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STOCK EXCHANGE BLUES

Companies prefer other outlets besides organized market to drum up capital

The organized public market in Slovakia is not fulfilling its basic mission of providing for free allocation and re-allocation of capital. But a wide range of capital market brokers and analysts say it's not the bourses' fault, but due to a variety of factors, ranging from executives' mindset to unclear privatization. According to Marián Sásik, director of the Bratislava Stock Exchange (BCPB), corporate executives are passing up easy opportunities to drum up capital on the public exchanges in favor of more traditional ventures such as issuing bonds or applying for loans.
"Issuing shares is a much cheaper source of financing than a bank loan,''Sásik said for The Slovak Spectator. "But most of the current management in Slovakia is still linked to the banks. For them, getting a loan is still the most natural way."


"Our stock exchange has not been based on the owners' need to raise capital, It has been based on the need to distribute ownership. All it needs is time.''

Marián Sásik, Director of BCPB


The organized public market in Slovakia is not fulfilling its basic mission of providing for free allocation and re-allocation of capital. But a wide range of capital market brokers and analysts say it's not the bourses' fault, but due to a variety of factors, ranging from executives' mindset to unclear privatization.

According to Marián Sásik, director of the Bratislava Stock Exchange (BCPB), corporate executives are passing up easy opportunities to drum up capital on the public exchanges in favor of more traditional ventures such as issuing bonds or applying for loans.

"Issuing shares is a much cheaper source of financing than a bank loan,''Sásik said for The Slovak Spectator. "But most of the current management in Slovakia is still linked to the banks. For them, getting a loan is still the most natural way."

Peter Grančič, a market analyst with the brokerage firm Capital Partners said companies shy away from issuing new share issues because the majority owners şşdon't have money and fear to lose their majority.''

No outside involvement

Others point to the low number of outside investors active on the bourses, who could pump in money and increase the market's liquidity. "Out of all post-communist countries, the Slovak capital market has perhaps the most advanced legislation and a very good intitutional structure. Even the country's rating is positive,'' said Valér Ostrovský, the 29-year-old director of the brokerage firm Schutz & Ostrovsky, based in Bratislava. "But foreign investors are scared off by untransparent ownership, and the country's overall image.''

Especially people not affiliated with the current government argue that the untransparent ownership stems from less-then-open deals made between the new owners of companies and the state privatization agency Fund for National Property (FNM), which is charged with scuttling the state's stake in virtually all economic sectors.

According to Ivan Mikloš, the minister of privatization in 1990-1992 and currently both an economic analyst with Mesa 10 and a member of the opposition Democratic Party, most of the state's property in 1995 ending up with the so-cal led şşindustrial lobby'' -managers who used to run the economy during communism.

These settlements, Mikloš argued, happened either through share transfers from portfolio investors whose licenses were taken away by the finance ministry or through the FNM, whose oversight board has individuals sympathetic to the ruling coalition. "It's only logical these people are using methods and personal relations from the past,'' Miklos said.

These new majority owners, founders of newly-created limited liability companies, are often unknown to the public and to analysts, Mikloš added.

No money from the middle

Yet it is not the foreign investor who should be the basic source for allocation and re-allocation of capital at the market, Ostrovský said. "Everywhere in the world, the most important investors come from the [domestic] middle class,'' he said. "But here, small investors have been scared away. Words like 'share' and şbond' have been discredited thanks to the first and second waves of coupon privatization.''

Coupon privatization was designed to privatize state-owned property in the hands of the people, and the capital market was created, so that people could buy and sell their newly-owned shares.

The first wave of the coupon privatization took place in early 1992. When Vladimír Mečiar took over as prime minister between June 1992 and March 1994, privatization in Slovakia slowed considerably. Many Slovaks who independently assigned their coupon points ended up disappointed. Their shares turned out to be worthless, often because the FNM held on to the remaining majority stakes that were originally planned to be privatized, and the companies went bankrupt.

The current Mečiar administration, which was elected in fall 1994, never liked coupon privatization, especially because investment funds made gobbles of money off it and used their cash to support the opposition and anti-government media. In early 1995, the second wave of coupon privatization was halted and changed into şşbond privatization,'' where citizens were given FNM bonds worth 10,000 Sk with a maturity in in 2001 in return for their coupon booklets.

Those bonds can be traded on the public market, but there are precious few takers. Those willing to buy them are offering such below-value prices that the government felt compelled to set the bond's minimum value at 8,100 Sk.

This apparently has left a bad taste in the public's mouth about the exchanges' worth. şşThe perception of the capital market among the population is generally very negative," Ostrovský said. "It will be a problem to convince people to participate.''

But analysts remain upbeat and estimate the Slovak capital market will bounce back. "In the next [few] years, many Slovak privatizers will likely sell their shares to foreign investors, who play by different rules,'' Grančič said. Ostrovský agreed. "The market will get moving,'' he said.

"Our stock exchange has not been based on the owners' need to raise capital," said BCPB's Sásik. "It has been based on the need to distribute ownership. All it needs is time.''

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