Since April this year, Radu Crăciun is the president and chief executive officer of BCR Pensii. One of the best known and respected experts in the local financial environment, Radu Crăciun was the chief economist and director of research within Banca Comercială Română, and for 10 years he coordinated the capital market analysis and research departments of ABN AMRO Securities and ABN AMRO Bank. For six years Radu Crăciun administered Eureko’s pension fund assets as investment director and deputy director. Radu Crăciun accepted to review the macro-economic situation of Romania and the financing opportunities for the energy industry.
Dear Mr. Radu Crăciun, there are a few good years now that Romania has experienced economic growth. As usual, most are tempted to extrapolate this trend. How do you see Romania’s current economic situation and what do you forecast in this regard?
It depends on what we extrapolate. If we extrapolate only the trend, then I believe the economy will continue to have a positive evolution. I would be more cautious as to extrapolating the growth rate. In my opinion, the current growth rate is too high and therefore not sustainable. When I say this, I refer to what we did or rather to what we did not do in the economy to support such high growth rates. First of all, the growth rate that we are going to experience this year – somewhere around 4% of slightly above this figure – is the temporary effect of the fiscal relaxation in 2015 and 2016. It is realistic to think that fiscal relaxation cannot be continued, as it produces imbalances in the economy. We already see inflationary pressures beginning to accumulate, and in the banking system we can see a boom of consumer loans which reminds us of the pre-crisis period. We generally see that people make consumption or investment decisions assuming their salaries will keep growing. They extrapolate current salary growth to the future, which leads to a less prudent behavior.
In the past, we used to link economic growth to the evolution of the energy industry. Today, we see them decoupled, their developments no longer follow the same direction.
Yes, I find this decoupling normal. The energy intensity of Romanian economy is currently twice as big as the energy intensity in developed Europe. At the limit, we could say that Romania’s GDP could double if we maintained the same energy consumption that we had so far. This is why I don’t believe we will see Romania’s energy consumption increasing dramatically in the near future, as there are still many energy efficiency reserves. In addition, even in the energy area a revolution is currently taking place, putting even more emphasis on efficiency, in countries that are already efficient included. We are now in a situation where we can skip stages, to reach energy efficiency ideas that are only being tested in Western Europe currently.
Do you think that this situation endangers the energy industry, an industry that can no longer count on predictable developments based on previous models?
Depending on how you look at this situation, it can be a threat or an opportunity. On the one hand, we have a moving picture of production capacities. Perhaps the most dramatic change is related to the wind energy, which attracted huge investments. Unfortunately, the situation created later – by changing the framework of benefits that these investors have had – didn’t do much good, in my opinion, to Romania as an investment destination. We can honestly ask ourselves whether other investors interested in conventional plants or nuclear plants would come to Romania, in the circumstances where there is the precedent of wind power. In addition, if they did, how much would we pay more for this increased risk that such investors now recognize and attach to Romania?
The energy industry remains capital intensive. If it stops growing at the same rate as the rest of the economy, don’t we have a risk of stagnation or regression in this industry?
It depends on how we define stagnation and regression. In the end, we may have a technological breakthrough that would mean that, using less primary energy, we can produce more secondary energy. On the other hand, I do not think we need to look at quantities by all means. The more important factor is consumption, what the Romanian economy requires, and what type of energy: electrical, thermal, green, or conventional, etc. Perhaps we should also have a look at the large gas deposits Romania had in the past and will no longer have in 10-15 years from now. Why not use such deposits as storage, allowing us to be immune from any fluctuations induced by green energy?
Under these circumstances, what is the view that a large investor would have of the energy industry? What are the more interesting or safer projects?
Any investor will praise predictability above all and I’m not saying anything new here, this is valid for any investment whatsoever. But with electricity this is all the more true, precisely because, as you were saying, it is capital intensive. The payback period is long and one wants to be sure they recover their initial investment. For this, one needs market and legislative stability. I think it is not accidental that Romania lacked investors in the energy industry in the past two decades, as we know a few famous projects which saw powerful consortia withdraw. In addition, investors were also worried about energy prices. I can see that discussions are being held, with the potential investors in Cernavodă regarding a guaranteed retail price.
Are there major differences between what a bank does and what an investment fund will do, with reference to the large investments that are needed in the energy industry?
Investment funds generally, including pension funds, can now fund such projects only through listed bonds or by way of participation in share purchases in the companies that are listed. From this point of view, analyses are different. Credit risk exists in both cases, but the risk involved in purchasing bonds, which have priority over shareholders, is smaller than the risk involved in purchasing shares. As regards the large projects proposed by the state, investment funds in Romania cannot get involved. Of course, we can possibly imagine an investment vehicle allowing various investment funds, including pension funds, to fund projects in the country, but… the road to hell is paved with good intentions. Before deciding to put my money into such an investment vehicle, I would like to have detailed information on how it is managed, by whom, etc. Because I want to make sure that the money are used in projects that make most economic sense and not in projects that are best connected politically.
A good and functional model was represented in the past by the involvement of the European Bank for Reconstruction and Development and of the World Bank in large scale projects…
I find it a good thing, because EBRD implemented many successful projects in Romania, the same as EIB (European Investment Bank) or the World Bank. Co-funding alongside prestigious international investors of projects in Romania may bring that additional credibility and professionalism any investment fund in Romania needs.
Do you currently have any availability to invest in such projects, at BCR Pensii?
So far we didn’t consider it, as the law only allows us to invest in listed financial instruments. On the other hand, of course we need to keep in mind that pension funds’ assets keep growing from year to year, while the stock exchange is not. If we want this capital to stay in Romania, as it normally should, we need to find new channels to use this primary capital accumulation in Romania. Otherwise we get stuck on a stock exchange that doesn’t grow and becomes less and less liquid, from one day to the other.
Do you have a feeling that you are stuck? The available capital keeps growing, but the legislation and general market context do not leave much room for maneuver…
We are not stuck, because, in our view, the investment universe is extremely wide. We are not obliged to invest in Romania only. Of course, this is what we want, because you always know your own country, your own economic environment best, and there is no currency risk, as you invest in lei. We can invest anywhere in Europe, where stock exchanges are extremely liquid, but I don’t think this is the idea, because Romania is, unfortunately, lacking capital. This is why I believe that major investments will stay with foreign investors for a while.
In addition to major investments, there are a large number of medium sizes, dynamic companies offering energy efficiency or automation services. What would be needed to fund such projects, not necessarily the large and risky ones, which are inevitably politically connected?
This, in fact, should be Romania’s strategy. We do not have enough money to build and create companies that need a lot of financial capital. We can let others do this. But – attention! – This requires a sufficiently attractive business environment. The key to success is, however, to have sufficient local suppliers to serve such entities created with the help of foreign investors. To some extent, an example is provided by the automotive industry. A precedent exists, therefore, but we must not lose sight of the fact that the labor market in Romania, in certain areas of the country, has become extremely tense. In fact, Romanian entrepreneurs no longer have people available to hire in their own businesses, which are now becoming a very important limiting factor for the further development of the entrepreneurial environment in Romania.
On the one hand, we have Western and Central Romania, where unemployment is close to nil and companies fight against each other to attract employees. On the other hand, we have Eastern Romania, which comes from a different era, with two digits unemployment figures, where people are looking for work in Italy and Spain. The question is how do we meet the surplus labor in the East with the businesses and demand in the center. The essential thing is for employment demand and offer to meet.
The full version of this article can be read in printed edition of energynomics.ro Magazine, issued in May 2016.
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