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)