Balkan Tiger Goes on the Prowl

For the Record: 3 May 2005, Tuesday.

By Ambrose Evans-Pritchard
The Telegraph

The Romanian and Bulgarian stock markets have both tripled over the past two years in anticipation of imminent EU membership, but analysts insist there is still plenty of money to be made in the 'tiger' economies of the forgotten Balkans.

With per capita incomes less than 30pc of the EU average, these two ex-Communist basket cases have turned their countries inside out in a frantic effort to comply with the Acquis Communautaire, the 90,000-page EU rule book.

Both have now been granted the EU's coveted status of "free market economy" able to withstand the full rigours of Europe's single market. Barring an upset veto by Euro-MPs, they have a guaranteed entry date of January 1, 2007.

Geoffrey Van Orden, a Tory MEP and the European Parliament's spokesman on Bulgaria, said it has been the prospect of EU entry - and the strategic imperative of a safe berth beyond Russia's clutches - that helped former Communist regimes stay the course on radical reforms.

He said: "One of the few good things about the EU is that it serves as a pole of attraction for failed states. These people suffered terribly under Communism. It is the lure of joining the club of democracies that has given them the impetus to see through some very tough decisions."

Romania's economy grew at 8.3pc in 2004. More than 96pc of the land is now in private hands under newly issued property deeds. The total private sector accounts for almost 70pc of GDP, arguably making the country more "free market" than Britain, where the private sector only accounts for about 60pc of GDP. A new flat tax of 16pc is being introduced.

The pro-American government of Calin Popescu Tariceanu, a wealthy entrepreneur, is privatising the state behemoth left by the Ceausescu regime at breakneck speed. Some 550 nationalised industries are on the auction block, following the sale - or outright closure - of 486 state firms between 2001 and 2004. The country's biggest employer, the state oil company Petrom, was sold to Austrian investors last year.

The biggest steel plant, Galati, is now in the hands of the Anglo-Indian steel baron Laksi Mittal, after Downing Street intervened directly to help smooth the takeover. Renault has bought the state Dacia car production plant, now a profitable business.

Last year, the credit rating agency Fitch upgraded Romania to "investment grade", and Standard & Poor's is expected to follow suit this year. The country has a population of 22 million.

Plamen Monovski, manager of Merrill Lynch's Emerging Europe Fund, said Bulgaria was in better shape than Romania after a genuine "supply side" revolution pushed through by ultra-liberal governments. The current prime minister is the former child-king Simeon Saxe-Coburg, who returned triumphant after half a century in exile.

"The banks went bust in the hyperinflation at the end of the 1990s, but now they have all been sold to foreigners and are incredibly stable," said Mr Movovski.

"The vision of EU accession has been a very powerful anchor. The Maastricht criteria for joining the euro have forced the government to bring its budget under control," he said.

He said the Balkan bond market was "played out", with spreads over core eurozone debt already very narrow.

Last year, car sales rose 46pc and property prices by 31pc, one of the highest rates in the world, with 5.7pc GDP growth forecast this year. However, the IMF has warned against overheating.

Even so, Mr Monovski said the equity and property markets still had potential. "Property prices are still very low compared to areas of similar beauty and geography. Bulgaria is a country where you can ski six months of the year, yet there are lovely beaches not far away," he said.

Merrill Lynch warns that Romania needs to tackle its unreformed banking system, still dominated by two dinosaur state banks.

Mr Monovski's best tip: Romanian and Bulgarian farm land. He said: "There are huge opportunities in agricultural land. This is a very fertile area with a good climate, going cheap."

But buyers should tread cautiously. Mr van Orden said Bulgaria and Romania were still hampered by the legacy of communism: dodgy courts, crooked police, corrupt civil servants, and a crime network with a deep reach into the state apparatus.

Mindful of the warning, Romania has sacked 40 police commissioners, frozen the bank accounts of 42,000 companies, and launched a blizzard of anti-graft inquiries.

The prime minister has sought to soothe sceptical French and German Euro-MPs, saying: "Major changes won't happen overnight, but corruption and the arbitrary will of bureaucrats are no longer the law. The next ten years shall make Romania reborn into a modern European country."