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EU accession talks boost markets

Croatia’s fledgling capital markets are benefiting from a surge in interest from domestic and foreign investment funds and a fast-growing corporate bond market as negotiations for EU membership get under way. Nick Spiro reports.
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These are exciting times for Croatia’s tiny capital markets. In 2004, the Crobex, the main index of the Zagreb Stock Exchange (ZSE), rose by 32% as foreign and local investors piled into the market in the expectation that Croatia would soon be allowed to begin accession negotiations to join the EU. Last year, the official start of membership talks in October contributed to a 28% rise in the Crobex, a 44% increase in the turnover in equities, bonds and certificates listed on the bourse and a 150% rise in trading volumes.

Bond growth

The market capitalisation of the equities and bonds quoted on the ZSE increased by 33.4%, while there was a 90% rise in daily transactions. Among the most actively traded stocks were the Adris Group, a large tobacco and tourist company, Pliva, the pharmaceuticals group, and Podravka, a food producer.

The country’s two largest banks, Zagrebacka Banka, owned by Italy’s UniCredit, and Privredna Banka Zagreb (PBZ), controlled by Italy’s Banca Intesa, account for roughly one-quarter of the bourse’s capitalisation.

According to the Croatian securities regulator: “Much of the credit for [the] growth can be attributed to domestic and foreign investment funds which, having seen the example of multiple growth in share prices in the [central European] countries which joined the EU, started to invest more heavily in the Croatian market.”

It adds that there are expectations that the Croatian capital market will follow the examples of the regional and Baltic markets, which allowed investors to make significant profits before their entry to the EU.

Although the Zagreb bourse, which was set up in 1991 but only started trading actively in 1996 after Zagrebacka Banka and Pliva made their debuts on the exchange, is tiny even by regional standards, with a market capitalisation last year of Hrk81bn ($13bn), it is eager to boost its liquidity.

“There should be more investment by funds, which previously faced restrictions [on investing] prior to the start of Croatia’s negotiations with the EU. We’re also in talks with the Vienna bourse about forming a loose alliance based on a harmonisation of our trading platforms,” says Zeljko Kardum, a member of the ZSE’s listing committee.

The bond market is developing rapidly. Although long-term funding in kuna, the Croatian currency, was non-existent prior to May 2003, when the Croatian government issued its first five-year benchmark kuna-denominated bond, several large corporates have tapped the market in the past two years.

Pliva got the ball rolling in May 2004 when it issued a €75m fixed-rate seven-year bond, the longest maturity and (at the time) the largest amount issued by a Croatian firm. Although the bond was euro-denominated, the settlement of interest and principal is in kuna. “Pliva is a very successful company, so it was fairly easy for it to sell bonds,” notes Mr Kardum.

Corporate issues

The other Croatian corporates that have issued bonds are Agrokor, a large conglomerate (€230m), Bina-Istra, an infrastructure group specialising in motorways (€210m), Podravka (€27m) and Atlantic Grupa (€15m). The bonds are listed on the Crobis, the ZSE’s bond index, which, although dominated by government securities, currently has nine corporate issues.

The Crobis’s market capitalisation increased by 40% last year, outpacing the growth of the Crobex, the equity index, which rose by 31%.

The market received a fillip in February when the local subsidiary of Raiffeisen Bank issued the largest corporate bond on the Croatian market (other issues were international ones), with a Hrk600m five-year issue with an annual interest rate of 4.1%.

Zoran Koscak, a board member of Raiffeisen Bank in Zagreb, says the main objective in issuing the bond was to secure funding in local currency.

“We are a greenfield bank. We have lots of deposits in euros and rely on funding [from our parent firm],” he says. “We therefore wanted to secure long-term kuna funding. It was also a good time to tap the market given the significant drop in yields.”

The other main reason for issuing the bond, according to Mr Koscak, was to circumvent stringent regulations by the central bank aimed at curbing commercial banks’ foreign borrowing. The central bank is concerned about the rapid growth of Croatia’s private sector external debt which, at nearly 70% of the country’s current account receipts, is the highest in the region.

Mr Kardum explains that because borrowing has become far too expensive, the banks thought one alternative would be to issue bonds – which would be bought mainly by their parent group. However, the central bank caught on to this and amended the regulations so that bond issues were also subject to high reserve requirements. “When Raiffeisen prepared [the bond’s] prospectus, they thought they could get round the restrictions, but in the end they realised they couldn’t,” he says.

Institutional investors

Croatia’s capital markets are also benefiting from the emergence of a domestic institutional investor base, which includes privately managed pension funds that provide a stable and long-term source of demand for equity and bond offerings.

Pension funds are legally obliged to keep at least 50% of their portfolios in government securities. The funds have helped the Croatian government to finance all of its borrowing needs domestically since mid-2004, thus stabilising the country’s high external debt level, according to a report from Standard & Poor’s.

Investment funds

Mutual funds are also catching on fast. Bankers see significant potential for growth in investment funds as interest rates fall, encouraging customers to shift their savings into higher-yielding mutual funds. The regulatory environment governing Croatia’s capital markets has also improved.

The securities watchdog was set up in 1996 and has wide-ranging supervisory powers over the stockmarket, brokerage houses and investment funds. However, as in other central and eastern European countries, the regulator’s enforcement powers are somewhat constrained because of a dilatory court system.

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Read more about:  Central & Eastern Europe , Croatia