establishing a co-operation between the stock exchange and the Chamber of Commerce and Industry of Romania to promote the use of market-based financing among SMEs; offering seminars and training sessions on market-based financing to SMEs; increasing the threshold to waive the prospectus requirement to encourage SMEs to undertake public offerings to reach a larger pool of investors; supporting smaller companies in preparing relevant and accurate information to be disclosed to investors; designing a mechanism for companies listed on the AeRO Market to transfer to the Main Market; and, increasing the visibility of the Romanian private equity and venture capital market to traditional government agencies, funds-of-funds and others asset managers.

Promoting household savings by: using co-operative banks as key partners in the implementation of a low-cost saving digital tool; leveraging the momentum from the National Strategy for Financial Education to reinforce co-operation among all relevant stakeholders; and, introducing a tax-exempt simplified individual savings account tailored to Romanian households.

Boosting the role of institutional investors by: revising the risk-weighting methodology applicable to pension funds to increase the investable universe of asset classes; allowing pension funds to lend securities; increasing the fiscal deductibility of the annual contribution to Pillar III; and, promoting occupational pension schemes within the scope of the national private-public campaign with the purpose of fostering long-term saving.

Facilitating market-based long-term debt financing by: undertaking a regulatory review to streamline the listing process; re-evaluating the requirement to hold an extraordinary general meeting to issue a bond; considering whether any existing authority has the capacity and the required data to provide credit ratings to the market; adapting the current pension fund regulatory framework that only recognises credit ratings from the three major international agencies to include more credit rating agencies; and, providing incentives for issuers of and investors in green bonds.

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