The Prospects of Capital Markets in Central and Eastern Europe Michael Schröder Centre for European Economic Research (ZEW) Mannheim, Germany, Dubrovnik, 27 June 2003

Contents of the Presentation u Evaluation of the Status of CEE Stock Markets u Future Prospects of Securities Exchanges u Countries: Czech Rep., Hungary, Poland, Slovak Rep. In some sections Baltic countries, Slovenia u ZEW-Discussion Paper (with J. Köke) (incl. also bond markets, corporate finance, case study “corporate finance in Poland”)

How large are CEE Stock Markets? u All CEE exchanges together amount to x% at the end of 2001: 0.2% of World stock market capitalization 9.2% of the German Stock Exchange 95.2% of the Athens Stock Exchange u The Warsaw Stock Exchange has approx. 46% of the capitalization of the whole region

Stock Market Capitalization, (market value of listed stocks in % of GDP)

Number of Listed Domestic Firms (FIBV)

Stock Market Liquidity, (trading volume in % of market capitalization)

Derivatives Markets

Regulation of Stock Exchanges u Strict regulation of official market segments u Rules and fees (admission, maintenance) comparable to western exchanges, but different across CEE exchanges --> harmonization necessary? u Listings concentrated in the free market (except Warsaw) => typically unattractive for (foreign) investors => rules too strict / costs too high in primary markets?

CEE Capital Markets: Summary u Stock markets still small and less liquid compared to western markets u Trends: –decreasing listing activity (except PL) –booming derivatives market in Poland –increasing institutional investment (HU, PL) u Warsaw stock market largest and most developed amongst CEE stock markets

Corporate Finance: Summary u Internal finance clearly dominates u External finance by domestic and foreign loans (HU, PL) u Small (and decreasinig) role of equity finance (except HU)

Current Organization of CEE Exchanges: A complex picture u Baltic exchanges: Tallinn and Riga are owned by the Helsinki Stock Exchange, Baltic list u Warsaw has trading system compatible with Euronext, but is independent u Budapest: connected to German Stock Exchange (Xetra) u Prague: agreement with LSE, interested in central CEE exchange? u Bratislava, Ljubljana, Lithuania: wait and see

Organization of Securities Exchanges: Results of Research u High international standards of infrastructure and legal system  attractive for foreign capital u Economies of scale particularly in trading  common trading platform u Linkages with larger exchanges: –Access to foreign capital markets –Higher liquidity, lower trading costs

Future Organization of CEE Exchanges : Four Options u Stand-alone solution: high overhead costs, trading rules not harmonized, unattractive for foreign investors u Fully fledged central CEE exchange: different interests of CEE exchanges, high costs for build-up, still low capitalization u Individual alliances with western exchanges u CEE platform at one western exchange

Proposal for an Optimum Solution for CEE exchanges u CEE platform at one western exchange u (Some) Influence on the management of the exchange u Highest visibility of CEE stocks u Fully harmonized trading rules and cost structures u Most attractive for foreign investors u High liquidity, attractive for issuers and investors

Future Organization of CEE Exchanges: Likely Developments u Individual alliances of CEE exchanges with western exchanges –Partly harmonized trading rules and cost structures –(Almost) no influence on the management of the western exchange, CEE equities hardly visible –Second best solution for investors and issuers: entry to international capital markets u Nordic Exchange (Norex + HEX) including the Baltic Exchanges

Summary u CEE exchanges are not very attractive for (foreign) investors and domestic companies u Alliances with western exchanges u Development of domestic banking system and venture capital markets (for small companies) u Development of domestic institutional investors (driving force for domestic market)