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The Prospects of Capital Markets in Central and Eastern Europe
Michael Schröder
Centre for European Economic Research (ZEW)
Mannheim, Germany, www.zew.de
Dubrovnik, 27 June 2003
Contents of the Presentation Evaluation of the Status of CEE Stock Markets
Future Prospects of Securities Exchanges
Countries: Czech Rep., Hungary, Poland, Slovak Rep. In some sections Baltic countries, Slovenia
ZEW-Discussion Paper 02-57 (with J. Köke)(incl. also bond markets, corporate finance, case study “corporate finance in Poland”)
How large are CEE Stock Markets? All CEE exchanges together amount to
x% at the end of 2001:• 0.2% of World stock market capitalization• 9.2% of the German Stock Exchange• 95.2% of the Athens Stock Exchange
The Warsaw Stock Exchange has approx. 46% of the capitalization of the whole region
Stock Market Capitalization, 1995-2002(market value of listed stocks in % of GDP)
0,0%
20,0%
40,0%
60,0%
80,0%
100,0%
120,0%
1995 1996 1997 1998 1999 2000 2001 2002
Czech Republic HungaryPoland Slovak RepublicGermany Spain
Stock Market Capitalization, 1995-2002(market value of listed stocks in % of GDP)
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%
35,0%
40,0%
1995 1996 1997 1998 1999 2000 2001 2002
Czech RepublicHungaryPolandSlovak Republic
Number of Listed Domestic Firms (FIBV)
0
50
100
150
200
250
1995 1996 1997 1998 1999 2000 2001 2002
Hungary
Poland
Czech Rep.
Slovak Rep.
Stock Market Liquidity, 1995-2002(trading volume in % of market capitalization)
0,0%
50,0%
100,0%
150,0%
200,0%
250,0%
1995 1996 1997 1998 1999 2000 2001 2002
Czech Republic HungaryPoland Slovak RepublicGermany Spain
Derivatives Markets
Hungary Poland Czech Republic Start 1995 1998 Permission in 2001 Futures on: Not yet active Stock Index Yes Yes Currency Yes Yes Interest Yes --- Individual stocks Yes Yes Trend Declining Booming
Regulation of Stock Exchanges Strict regulation of official market segments
Rules and fees (admission, maintenance) comparable to western exchanges, but different across CEE exchanges --> harmonization necessary?
Listings concentrated in the free market(except Warsaw)=> typically unattractive for (foreign) investors=> rules too strict / costs too high in primary markets?
CEE Capital Markets: Summary Stock markets still small and less liquid
compared to western markets
Trends:– decreasing listing activity (except PL)– booming derivatives market in Poland– increasing institutional investment (HU, PL)
Warsaw stock market largest and most developed amongst CEE stock markets
Corporate Finance: Summary
Internal finance clearly dominates
External finance by domestic and foreign loans (HU, PL)
Small (and decreasinig) role of equity finance (except HU)
Current Organization of CEE Exchanges: A complex picture
Baltic exchanges: Tallinn and Riga are owned by the Helsinki Stock Exchange, Baltic list
Warsaw has trading system compatible with Euronext, but is independent
Budapest: connected to German Stock Exchange (Xetra)
Prague: agreement with LSE, interested in central CEE exchange?
Bratislava, Ljubljana, Lithuania: wait and see
Organization of Securities Exchanges: Results of Research High international standards of infrastructure
and legal system attractive for foreign capital
Economies of scale particularly in trading common trading platform
Linkages with larger exchanges:– Access to foreign capital markets– Higher liquidity, lower trading costs
Future Organization of CEE Exchanges: Four Options Stand-alone solution:
high overhead costs, trading rules not harmonized, unattractive for foreign investors
Fully fledged central CEE exchange: different interests of CEE exchanges, high costs for build-up, still low capitalization
Individual alliances with western exchanges CEE platform at one western exchange
Proposal for an Optimum Solution for CEE exchanges
CEE platform at one western exchange
(Some) Influence on the management of the exchange
Highest visibility of CEE stocks Fully harmonized trading rules and cost
structures Most attractive for foreign investors High liquidity, attractive for issuers and
investors
Future Organization of CEE Exchanges: Likely Developments
Individual alliances of CEE exchanges with western exchanges– Partly harmonized trading rules and cost structures– (Almost) no influence on the management of the
western exchange, CEE equities hardly visible– Second best solution for investors and issuers:
entry to international capital markets
Nordic Exchange (Norex + HEX) including the Baltic Exchanges
Summary CEE exchanges are not very attractive for
(foreign) investors and domestic companies
Alliances with western exchanges
Development of domestic banking system and venture capital markets (for small companies)
Development of domestic institutional investors (driving force for domestic market)