Stephen Timewell reports from the EBRD’s annual meeting in Tashkent on the potential recipe for success in the developing economies.
The central and eastern European countries, especially the eight European Union (EU) accession states, are expected to significantly outpace their western neighbours this year as ongoing inflows of foreign direct investment provide double the growth rates of existing EU economies.
While fragile foreign demand and high budget deficits provide concerns, economists at the European Bank for Reconstruction and Development’s (EBRD) recent annual meeting in Tashkent were still guardedly optimistic about the prospects for the central and eastern European (CEE) region and bankers could point to a small but steady flow of new deals and acquisitions.
Economic disparities
However, the Uzbekistan meeting, which was the first EBRD annual meeting to be held in central Asia, amply demonstrated the significant economic and political disparities between the bank’s 26 member states. As eight states prepare for EU membership in May 2004, others, such as Uzbekistan, have been heavily criticised over torture, lack of openness and market reforms.
The EBRD noted in its report on Uzbekistan: “Foreign direct investment flows are the lowest of all transition economies on a per capita basis and the economy remains generally closed to competition, with a high degree of direct state involvement and control.”
It added: “There are serious concerns regarding development of genuine multi-party democracy and pluralistic society and the situation with the rule of law and respect for human rights remains difficult. The overall political environment in Uzbekistan is not conducive to criticism of government policies.”
But while the Uzbek leader, Islam Karimov, appeared to ignore the calls for reform at the meeting, elsewhere reforms are bearing fruit. According to the EBRD, growth in central Europe and the Baltics is expected to recover to 3.4% this year while south eastern Europe will stay at 4% and the Commonwealth of Independent States (CIS) is expected to decline slightly to 4.5%, with Russian growth maintained at 4.3%.
These are all well above eurozone growth forecasts of 1.3% this year and result from higher consumer spending and the region’s ability to attract net capital inflows. The EBRD notes that net private capital inflows reached $36.7bn in 2002, up from $33.2bn in 2001, reflecting stability and reform in many of the transition countries.
Even Uzbekistan is attracting some interest. During the meeting, the country’s first private equity fund was launched. Carthill Asset Management Company, a subsidiary of UK-based Carthill Investment, has joined with New York-based Latin World Asset Management to form the Central Asian Opportunity Fund with an initial first tranche of $5m.
Carthill managing director Alisher Djumanov believes there are good opportunities in minerals, cotton, food processing and telecoms, and the equity fund launch follows Carthill’s pioneering work in establishing a corporate bond market (The Banker, April 2003, p91).
Looking north, Kazakhstan has already introduced major economic reforms, which produced strong growth of 9.5% in 2002 and 9.8% in the first quarter. Grigori Marchenko, governor of the National Bank of Kazakhstan (central bank), told The Banker: “We have had three years of rapid growth but we need that growth for another five to seven years to gain international recognition.” He is also keen to restructure the central bank’s role.
Under the changes, all financial supervision and regulatory activities for the financial sector will be spun off into a separate legal entity to be known as the Financial Supervision Agency (FSA). The agency, which will report directly to the president of the country not the central bank, will start operations on January 1, 2004 and will be headed by Anvar Saidenov, the current deputy governor of the central bank.
Slow to reform
The latest report by the Washington-based Institute of International Finance notes overall structural reforms have slowed in CEE. However, the IIF adds: “Bank restructuring remains the most advanced of the reforms undertaken in the region, except in Russia, where moves to strengthen regulation and supervision have only recently begun.
“Restructuring elsewhere has been largely completed. Banks are well capitalised, with very few exceptions. Non-performing loans are at magnitudes much reduced from earlier levels and largely provided for. Dominant foreign ownership has helped improve risk management and limit vulnerabilities of the banking sector.
“Privatisation has been fully or largely completed in Hungary, Slovakia, Czech Republic, Bulgaria and Romania. In Poland, by contrast, the government has moved slowly in privatising the four remaining state-owned banks in order to direct their restructuring and help preserve employment,” it says.
Although most of the cherries have gone, the active foreign banks are still interested in picking off some smaller players and boosting market share. Austria’s RZB Group has recently acquired a 75% stake in the American Bank of Kosova, a small bank with a capital of e56m ($65m) and 118 employees serving 70,000 customers. The bank, the second largest in the country, was renamed Raiffeisen Bank Kosova last month and will focus on microfinance.
RZB deputy chairman Dr Herbert Stepic has been a prime mover behind his bank’s expansion in the region. Earlier this year he was the first foreign banker to buy into Belarus. RZB bought a majority stake in Priorbank, the country’s third largest with a balance sheet of e280m, 71 branches and 400,000 customers.
He expects to provide badly needed help to Belarus exporters and use its strength as a bank for the Mittelstand. “Belarus has had a change in philosophy and is now beginning to open up its economy, but it is unable to absorb shock tactics – this will be more Chinese-style, a step-by-step liberalisation,” he says.
Plan for sell-offs
With Belarus taking reform more seriously and officials contemplating more privatisations and foreign investment, the central bank plans to sell its stakes in four banks. RZB is well placed to match Belarus’s expansion.
Bank Austria Creditanstalt, a subsidiary of Germany’s troubled HVB Group, has the largest international network operating in the CEE region with 900 offices in 15 countries serving 3.5 million customers.
It has grown dramatically from e2.9bn in total assets in the region in 1996 to e25bn at year-end 2002. And the funds from the coming share issue are expected to be used for further acquisitions in the CEE region.
Bank Austria expects its CEE assets to grow to e40bn in 2005 and sees strong potential in south east Europe. Following the acquisitions of Splitska Banka and Bulgaria’s Biochim last year, the bank opened a representative office in Skopje, Macedonia, in March this year and is planning to buy Hungary’s Postabank in the coming months.
Bank Austria’s pre-tax profits from its seven CEE subsidiaries reached e280.3m in 2002, a 34% rise, and senior general manager Martin Grull expects profits in e300m this year.
Up for grabs
The big prize still on the market is Romania’s biggest bank, Banca Comerciala Romana, which has about 30% market share but has not attracted a key strategic investor in the past 18 months. Romania has now had to adjust its privatisation strategy for BCR and bankers confirm that the EBRD and the World Bank’s private-sector arm, the IFC, plan to buy a 25% stake in the bank, split equally between them. Due diligence was expected to be completed by the end of May and contracts to be signed by the end of this month.
The deal is understood to include a call option and a put option due in 2006, allowing the institutions to sell back and the state to buy back if a strategic investor is found before 2006. If it takes place, remaining shareholders would be the state (37%), domestic institutions (30%) and BCR employees (8%).
Who could be interested in BCR? Unicredito, Citibank, Société Générale, ING, KBC, along with Bank Austria, RZB and Erste all have strong interests in central Europe, and Romania represents a large, growing market. BCR is a large acquisition, however, and size alone may deter some players. “It would fit into our strategy but not at present,” notes Bank Austria’s Mr Grull.
Meanwhile, Erste Bank has been negotiating to buy Bulgaria’s DSK Bank, a savings bank that CEO Andreas Treichel believes would fit Erste’s model perfectly. Mr Treichel’s strategy is to go into retail and only move into markets where he has 20% market share. “You need 20% because then you can work on the same principles as food retailers: price and volume,” he says.
For him and other foreign banks, the EBRD member countries offer good opportunities to expand beyond their domestic markets into growing economies that are still significantly underbanked. It is a recipe for success and even slow western European economies will not dampen the potential.