The strong performance of ex-Yugoslav stock markets in 2023 was largely eclipsed by news from the broader region: Romanian company Hidroelectrica spearheaded an initial public offering (IPO) that topped the charts across the European capital market. This company raised nearly two billion euros, securing a valuation exceeding 10 billion euros, marking a significant milestone in the development of the Bucharest Stock Exchange after years of progress. Romania, often compared in size and population to former Yugoslavia, has now created a capital market several times stronger than the combined national ex-Yugoslav exchanges. This trend is likely to deepen the disparities in the coming years.
What did our counterparts in the Carpathian region know, and what elusive secret evaded regional politicians and investment environment creators? More importantly, what are the chances that local stock market dynamics could at least begin to emulate these positive experiences?
The Romanian Model A critical precondition for cultivating a robust capital market lies in instilling investor trust in investment processes, achievable only with unwavering support from political leadership. This vital element in shaping the capital market foundation has been largely absent in all ex-Yugoslav countries, or at least lacked the continuity for sporadic stimuli to endure long-term.
In nurturing its market, Romania embraced external knowledge and experiences to enhance education for both direct participants in market upliftment and the broader state administration. The management of the national restitution fund by American investment firm Franklin Templeton, almost uninterrupted since the onset of the global economic crisis, significantly contributed to market development and last year’s record-breaking IPO. Additionally, shortly after Templeton’s involvement, Romania adopted insights from the most advanced capital market in Eastern Europe, the Warsaw Stock Exchange, by appointing its director. This gradual process laid the groundwork for market development, with large Romanian state-controlled companies and small to medium-sized enterprises, predominantly from prosperous sectors such as information technology, agriculture and energy, entering the listings.
Adhering to Balkan Norms While the Romanian capital market embarked on its initial stages of continuous development parallel to the onset of the global economic crisis, regional stock market narratives unraveled. A substantial correction in stock market index values wouldn’t have wielded such destructive force had it not been for numerous anomalies hindering market recovery in the post-crisis years.
If there’s a common denominator thwarting any substantial success of regional stock exchanges, it’s the generally low level of corporate governance that the exchanges themselves failed to significantly enhance. Each national market experienced varying degrees of confidence crises, resulting in investor disinterest and declining turnover, perpetuating a vicious cycle hindering significant developmental strides.
For instance, following the global economic crisis, the Ljubljana Stock Exchange suffered from the collapse of the banking system, which stemmed from years of robust economic growth largely fueled by loans granted on fraternal principles. Banks under state control, with loose oversight, suddenly faced a plethora of non-performing loans, leading to the banking system’s collapse, subsequent bank nationalizations, and significant shareholder losses. Another casualty of this chain reaction was the national retail giant, Mercator, forcibly sold to Croatian Agrokor. This takeover likely sealed the fate of Croatia’s largest holding company, which went bankrupt due to years of accumulated debt, relying excessively on political power and insufficiently on effective corporate governance. While Agrokor wasn’t listed on the Zagreb Stock Exchange, numerous subsidiaries inflicted substantial losses on minority shareholders, dealing a blow to market confidence.
Similarly, the Belgrade Stock Exchange, like its Slovenian counterpart, was reshaped by the banking crisis, with numerous mostly para-state banks going bankrupt due to poor management and bad loan accumulation. Shareholder losses extended beyond banks, affecting many companies in the real sector, where the rights of minority shareholders were left to the discretion of majority owners due to institutional loopholes.
What Lies Ahead? After examining the weaknesses of regional markets, it’s evident why these exchanges failed to even approach pre-crisis levels during the prolonged aftermath of the global economic downturn. Croatian and Slovenian companies dominate the region in terms of market capitalization, but with limited freely tradable shares, hindering significant trading volumes and global investor attraction. Moreover, most regional companies are scarcely subject to acquisition, either possessing a majority owner or, as is often the case with Slovenian firms, listed as strategic state-owned enterprises exempt from full privatization.
In entrenched circumstances like these, market growth can only stem from listing new companies, either nominated by the state to enhance their efficiency or by private capital owners. Intriguingly, none of the exchanges listed has a national power utility or a segment for small and medium-sized enterprises, which could facilitate the entry of initially small yet prosperous private companies.
While it’s apparent why politically appointed officials in state-owned enterprises aren’t particularly fond of stock market listings and the transparency they entail, it remains a puzzle why no regional entrepreneur dared to follow the developmental path so common among their counterparts across the Atlantic. Numerous barriers, complex regulations, and high costs undoubtedly pose challenges, but these unfavorable conditions wouldn’t remain insurmountable if there were greater interest from private capital.
Hence, future creators of “Talking Tom” or “Top Eleven” might opt for further development through capital market entry rather than premature business absorption by multinational corporations. Until then, local investors mainly resort to investing in global markets, indirectly financing foreign economies.
