On March 4, Bratislava Stock Exchange's (BSE) official SAX index plummeted to an all-time low of 144.27. This was no surprise, as the BSE has been in free-fall since December 1994, when the then-Finance Minister Sergej Kozlík decided to cancel the second round of voucher privatization. But with each new BSE mishap, it becomes less and less likely that the Finance Ministry will be able to put the Slovak capital market back together again.
The Association of Stock Traders (AST) on February 17 published a scathing report entitled 'The Capital Market in Slovakia: Reasons for Decline and Ways Out.' The document provoked widespread debate, and was the subject of a February 23 meeting between Finance Ministry (MF) and BSE officials.
But market analysts said the analysis was unlikely to provoke any dramatic legislative action during an election year. Instead, they claimed, the report should be seen as part of an attempt by capital market players to distance themselves from the failures of the BSE.
"I don't know who triggered all of this discussion about capital markets," said Martin Kabát, an analyst with Slávia Capital. "Maybe [the AST] wanted to recapitulate everything that has not been done by the government, to cast themselves in a good light."
But Martin Barto, an analyst with ING Barings, said the AST had no secret agenda. "This discussion has been going on for a long time, and [AST President Michal] Horváth has been publishing his views for years," Barto said, adding that the document "contains quite a good description of the real situation, and is a good starting point for discussion about change."
The AST paper represented a vitriolic attack on the "state officials" responsible for the capital market's woes. The MF, the report read, had been guilty of "protectionism, self-importance and dragged-out red tape", while state-appointed capital market supervisors had displayed a "non-professional attitude, limited experience and tardiness" in carrying out their jobs. The result was a stock market in which "bizarre" legal interpretations, "unjustified" demands on players and "arrogant" treatment of clients have become the norm. The AST concluded that the BSE was "currently in a lifeless state," and about "to fall apart."
"[No recovery is possible] without the involvement of foreign portfolio investors, [but] sadly, they have turned their backs on Slovakia," the document reads. "For many foreign fund managers, the Slovak equity market is one of the last places to go in Central and eastern Europe."
What was needed, the AST continued, was improved market transparency, protection for minority shareholders, better access to company information, stronger market regulation and more provocative investment incentives for clients (please see related column, page 15).
The AST report got a thumbs-up from Marián Sásik, Secretary General of the BSE. "The analysis successfully records the problems we encounter on the capital market," he said. "[It] nowadays suffers from the notorious illness of its environment."
"We want to increase the awareness of those people who have the power to directly influence the current situation," said Juraj Lazový, vice-chairman of the AST Executive Committee.
MF officials were less enthusiastic about the report: the Ministry's Capital Market Department Director, Dušan Koledzai, was reported in the state-run news agency TASR as having judged the analysis to be "one sided...one of the main problems is the absence of ethics in stock commercial activities."
But Horváth charged that state officials are not getting the full picture. "Arguments that [the crisis] is just the natural development of recent stagnation and market inhibitions are absolutely unrealistic," he said. "This [document] is a warning that if we don't take radical action soon, the Slovak capital market will be in a difficult situation."
Most analysts agreed that the BSE's current problems are deeply rooted in the process of privatization. "During the first wave of voucher privatization, the government needed to concentrate shareholders in order to create majority blocs," Kabát said.
The idea had been to find a compromise between social justice and economic necessity. "Sure, people deserved to have some shares in state property after socialism, but these companies needed strong management," Kabát continued.
But the result was a concentration of stock holdings and controlling stakes in the hands of a few powerful groups during 1996. "This process was [only] accelerated by abolishing the second wave, with direct sales [taking over]," he said.
These ownership groups, the AST report claimed, were more interested in making a quick buck than in establishing their companies on solid financial ground. "Minority sharesÉlost their value due to dubious profit transfers and looting that benefited the major stockholders," the report read.
During the first wave, all state companies were turned into joint stock companies, and a nominal value of 1,000 crowns was assigned to each share. The book value of every firm was then divided by 1,000, and the result used to determine the number of shares to be issued. But the problem, as Kabát described it, was that "the stock quickly dropped in value after 1995 as company fundamentals worsened due largely to interest rates."
Because no money was to made from dividends on company stocks, acquiring an ownership stake in a firm became the only reason to play Slovak capital markets. "And after a group has assembled a majority stake in a company, maybe 51 percent of shares, they have no interest in buying more," Kabát explained. "And who else would buy the remaining 49 percent if they can neither make money nor exercise any control?"
At present, Kabát continued, more than 99 percent of company stocks traded on the BSE were well below their nominal value. In such a situation, he said, investors were unlikely to pay the nominal price for new issues, and even were the interest there, the majority owners would be reluctant to issue more shares "because they don't want to dilute their stake in the company."
With interest in purchasing existing stocks nil, and willingness to issue or buy new shares no greater, the BSE was virtually at a standstill. "We must first complete the process of privatization," Kabát concluded, "and then we can talk about changing the laws."
12. Mar 1998 at 0:00 | Tom Nicholson