Bucharest Stock Exchange has been on an upward trajectory ever since it appointed Ludwik Sobolewski as its chief executive in August 2013. Mr Sobolewski previously held the same position at Warsaw Stock Exchange, arguably the largest in central and eastern Europe.
Mr Sobolewski’s “overarching goal” is to raise Bucharest Stock Exchange from being a frontier to an emerging market – and his goal is coming ever closer.
With Romania's capital markets reaching the third year of their modernisation programme, Bucharest Stock Exchange, the Central Depository, Financial Supervisory Authority and other Romanian institutions have all upgraded their infrastructure and operations. “In 2014, we made some efforts to significantly decrease the trading fees, which has been acknowledged by [investment research institution] FTSE Russell in its most recent assessment,” says Mr Sobolewski.
Final frontier days?
FTSE Russell is one of the international institutions determining the status of development of capital markets. In March 2016, the London-based firm informed Mr Sobolewski that Bucharest Stock Exchange now meets all but one of the criteria required to be promoted from 'frontier' to 'emerging' market: liquidity.
The liquidity criteria refers to “a larger number of companies in terms of market capitalisation and number of shares available for trading, with higher transaction values”, according to the letter from FTSE Russell to Bucharest Stock Exchange.
Other investment research firms with capital markets classifications and their own indices, including the US MSCI and S&P Dow Jones institutions and the Switzerland’s Stoxx, have all come to similar conclusions regarding the Romanian capital markets.
The criteria and analysis processes used by the firms are relatively similar and relate mainly to the value of transactions and size of listed companies, as well as the speed of access to the capital market for investors and how they can buy and sell shares.
“The problem is quantitative,” says Mr Sobolewski, who adds that what is needed is the listing of some larger businesses, ideally through the privatisation of some state assets through the equity market.
“It would be a very interesting period for Romania to be on the watch list, as it would pass a very clear message,” he says. “The investment world would see that Romania is a country where macro risks and others are at a level of an emerging market country at a return of a frontier market.”
The status of a watch list constituent would indeed be expected to draw more investors to the Romanian equity market, seeking to take advantage of the higher return proposition. This would further enhance Bucharest Stock Exchange’s attractiveness. The next step – actual emerging market status, which would see Romanian stocks included in emerging market indices – would in turn boost the exchange’s trading volumes, and with it profitability.
Power boost
To reach this target, Bucharest Stock Exchange needs more initial public offerings (IPOs). At the top of the wish list is Romania’s largest hydro power producer, Hidro-electrica. The majority state-owned utility, which became insolvent in 2012 after losing $1.4bn over the course of six years due to contracts selling power below market prices, was pushed back into insolvency in early 2014. A court decision in late June has seen the firm exit insolvency, paving the way for a part-privatisation, which could happen as early as November. However, a government shake-up with the replacement of four ministers in July may delay the start of any privatisation process.
Hidroelectrica’s court-appointed manager, Remus Borza, had told local media after the court decision that the company had already appointed listing and legal advisers and was considering floating a 15% stake on both the Bucharest and London stock exchanges.
According to investment bank Renaissance Capital’s IPO Center, the likely deal size for an IPO of Hidroelectrica in Bucharest is $570m. Hidroelectrica’s listing would be the first privatisation through the stock market in Romania since the sale of utility Electrica in 2014.
However, Mr Sobolewski is looking ahead still further. “There are concrete hopes that the privatisation process will be resumed,” he says. “But so far there has been no push from the government.”
Yet, if the process were to go ahead, another asset the investor community expects to be privatised through a listing is the national postal service, CN Poșta Romana, which would also be the first postal company in central and eastern Europe to be listed.
Other IPOs expected include RCS & RDS, Romania’s privately owned telecoms and cable TV business, which has strong market positions in Romania and Hungary and which may list a 25% stake on Bucharest Stock Exchange. Local media estimate a transaction in the range of €400m to €500m would allow some of the group’s minority shareholders to exit the business, offering further opportunities for the stock exchange to flourish.
Linking up
While waiting for the big privatisation push, Mr Sobolewski has set himself an immediate target of attracting additional brokers to the market. “Intermediaries are very important,” he says, adding that in 2015 Hungarian broker Concorde became a member of the exchange. Mr Sobolewski further plans to join SEE Link, a regional trading platform established by three exchanges in the south-east European region with funding from the European Bank for Reconstruction and Development (EBRD).
“SEE Link is a central hub through which orders can be placed and distributed,” he says. “That means that brokers don’t have to be connected to all these countries. Instead, orders are routed to the respective markets.”
The SEE Link project started in late March with an agreement between the exchanges in Bulgaria, Croatia and Macedonia. In the short period of its existence, SEE Link has added the exchanges in Serbia and Slovenia, while Banja Luka Stock Exchange of Bosnia-Herzegovina’s Republika Srpska region, Montenegro Stock Exchange and the exchange in Athens have agreed to join and will be operationally connected in November, boosting total equity market capitalisation from $29.9bn at launch to $78.9bn and trading volumes from $777m to $22.5bn, according to data from the EBRD.
“The idea behind this cross-border initiative is to integrate regional equity markets without merger or corporate integration, using only technology that will enable participating stock exchanges to remain independent yet complementary and to allow investors an easier and more efficient approach to those markets through a local broker,” says Jacek Kubas, the EBRD's principal for local currency and capital markets development. “Everything we did, we used local resources including IT, legal and operational [resources, which] also allowed us to decrease costs.”
The first trade was completed on March 29. SEE Link has further launched the SEE LinX and SEE LinX EWI indices, including stocks from the three founding exchanges.
Closely monitored
Mr Sobolewski says that he has been monitoring the project closely. “When Serbia joined we thought it could be a new business proposition, and with Greece the project’s attractiveness is even larger,” he says.
Bucharest Stock Exchange’s 2015 market capitalisation was $18.5bn, which, if it joined the Skopje-based trading hub, would make it the second largest member after Greece with $42.1bn.
“We can gain from such a platform but we can also see a situation in which our brokers have easier access to other markets,” says Mr Sobolewski. “Even so, these young countries need capital to be imported and we believe it seems as if the advantages will prevail.”
After joining the hub, the potential inclusion of some Bucharest-listed stocks in new indices to be launched through SEE Link could also further boost liquidity, putting Bucharest Stock Exchange another step closer towards emerging market status.
