Gary Kleiman of Kleiman International -
Just before opposition candidate Andrzej Duda of the Law and Justice party won the Polish presidency on a populist platform that spooked the financial markets, the Warsaw Stock Exchange (WSE) held its first “Investor Day” in New York on May 18 where participants questioned the bourse’s direction and longstanding regional ambitions in particular.
Poland still has the biggest stock market in Central Europe with a capitalization of around €130bn, including an active small company tier, and has attracted a smattering of cross-listings from neighbours like Ukraine prior to the conflict in the east of that country. But self-inflicted policy wounds such as the slow privatisation of state enterprises and reforms that destroyed the private pension system have opened the way for challengers to Poland's financial ambitions: Austria’s cross-border alliances and Romania’s core emerging market push, as well as Turkey through its overlooked Euro-Asian exchange network could all upend Warsaw’s once commanding status.
At the New York conference WSE representatives downplayed the damage from the fallout from the Russia-Ukraine conflict such as the trade ban. Poland’s first-quarter GDP was up 3.5%, as half of all exports go to the EU and less than one-tenth to the former Soviet Union, and German demand in particular lifted industrial output 9% in the period. Retail sales rose over 5% on an annual basis with consumption a mainstay in the half a trillion dollar economy. Before the presidential poll, rating agencies affirmed sovereign ‘A’ grades, with the fiscal deficit due to fall under the 3% of GDP threshold that the EU Maastricht criteria stipulates, and public debt is now safely under the 50% statutory ceiling following the government bond cancellation from the pension changes.
However, that positive message couldn't mask the drawbacks of recent moves. Poland pioneered private pensions with foreign technical assistance in the 1990s, and they were the core domestic institutional investor base that underpinned the financial hub concept until last year. A mandatory 3% of salaries went into the schemes and then into the Polish stock market, but with the controversial reform only workers choosing that option will probably contribute, as the overwhelming majority are now covered by the traditional state social security regime. Private funds in turn closed or slashed their operations, and with narrower allocation and trading scope at home, they moved assets abroad up to the maximum 30% of portfolio allowed.
Polish government officials pledged in the aftermath to accelerate the pace of state bank and company stake sales on the WSE to spur interest, and Polish LOT Airlines could be floated soon after years of discussion. Bank equity offerings are another prospect led by the giant PKO Bank Polska, but current valuations exceed the emerging market average and a resolution to the problem of $35bn in Swiss franc mortgage loans after the currency’s spike against the zloty is still uncertain.
On pensions and mortgage conversion the respective Hungarian-style extremes of confiscation and arbitrary redenomination have been avoided. But President-elect Duda hinted at harsher treatment against the banks during his victorious election campaign. He disagreed with the central bank preference for voluntary borrower workouts, and vowed to reduce the retirement age by finding additional resources in the system. The finance minister, himself an ex-bank executive, has dismissed the proposals as political posturing and warned of serious fiscal and financial stability consequences, but the MSCI Poland index has since drifted along in flat to negative territory, while Hungary is at the front of the regional pack with a 25% stock market gain despite similar deflation and growth conditions. Investors are perhaps being drawn into Hungary since Prime Minister Viktor Orban might already have completed his draconian financial sector agenda, and the Budapest bourse is now joined with Vienna, Ljubljana and Prague in a combined €50bn free float arrangement, the CEE Stock Exchange Group.
According to the Vienna-led CEE Exchange Group's annual report, one-quarter of outside institutional investors are from the US, 20% from the UK, 40% from Europe including 3% Poland, and 15% from other regions mainly Asia and the Persian Gulf. Among the big asset managers taking this route for their exchange-traded funds (ETF) and dedicated funds were Capital Group, Blackrock, Aberdeen and the China Investment Corporation sovereign wealth fund. They concentrate on larger companies with higher governance standards in seeking diversified exposure, although earnings growth lagged Asian and Latin American markets.
Romania, which is only one-quarter Warsaw’s size and was up 2% on the MSCI frontier index through June, expressed its own financial hub goal recently after the European Bank for Reconstruction and Development (EBRD) took a 5% stake in the Bucharest Stock Exchange. It is the biggest in Southeast Europe and aims for core emerging market status in the next three years. New Romanian President Klaus Iohannis, an ethnic German whose victory ended a long record of coalition party infighting, has prioritized the bourse's expansion and foreign participation. He has pledged to root out corruption previously associated with privatisations, which are proceeding under an International Monetary Fund (IMF) programme with power utilities next in the pipeline. Ironically, the original Polish model of second-pillar pension savings will be a main impetus and a former WSE chief executive has been recruited to spearhead the effort. The leading listed privatisation fund Fondul Proprietatea is managed on the state’s behalf by Franklin Templeton Investment Management, whose well-known public face Mark Mobius regularly touts the country’s capital market progress.
Turkey, which chairs the G20 this year and established the Federation of Eurasian Stock Exchanges (FEAS) two decades ago, recently reiterated its ambition to become both a conventional and Islamic financial centre. Romania is among the two dozen members of FEAS heavily concentrated in the Balkans and Caucasus, and stretching to Central Asia and the Middle East. Dow Jones has launched a FEAS Titans 50 index of the largest companies, and taskforces work to align operating and regulatory standards.
Poland now faces multiple competitors in the financial hub race as it has lost investor favour from poor policy decisions and complacency. The lacklustre New York reception and presidential election share crash argue for immediate adjustments on privatisations, pensions and cross-border alliances to repair the spokes.
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