Romanian municipal bond market at Bucharest Stock Exchange: further investigations

The sub-sovereign finance importance for emerging and frontier markets is constantly growing since the beginning of 21st century. The change in regulations governing Romanian municipalities source of financing in 1998, allowed local governments to access alternative financing sources, mainly for medium and long term investment projects, through bond issuance. A secondary market for municipal bond trading was launched at Bucharest Stock Exchange at the end of November 2001 and the exchange also offers a platform for announcement and subscriptions of municipal bond public offerings. Thus, more than a decade later, the Romanian municipal bond market segment remains in a premature stage of development. The paper presents a comprehensive data set of Romanian municipal bond sector since it was launched in November 2001 until December 2013. The paper also reveals the level of Bucharest Stock Exchange (hereafter abbreviated as BVB) municipal bond segment underdevelopment after 12 years of trading. The findings highlight the factors influencing the trading decisions and might represent some suggested ides to be considered by their municipal bond issuers and the financial intermediaries assisting them. The investigations show that coupon and risk premium play only marginal roles in trading decisions hinting toward an unsophisticated market, dominated by a small number of institutional investors which rather treasure the scarce municipal bond offer. The absence of rating and the inappropriate correlation mainly between the risk premium and the economic potential of the issuer impair on further developments. The lack of sophistication displayed by the Romanian financial system, which also does not provide credit enhancements dedicated to local government, along with a thin domestic investor base are factors fencing, at least for the moment, the possibilities to overcome the rating problem and the offer diversity problem.