Vladimir Mitev, Economy Magazine, 5 May 2016
This article was published in the April 2016 issue of “Economy” magazine.
The Bucharest Stock Exchange (BSE) is modest in scale when compared to the major exchanges in the region. Its Warsaw counterpart has a market capitalization of 232.875 billion euros and a daily trading volume of 233 million euros. The BSE boasts a market capitalization of just 29.076 billion euros and a trading volume of only 7.55 million euros. And yet, people—and stock exchanges—are only as big as their dreams.
Since the beginning of the year, the Romanian financial media has been reporting extensively on the Bucharest Stock Exchange’s intentions to raise its profile. These plans actually date back years, but they appear to be back on the table under the current transitional government led by former European Commissioner Dacian Cioloș, which replaced that of Social Democrat Victor Ponta. Currently, the exchange is classified by Morgan Stanley Capital International as a “frontier market.” Exchange managers want to upgrade its classification to “emerging market.”
They believe this will provide access to 30 times more capital—that is, to funds totaling $1.2–1.5 trillion. They cite the example of the Qatar Stock Exchange, which attained this higher status on June 2, 2014. Its daily trading volume, which was $16.35 million before the change, rose to $154.4 million afterward. “It is vital that we succeed in maintaining the interest of Romania’s decision-makers so that they continue to support the stock exchange’s designation as an ‘emerging market.’ This is a national project from which everyone will benefit. The state stands to be the main beneficiary, because its implementation will lead to greater potential for growth in the value of companies listed on the Bucharest Stock Exchange,” said Lucian Anghel, chairman of the exchange’s administrative board, in an interview with the Romanian national news agency Agerpres.
He continued: “In the medium term, I propose that, together with my colleagues on the BSE Board, we continue the process of establishing the capital market as an ‘emerging market’ recognized by specialized international institutions. In this regard, the implementation of the privatization program (by the government—ed.) is very important for meeting the quantitative criteria. To a large extent, the qualitative criteria have already been met. What we lack is the free-float ratio for large companies listed on the BSE. The privatization of Hidroelectrica through the stock exchange could be the largest listing on the capital market and could thus increase Romania’s chances of being recognized in the upper tier of capital markets.”
The website Cursdeguvernare.ro explains what criteria must be met for the BSE to achieve its goal. In terms of quality, the trust of investors in the local market must be earned, which management acknowledges has largely been achieved. It periodically organizes presentations at stock exchanges in the West specifically to promote the Romanian capital market.
In quantitative terms, the situation is different. The exchange must have at least three highly liquid companies that meet the following conditions: have a market capitalization of at least $1.26 billion; have a value of freely tradable shares of $630 million; and have a free float of at least 15% of the company’s market capitalization.
Since Romanian private companies are small in size and have recently shown little interest in listing on the stock exchange, hopes are pinned on the privatization of large state-owned enterprises through the BSE. Hidroelectrica is precisely such a company; its main activity is the generation of electricity from hydroelectric power plants. The company operates over 270 hydroelectric power plants and accounts for over 20% of Romania’s electricity production.
Hidroelectrica is currently in bankruptcy. If it is indeed listed on the stock exchange, as is expected to happen this year, the BSE will receive the much-needed boost it requires.
Mircea Ursache, Vice President of the Financial Supervisory Authority (ASF), explains that his institution is taking several measures to prepare the BSE for the launch of the single capital market in the EU in 2019. These include corporate governance rules that will also apply to the managers of companies listed on the exchange, increased transparency, and greater protection for “capital market consumers”—specifically, minority shareholders.
According to Euromoney, Romania is not among the countries where the 20 largest initial public offerings (IPOs) took place in 2015. Most of these IPOs took place in Poland—11—followed by Russia—4. Other countries on the list include Hungary, the Czech Republic, Croatia, Lithuania, and Turkey.
“We will never become an emerging market unless the Romanian government proceeds in a more decisive manner than in the past with the privatization program for new companies, as well as for those already listed on the stock exchange,” said Ludwik Sobolewski, the Polish manager of the Bucharest Stock Exchange (BSE), in New York in September 2015. He was in the largest U.S. city to participate in a joint forum of Romanian companies and American investors.
Ludwik Sobolewski, manager of the Bucharest Stock Exchange (source: bvb.ro)
Sobolewski’s appeal came just days before the previous government, led by Social Democrat Victor Ponta, was ousted from power following protests involving tens of thousands of people, sparked by the tragic incident at the “Colectiv” club that claimed the lives of dozens of young people. Ponta’s government was in no hurry to carry out privatizations. Instead, it introduced a preferential VAT rate for food products and committed to raising the salaries of teachers and doctors. In other words, it pursued policies that favored the general electorate rather than business.
The new government of Dacian Cioloș is perceived by many as pro-market and close to international companies operating in the country and the national central bank. Among its ranks—including ministers, deputy ministers, and state secretaries—there are many representatives of foreign business. This likely explains the renewed media calls in support of elevating the BSE’s status.
BSE management points to 2017 as a possible year in which to achieve its goal of becoming a “developing market.” But such statements are always made with a degree of uncertainty.
“The lack of new initial public offerings (IPOs) and reduced liquidity are holding us back. And since 2016 did not start well for capital markets around the world, including the Bucharest Stock Exchange, there is a strong likelihood that IPOs will be postponed until next year,” notes the Romanian financial weekly Capital. Representatives of the financial community and experts will continue to monitor the progress of Hidroelectrica’s privatization through the stock exchange. It also appears that, as in other parts of Eastern Europe, capitalism on its own has limited power and needs state support to grow.
Photo: The Bucharest Stock Exchange logo (source: bvb.ro)
Subscribe to the channel of the blog “The Bridge of Friendship” in YouTube, where a number of video and audio interviews are published! The blog can also be followed in Facebook and Twitter. Its Telegram channel is here. And here is its Substack account.
About Author
Discover more from The Bridge of Friendship
Subscribe to get the latest posts sent to your email.
