Baltic states to create unified MSCI stock market index

Baltic states to create unified MSCI stock market index
While the Baltic states remain something of a European capital markets backwater, the local markets have seen a few significant deals. / bne IntelliNews
By Ben Aris In Samarkand May 17, 2023

The three Baltic states' stock markets are to unify into a single index on the benchmark MSCI index system in order to increase their appeal to international investors as part of a plan to upgrade their capital markets from frontier to developed market status.

Latvia, Lithuania and Estonia have well developed, but small, capital markets that actively trade stocks and bonds and are currently included in the Morgan Stanley Capital International (MSCI) index system that investors use to allocate weightings to different types of market and assess risks.

For Emerging Europe the aggregate MSCI Emerging Markets (EM) index is the benchmark but each country has their own index as well.

The unified MSCI Baltics index is the culmination of five years of work since the three countries' finance ministers came together with the European Commission as part of broader plan to better co-ordinate EU capital markets.

“The three finance ministers and the EC agreed to co-operate to make a single index for the Baltic markets, as our markets are small and then can better attract more investors,” Kaarel Ots, the CEO of Nasdaq Tallinn, told delegates at the annual EBRD meeting in Samarkand. “We are classed as a frontier market, but I disagree. As the head of the exchange I call for more companies to come to the exchange and to list so that we can increase to development market classification.”

Despite the progress the Baltic states have made in the last three decades, their economies remain small by European market standards and the capital markets are shallow.

“Growth of the pool of liquidity is an obvious goal,” says Tomas Kairys, the EBRD Baltics country manager. “And the markets already play an important role in the region. Some 60% of EBRD deals done have been done via the capital market transactions, of which 80% have been done via debt.”

Part of the work to prepare the integration has been to bring the rules together and streamline them. A second goal of the reforms is to attract and make it easier to SMEs to tap the market to crease the overall market capitalisation.

“We have some blue-chips listed already but the backbone of these economies is the SMEs, and so giving them more access to capital markets will only improve growth,” says Kairys.

As part of his presentation Kairys also mentioned the rise of commercial notes as a funding option, which were first introduced during the coronavirus pandemic and used by companies to raise short-term money to tide them over during the financial stress during lockdown.

While the Baltic states remain something of a European capital markets backwater, the local markets have seen a few significant deals. The government chose to privatise 33% of the Port of Tallinn, raising €150mn in an IPO that was heavily oversubscribed and regarded as a success.

Another example was Estonia’s Enefit Green, which floated 22.7% to raise €175mn that was the Baltic states' first ever pure energy play and a purely green offer.

The state-owned Latvenergo used its capital market to issue the Baltic’s first ever green bond to raise €50mn, followed by AST, another local energy company that raised €100mn.

But the biggest deal to date was from Ignitis, the Lithuanian energy company that issued a €300mn green bond, 10% of which was taken up by the EBRD. That was followed by an IPO of a 27% stake in another partial privatisation that raised €450mn – the largest IPO in the Baltics to date.