Trade finance in Romania: A promising outlook

Romania is attracting increasing attention from the international trade-finance community, including major Austrian banks. As Robert Fleischmann writes, this is reflected by growing competition and, recently, a sharp decrease in margins.

After a successfully managed turnaround following the fall of the Iron Curtain, joining the European Union and Nato is now high on the agenda of Romanian Prime Minister Adrian Nastase. To this end, the government has implemented an ambitious programme in order to transform Romania into a full market economy. In light of the difficult global climate, Romania has performed quite well and its key economic indicators showed a generally positive trend in 2002; its outlook is also promising.

Although Romania’s overall growth rate – 4.9% in 2002 – was somewhat lower than the previous year, the figure is still impressive. The realistic growth forecast for 2003 is around the 4.5% mark. The main engine for growth was gross fixed-capital formation – an increase of 8.3% over 2001 – thanks to the friendlier economic climate and substantial need for restructuring. Exports expanded vigorously by 15.4% despite the weak international economy. The current-account deficit (in euro terms, since Romania adopted the euro as reference currency in March 2003) fell from 5.9% in 2001 to 3.5% in 2002, with reserves in foreign currency growing considerably to EUR6.5bn at the end of 2002.

The confidence of international investors is reflected by the fact that two-thirds of the current-account deficit has been financed by foreign direct investment, running up in total to EUR1.2bn in 2002. In order to defend this position, the government will have to identify attractive privatisation targets and express a clear commitment towards the restructuring of large-scale state-owned enterprises. Nevertheless, one can expected that the privatisation process will be postponed further due to social factors and lack of administrative capacities.

However, the government managed to lower the average inflation rate from 34.5% in 2001 to 22.5% in 2002, mainly due to a decline in consumer prices and a tight fiscal policy. As budget consolidation is one of the International Monetary Fund’s (IMF) main concerns, the government has clearly focused on this issue in recent years.

The positive development of the Romanian economy has strengthened the country’s risk position on a steady basis (an S&P rating improvement by the end of February from B+ to BB- for long-term debt in foreign currency and from BB- to BB for local currency) and the increasing trade flows provide financing opportunities for international and local banks.

The improvement of key economic data and transformation into a market economy have made Romania an attractive target for the international banking community in regards to trade finance. This is reflected by growing competition and, recently, a sharp decease in margins.

What’s on offer?

Buyer’s credits are the classical instrument for long-term financing. In order to facilitate large-scale investments in infrastructure, the government is prepared to issue state guarantees subject to IMF regulations and most of the export credit agencies (ECA) are open for long and medium-term sovereign risk in Romania. One of the most important achievements in this respect has been the financing of Diesel Desiro trains manufactured by Siemens Erlangen and imported by SNTFC CFR Calatori (the Romanian state railway). Financing for the first three tranches took place in November 2002 with an amount of EUR47.4m and HVB Bank Romania acting as local financing adviser. Part of the transaction (EUR25.5m) was covered by Hermes; the respective export credit was extended by HVB Group. The transaction also included a commercial loan of EUR21.9m granted by Bank Austria Creditanstalt (BA-CA) with a tenor of ten years – a first for Romania and a reflection of the overall improvement in the macroeconomic situation.

For projects without strong support from the government and, consequently, state guarantees, bank-to-bank loans are the appropriate financing instrument. BA-CA has concluded a EUR20m multisourcing framework agreement with the largest Romanian commercial bank, Banca Comerciala Romana, which allows quick and efficient implementation of the financing by means of a standard loan agreement once the transaction has been approved by the respective ECA.

In the field of commodity and structured trade finance, Romania provides a wide range of opportunities. The primary commodities currently financed in Romania are oil, steel and, partly, soft commodities such as foodstuff. In 2002, BA-CA managed to arrange, together with HVB Bank Romania, a US$30m revolving crude-oil purchasing facility with Romania’s second-largest refinery Petromidia, a part of the Rompetrol group. Although Romania is equipped with considerable oil resources, covering approximately one-third of domestic consumption, access to financial resources is crucial for the development of this key economic sector. In recent years, the necessary transition to western standards in production and final products was slowed considerably by the lack of adequate financial support.

In line with its growing political and social stability throughout the last years, Romania has become a place of interest for the European manufacturing industry, attracting foreign investment primarily through competitive workforce. On the basis of a sound track record and corresponding offtake agreements with western buyers/investors, production financing and, on a limited basis, financing of capital expenditure have become feasible and are pursued by local and international banks. As one of the remaining shortfalls in the Romanian economy, transportation infrastructure is still lacking adequate resources to cover its substantial investment needs. Financing on the basis of transportation contracts is an alternative to funding provided by multilateral financing and development institutions. Due to the usually long tenors required, performance-related financing can be used only as an additional way of enhancing the infrastructure in place. The main target borrowers are (usually private) road freight-forwarding companies and the (still public) railway companies (freight and passenger). However, limited cashflows and demands for extended maturities narrow down the availability of trade and performance-related funds.

With trade flows growing steadily, one can expect to see more forfaiting business out of the region. Until now, only relatively few assets guaranteed by the state or the big Romanian banks have been traded in the market.

Banking with the locals

Romania’s improved risk position is demonstrated by the internationalisation of the banking sector. While the privatisation of Banca Comerciala Romania failed, many internationally reputable banking institutions have established subsidiaries or acquired existing operations. BA-CA opened a subsidiary bank in 1998, which has developed into a universal bank providing a broad range of banking services for both Romanian and international large and medium-sized companies, as well as for private customers. At the end of December 2002, the total assets of BA-CA’s subsidiary HVB Bank Romania amounted to more than EUR500m. The bank operates six branches throughout Romania; three more branches are planned for 2003. In the field of trade finance and related products, HVB Bank Romania offers its customers tailor-made short and long-term financing solutions, as well as a variety of professional cash-management and documentary-credit services.

However, servicing local clients has always been the main target of HVB Bank Romania. Thus, HVB Bank Romania was involved in arranging a US$320m facility for Romania’s energy sector and acted as local disbursement and collection agent for fuel purchases of Termoelectrica and 18 independent power plants during the winter of 2002-2003. Following the privatisation of Romania’s largest steel mill in late 2001, last year HVB Bank Romania acted as the first bank with international background to provide a revolving multipurpose facility to finance imports of raw materials based on the assignment of export contracts.

Robert Fleischmann is head, international export and trade finance for bank Austria Creditanstalt in Vienna.