Les marchés financiers des nouveaux Etats membres, un an après l'élargissement

Dans un numéro spécial, la Revue Elargissement  dresse un état des lieux de la situation des marchés financiers dans les dix nouveaux Etats membres de l’UE.

The 10 New Member States’ (NMS) Stock Exchanges appear to be very useful in providing financing to local companies, very important for their home countries’ economy but relatively too small to be profitably listed on Western European Markets. Despite the fact that maintaining local Stock Markets appears desirable for the NMS, the enactment of the new European Legislation from the Financial Services Action Plan will significantly toughen their competitive environment in the coming years. 

1 – Stock Markets of the NMS are relatively small, but they appear to provide efficient financing to their listed companies. 

At the end of April 2005, their total market capitalisation was 123 billion Euros, which represents 0.45% of the world stock capitalisation, less than 1.8% of the EU market capitalisation and only 7% of Euronext. The most significant market of the CEE region, the Warsaw Stock Exchange (WSE), exceeds only, among the former EU-15, the capitalisation of the Luxembourg Stock exchange. The ratio of stock capitalisation of the NMS to their GDP (26%) appears also relatively low compared with that of the EU-15 (71% of their GDP). Finally, the NMS stock exchanges’ liquidity is usually lower than in Western Europe: the average turnover velocity ratio (yearly amount of trades on market capitalisation) is 35% on average in the NMS, which is the level of the smallest Western European markets (Athens: 40%; Vienna: 35%) and three to four times lower than those of Euronext, Deutsche Börse or the LSE (between 100 and 130%). The Budapest Stock Exchange presents the highest turnover in the NMS, with a rate of 63% in 2004. 

No conclusion can be drawn from the relatively small size of these markets regarding their effective importance in the local economy. Indeed, comparing capitalisation between markets continuously functioning since at least sixty years and others built from nothing only less than fifteen years ago does not make sense. An acceleration of the catching up actually took place in 2004, the year of the accession to the EU, which granted to the NMS markets the European status of ‘regulated markets’, accessible to any European financial intermediary or collective investment fund. Between the end of 2003 and April 2005, in spite of the set back of the first months of 2005 (linked with the weakened interest of global investors for the emerging countries), the total capitalisation of the ten NMS markets grew +73% in euros, compared with only +14% for the former EU-15 markets and the ratio capitalisation/GDP grew +63% (compared with +8% in the EU-15). 

The number of listed companies is similar in the CEE markets and the average sized Western markets* (which could be made less visible by the reunion of four Western markets into Euronext and of three into OMX) and the number of Initial Public Offerings (IPOs) is comparable in the CEE and Western markets: that listing activity witnesses an effective role in financing the economy. Poland in particular, with 36 IPOs in 2004 and already 12 in the first four months of 2005, ranks number two of all European markets. New listings in Poland represented an additional capitalisation of €11.2bn in 2004 (5.5% of GDP); of that amount, 2.5bn (7% of the GFCF) were new financing for the companies and 8.6bn were returned to the initial owners (including 2.5bn of privatisation receipts for the State and 6bn for private investors). From 1999 to 2004, in Poland, Hungary and Slovenia, IPOs and secondary offers (of already listed companies) represented on average more than 4% of the total investment in these economies. That percentage was inferior in Western countries which have an average sized market (Austria, Denmark). These IPO numbers represent a strong incentive for the development of the private equity/venture capital in the region. 

The anticipation not to encounter difficulties in the listing process, thanks to the efficiency of the stock exchanges (and particularly the Warsaw Stock Exchange), appears to contribute strongly to the catching up of the CEE region in terms of development of the venture capital (which represents only one third of the level reached in Western Europe). According to the European Venture Capital and Private Equity Association (EVCA), €320M were raised in 2003 by private equity funds dedicated to the CEE region (including €177M dedicated to Poland only), €550M were raised in 2004 and the EVCA forecasted (in May 2005) €800M of new funds for 2005. In 15 years (1990-2004), private equity funds invested €7bn in the CEE region. 

According to the Warsaw Stock Exchange, listed Polish companies receive, on average, approximately one quarter of their financing from the stock market (as well as one third from self financing and one another third from bank loans). The issuing of debt securities is growing (€1.7bn in 2004, +37% compared to 2003), but only a small number of companies are concerned (generally in the NMS, except in the Czech Republic, the sovereign debt has a de facto monopoly on the local debt markets). The share of financing brought by the stock market would be even more important (close to half of the total) for the 30% smallest listed companies, that is to say those which could potentially experience more difficulties in accessing bank loans or foreign direct investment. Listed companies in the NMS markets are, in general, small according to international standards: 50% of listed companies in Hungary and Poland would have less than €150M of yearly earnings. Companies whose size would be insufficient to access profitably to the biggest Western markets appear to be able to get financing from CEE markets. Nevertheless, of the 500 Polish companies with the highest yearly earnings, only 115 are currently listed, which indicates a potentially strong rhythm of new IPOs for the coming years. 

That role in financing should continue to develop in parallel with the enlargement of the investors’ base: the NMS register a parallel progression of the domestic institutional investors and of the foreign investors in the holding of shares of local companies. Foreign investors are already especially strong in Hungary and Estonia (where their holdings represent 80% of the total market capitalisation). 30% of the Czech capitalisation is held by non-residents. In Poland, the volume of trades are equally shared between non-residents (33%in 2004), domestic institutional investors (32%) and domestic individual investors (35%). On the contrary, foreign investors hold only 10% of the market capitalisation in Slovenia. The growth of the significance of the domestic institutional investors should be, in particular, a strong driving force of the development of the NMS stock markets. With the growth of the collective investment funds (especially mandatory pension funds), the share of their portfolios invested in stocks should also grow: in Poland, stocks represent only approximately 30% of the assets managed by institutional investors; in Hungary, pension funds have invested only 8% of their assets in stocks. 

2 – The enactment, between 2006 and 2008, of the main new regulations from the European Financial Services Action Plan will toughen the competitive environment and could induce the disappearance of several NMS stock exchanges: 

Until now, contrary to what was anticipated by many, the EU accession did not provoke any important migration of NMS companies’ listings from their local markets to the main Western markets (approximately 150 important companies from NMS were already double-listed abroad before the accession). Some significant de-listings took place in the last few months, but were mostly related to individual M&A activities*. However, the risk of such a systemic migration still exists and could be reinforced, in particular, by the enactment of the ‘Prospectus’ Directive, which will make automatic the acceptance, by any host country, of a prospectus which already got the issuance visa from the market authority of the issuer home country (inside the EU). The mutual recognition of all EU markets theoretically allows any member of a stock exchange to trade remotely any of the NMS securities: therefore, the biggest NMS companies could choose the liquidity and the prestige of the sole foreign market in order to save the added costs of multiple listings. That migration risk should be kept limited, as it was until now, by the many positive externalities, for the NMS companies, of being listed close to their home-base, where they are well-known and where their economic impact is significant. 

The enactment, expected by 2007, of the ‘Markets in Financial Instruments’ Directive, represents another risk. Most NMS stock exchanges (in particular the Polish, Hungarian and Czech) benefit from a ‘concentration rule’ (obligation to trade listed securities through a regulated market): the MIFI Directive will authorise the systematic internalisation (internal netting, by a bank for example, of buying and selling orders, only the net amount being brought to the market and contributing to the liquidity and the price formation of the security) and therefore, should contribute, on the NMS markets, to the fragmentation of an already weak liquidity. That added fragmentation will be organised by players (the international investment banks) whose ‘price making’ power will be significantly superior to those of the NMS regulated markets. The smaller these markets are, the heavier the competitive pressure will be on them. 

The NMS stock exchanges are currently making strategic choices in order to assure their survival. Several directions are possible **, but the reshaping of the ‘post-trade’ activities appears to be the most preferred. The research of new revenues has actually mainly translated, in the NMS, into the constitution of ‘vertical silo structures’ which combine, along with the model of the Deutsche Börse, the management of the market place (listing and trading) with the post-trade management (clearing and settlement, central securities depository -CSD). Thus, the Prague Stock Exchange already owns 100% of the Czech clearing and settlement company (from which the PSE receives at least one half of its revenue) and is supposed to merge it with the Czech CSD in 2006. In 2002, the Riga and Tallinn Stock Exchange bought their local post-trade structures. The Budapest Stock Exchange should buy entirely its own post-trade structure in the coming months. 

Three actors in CEE appear to have currently a regional role. The first of these is the Swedish OMX. The research of harmonisation and of sharing of technology between the three Baltic Stock Exchanges had previously given birth, in January 2000, to the ‘Baltic List’ (virtual market of the 15 main listed securities of the three exchanges) and was pursued in 2001 with a cooperation agreement with Helsinki, whose exchange, HEX, eventually took over the Estonian and Latvian exchanges. Scandinavian countries (Sweden, Denmark, Norway, Iceland) were together building a common market place, NOREX, based on a common trading platform accompanied by cross-membership agreements. In 2003, the take over of HEX by OM-Gruppen, the company of the Swedish Exchange (which renamed itself OMX and subsequently took over the Lithuanian and Danish exchanges), induced the integration of the Baltic exchanges to NOREX, with whom they share the trading infrastructures and the members, while at the same time they continue to be identified by the investors as an autonomous sub-group. 

The German bank HVB is the second main regional player. At the beginning of 2004, the Hungarian subsidiary of HVB created a consortium with several Austrian banks and the Wiener Börse, in order to buy 69% of the Budapest Stock Exchange (BSE). The melding between the exchanges of Vienna and Budapest was put into the spotlight; but the actual intention of HVB-Hungary (first shareholder of the BSE) was, according to the local financial press, to be able to take over the very profitable post-market company, KELER (CSD and Clearinghouse, the only one in the NMS acting as a Central Counterparty –CCP), which is partially owned by the BSE. The BSE should be able to buy 100% of KELER at the end of 2005, thanks to the selling of the shares (representing 53.5% of the company) held by the Hungarian Central Bank (MNB). Before that sale, the MNB wants to be sure that, in the future, the Central Depository function will be safe from any kind of banking risk (credit, loan of securities, etc.). Poland presents a similar situation: the consortium HVB-Wiener Börse has already demonstrated its interest in participating in the privatisation of the Warsaw Stock Exchange and, eventually, of the Polish Central Depository (KDPW, equally owned by the WSE, the State Treasury and the Central Bank). In lobbying the Polish Government, HVB will be able to put emphasis on its preoccupation of maintaining local independent market places. The planned merger with Unicredito should reinforce the regional ambitions of HVB. 

The third regional player is the Warsaw Stock Exchange (WSE), owned 98% by the State Treasury and the privatisation of which will be a milestone for the reshaping of CEE stock markets. The WSE, representing approximately 40% of the NMS capitalisation, takes advantage of an investor base of ‘captive’ mandatory pension funds (which cannot invest more than 5% of their assets in foreign securities) and has the will to develop itself as a ‘hub’ for the whole CEE region. Globally perceptible by international investors, the WSE indeed keeps the vicinity to their local markets and investors base which appeared to be important to the success of the listing of the NMS companies. Thus, six foreign companies recently got listed on the WSE, including two Hungarian companies and two Austrian banks. As it can be illustrated by the failed attempt (in partnership with Euronext) to take over the Vilnius Stock Exchange, the WSE currently appears more as a prey than as an active player in the reorganisation of the CEE exchanges; that situation will change once its privatisation is completed. In the case that a ‘strategic partner’ is chosen during the privatisation process, it would have to strongly commit itself to preserve the independence and visibility of the Polish stock exchange. 

To read the article complete with tables and notes, visit to Revue Elargissement website.