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Slovak stock market eyes future gloomily

Slovakia's stock market, plagued by low liquidity and little foreign interest, has long looked at September's general elections as a chance to turn the sleeping market to an active trading floor. But one month before voters go to the polls, market analysts and traders say that regardless of the outcome of the elections, it will be years before the market finally recovers and trading picks up.
With a market capitalization of only around $900 million, the Bratislava Stock Exchange (BSE) has always languished in the shadow of its bigger neighbours in Prague ($5.0 billion), Warsaw ($4.6 billion) and Budapest ($3.5 billion).

Slovakia's stock market, plagued by low liquidity and little foreign interest, has long looked at September's general elections as a chance to turn the sleeping market to an active trading floor. But one month before voters go to the polls, market analysts and traders say that regardless of the outcome of the elections, it will be years before the market finally recovers and trading picks up.

With a market capitalization of only around $900 million, the Bratislava Stock Exchange (BSE) has always languished in the shadow of its bigger neighbours in Prague ($5.0 billion), Warsaw ($4.6 billion) and Budapest ($3.5 billion).

The Slovak stock market often posts daily turnover of less than one million dollars, while even the most-heavily capitalized blue chips often trade volumes of less than 100 stocks during anonymous trading on the bourse's main listed floor. Adding to the bourse's misery, the official 16-share SAX index has been on a constant decline over the past few days, repeatedly setting new all time lows.

The SAX has been falling steadily since February 1994 when it reached an all time high of 405.49 (see chart this page). It has not risen through 300 points in the last three years. The index lost 37.9% of its value in the first eight months of 1998, closing at 113.54 points on August 28.

"The reason for the situation on the market is a combination of several factors: The general lack of confidence in privatized companies, low transparency on the market, lack of confidence in the currency, and the fact that this is a pre-election year," said Michal Holík, an equity trader at J&T Securities in Bratislava.

While a few months ago, many local and foreign market participants said elections could be an important turning point for the troubled Slovak market, at present few believe that any significant improvement will arrive quickly, even if the result of the polls is considered positive. Stock traders explained that a 'positive result' would be a stable pro-European government formed soon after elections.

But traders also said that the problems of the Slovak capital market are so deeply rooted that only dramatic changes in market conditions could improve the BSE's negative image.

"We have known the attitude of this government to the capital market for a long time," said one foreign bank securities trader who requested anonymity. "So much damage has been done by scrapping voucher privatisation, selling state property to unknown owners and by bad securities laws, that we cannot possibly hope that a government connected to the current cabinet could improve the capital market situation."

On the other hand, the source continued, "even if a completely new government emerges from the elections, the whole economy will be in such a bad situation that more urgent things will have to be dealt with, so any fast improvement will not probably happen within months. It will take a long time until the capital market starts fulfilling its basic function - to be a source of financing for companies."

Dealers are calling for mainly tougher information obligations for listed companies, tougher regulatory rules for market participants and better protection of minority shareholders as preconditions for an improvement in the market.

"Even the best blue chips were privatized to company managements. The information policy has been very bad and the companies are intransparent for investors who find it difficult to get the information they need to make decisions," said J&T's Holík.

The market has long called for the establishment of a U.S-style Securities and Exchange Commission which would independently supervise activities on Slovak capital markets. After years of delay, the Ministry of Finance and the Association of Securities Traders earlier this year finally agreed on the basis for a capital market commission But traders said the draft proposal was too vague to provide the necessary powers to the commission.

"The commission needs to have executive powers and not some kind of an advisory position," said a Slovak stock trader after thee first review of the draft proposal of the new securities commission. "For example, it is still not clear whether it will be allowed to fine someone for manipulating share prices. I think we still have a long way to go to get at least to the point where the Czechs are now."

The trader was referring to a recent Czech Republic move which set up an SEC-style watchdog, giving it executive powers and the right to impose fines of up to 100 million crowns or revoke the licence of a security broker. At present in Slovakia, low liquidity and poor regulations mean that it is easy to manipulate share prices with small amounts of shares traded.

But Slovakia's overall economic situation and high interest rates may prevent a stock market improvement regardless of regulatory changes. Virtually all foreign investors now have their capital parked in Slovak bonds, some of which offer an annual return of more than 20 percent, instead of stocks. Any decrease in interest rates will depend on the entire macroeconomic situation, and will require a lower state budget deficit. In such a scenario, the central bank could ease its tight monetary policies and allow for more money to be pumped into the economy.

However, the central bank will only form its new monetary programme at the end of the year after it reviews the economic plans of the new Slovak government.

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