COMMENT: Balkan stock exchange combination to end investor isolation

COMMENT: Balkan stock exchange combination to end investor isolation
SEE Link will connect the five markets in a single debt and equity trading system.
By Gary Kleiman of Kleiman International March 18, 2016

Balkan frontier stock markets Bulgaria, Croatia, Macedonia, Serbia and Slovenia continued their poor 2015 performance with losses through February this year, as foreign investors ignore the tiny exchanges with limited liquidity and mixed economic backdrops. However, with a little help from the European Bank for Reconstruction and Development (EBRD), they could end decades of relative isolation as the SEE Link platform goes into operation in the coming months.

Backed by a €540,000 grant from the EBRD, SEE Link will connect the five markets in a single debt and equity trading system. By using only technology rather than relying on a merger or corporate integration, the thinking is that “it will enable participating stock exchanges to remain independent yet complement and to allow investors an easier and more efficient approach to those markets through a local broker”, says the website.

Dozens of brokers have already signed on, figuring the common technology could finally allow the economies of scale that have been lacking since the breakup of the former Yugoslavia. This pattern was followed successfully in the Baltics before the global financial crisis, and the joint dealing arrangement between Estonia, Latvia and Lithuania eventually led to a merger with Scandinavia’s OMX. The Balkan plan may never see such integration due to regulatory and technical, as well as longstanding historical differences, but it represents a post-crisis model that could draw new international investor attention and be followed by small bourses in other Emerging Europe sub-regions.

The project was launched as a joint company in Skopje in 2014 between the Bulgarian, Macedonian and Zagreb stock exchanges, with the three exchanges holding an equal share of ownership. The Serbian and Slovenian exchanges joined in February.

Macedonia with a market capitalization under €2bn has yet to qualify like the other exchanges for MSCI’s Frontier Market index. SEE Link will establish its own benchmark based on ten leading stocks, from almost 400 eligible listings in the initial phase joined under a single order routing system. Dedicated sub-regional investors will be able to more easily access Macedonian banks, where bad loan ratios have almost fallen to single digits in contrast with its neighbours and profits are at a post-crisis high. Regulators there forced the sale of foreclosed assets, and banks have reopened credit spigots to support 3.5% GDP growth despite a longstanding political standoff and chilly diplomatic relations with Greece.

Croatia and Slovenia have a combined total cap of €30bn after the Zagreb Stock Exchange, with an EBRD ownership stake, took over Ljubljana at the end of last year. Croatia’s first new listing in seven years also took place in 2015 alongside the heavily traded state telecommunications firm and candy giant Kras. The new government of Prime Minister Tihomir Oreskovic, a former international drug company executive not from the two main traditional parties, has pledged an “economic overhaul”, including billions of euros in foreign investor inflows that can be channeled through the merged securities markets, where Zagreb also trades a large bond component.

After years of recession Croatia managed 1.5% growth in 2015, although debt/GDP also hit 90%, according to the European Commission. In early March, Moody’s Investors Service downgraded the sovereign rating further into high yield with a negative outlook, and estimated this year’s budget deficit would again breach the Brussels threshold at 4% of GDP. It also cited “structural rigidities” with the workforce and low EU fund absorption as long-term obstacles, and noted that the ruling coalition is precarious with a slim parliamentary majority, while the refugee crisis will dent tourism. Croatia’s finance ministry has fired back with a “winning plan” to bring the gap down close to 3% through subsidy cuts and health and pension reforms, and aims to issue €1.5bn in fresh Eurobonds this summer after legislative debate and passage. However, coalition partners could exact a steep price for backing it, including less independence for the central bank following the previous government’s pattern of ordering the banks to convert Swiss franc loans at advantageous rates for borrowers. The move saddled banks with their first losses since the late 1990s. 

Slovenian state banks have slowly emerged from the 2013 crisis that nearly made it the latest Eurozone country to require an international rescue. While bellwether NLB was profitable last year, its privatization remains on hold. Refugee border closures could jeopardize the 2% GDP growth forecast, and the European Commission continues to point out demographic and competitiveness issues. Doubts about the broader post-crisis path may have aided the Austria exchange’s decision under its own CEESEG Central and Eastern Europe consortium to sell the Ljubljana exchange to Zagreb.

Serbia’s equity market is capitalized at €5.5bn. The country alone in the SEE Link group is under a formal International Monetary Fund programme, with public enterprise divestiture at the core of it to promote budget discipline and foreign investment. Mining and steel firms are on the block, and the state gas company is in talks on debt restructuring. Against IMF advice, the central bank has continued its currency interventions, as the current account deficit fell to a decade low of 4.5% of GDP last year. Foreign capital inflows, which contribute 40% of the Belgrade exchange turnover, have worked to offset the gap, but the polls have frozen economic reform and future momentum could stall without a clear victory for Prime Minister Aleksandar Vucic’s centre-right party.

Bulgaria is smaller at €3.5bn, in part due to being overshadowed by the larger Romanian exchange. The 2% budget deficit and 35% of GDP public debt figures stand out, but banking crises, with Corpbank the latest to collapse in 2014, have been chronic. The sector is now undergoing inspections under European Central Bank standards, and these stocks will be avoided until positive reviews can accompany SEE Link activation.

The Banja Luka Exchange in Bosnia & Herzegovina also intends to join, but success over the next year will depend as much on economic and political as technology shifts, and focus on the surrounding platform eco-system such as liberalization of Balkan pension fund cross-border allocation. Central Asia’s smaller exchanges have also expressed interest in similar arrangements, but must first be able to see the link that can be catalyzed between incremental mechanical integration and bolder securities market development policies.


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