Poland’s Revved Regional Hub Rivalry
Just before Polish opposition Law and Justice Party candidate Duda won the presidency on a populist platform spooking financial markets, the Warsaw stock exchange held its first “Investor Day” in New York where participants questioned direction and longstanding regional hub ambitions in particular. It is still the biggest in Central Europe, with capitalization of EUR 130 billion including an active small-company-tier, and attracted a smattering of cross-listings from neighbors like Ukraine prior to its conflict. However self-inflicted policy wounds, including slow state enterprise divestiture and private pension destruction, have opened the way for challengers through Austria’s cross-border alliance and Romania’s core emerging market push, and Turkey through its overlooked Euro-Asian exchange network could also upend Warsaw’s once commanding status.
At the New York conference representatives downplayed the damage from the Russia-Ukraine trade ban and interruption as first quarter GDP was up 3.5 percent. Half of exports go the EU and less than one-tenth to the former Soviet Union, and German demand in particular lifted industrial output 9 percent in the period. Retail sales rose over 5 percent on an annual basis with consumption a mainstay in the half a trillion dollar economy. Before the presidential poll, rating agencies affirmed sovereign “A” grades, with the fiscal deficit due to fall under the 3 percent of GDP Brussels monitoring threshold, and public debt now safely under the 50 percent statutory ceiling with government bond cancellation from the pension change.
Poland pioneered private pensions with foreign technical assistance in the 1990s, and they were the core domestic institutional investor base for the hub concept until last year. A mandatory 3 percent of salaries went into the schemes and then into the stock market, but with the controversial reform only workers choosing that option will contribute as the overwhelming majority are now covered by the traditional state social security regime. Private funds in turn closed or slashed operations, and with narrower allocation and trading scope at home moved assets abroad up to a 30 percent of portfolio value cap. Officials pledged in the aftermath to accelerate the pace of state bank and company stake sales on the Warsaw exchange to spur interest, and airline Lot may go on the block soon after years of discussion. Bank reshuffling is another prospect led by giant PKO, but 20-range price-earnings ratios exceed the emerging market average and resolution of $35 billion in Swiss Franc mortgage loans with the currency’s spike against the zloty remains uncertain.
On pensions and mortgage conversion the respective Hungary-style extremes of confiscation and arbitrary redenomination have been avoided, but new President Duda hinted at harsher treatment during the campaign. He disagreed with the central bank preference for voluntary borrower workouts, and vowed to reduce the retirement age by finding additional resources in the system. The Finance Minister, himself an ex-bank executive has dismissed the proposals as political posturing and warned of serious fiscal and financial stability consequences, but the MSCI index has since drifted along in flat to negative performance. Hungary in contrast is at the front of the regional pack with a 25 percent gain, despite similar deflation and growth indicators. Buyers are drawn since Prime Minister Orban may already have completed his draconian financial sector agenda, and the Budapest bourse is now joined with Vienna, Ljubljana, and Prague in a combined EUR 50 billion free float arrangement.
According to the consortium’s annual report one-quarter of outside institutional investors are from the US, 20 percent from the UK, 40 percent from Europe including 3 percent Poland, and 15 percent from other regions mainly Asia and the Persian Gulf. Among the big asset managers taking this route for their ETFs and dedicated funds were Capital Group, Blackrock, Aberdeen, and the China Investment Corporation sovereign wealth pool. They concentrated on larger companies with higher governance standards in seeking diversified exposure, although earnings growth lagged Asia and Latin American markets.
Romania, which is only one-quarter Warsaw’s size and was ahead 2 percent on the MSCI frontier index through June, expressed its own hub goal recently after the EBRD took a 5 percent stake in the Bucharest exchange. It is the biggest in Southeast Europe and aims for core emerging market status the next three years. New President Iohannis, an ethnic German whose victory ended a long record of coalition party infighting, has prioritized expansion and foreign participation. He has pledged to root out corruption previously associated with privatizations, which are proceeding under an IMF program with power firms next in the pipeline. Ironically the original Polish model of second-pillar pension savings will be a main impetus and a former Warsaw Exchange chief executive was recruited to spearhead the effort. The leading listed privatization fund is managed on the state’s behalf by Templeton, and well-known public face Mark Mobius regularly touts capital market progress.
Turkey, which chairs the G-20 this year and established the federation of Eurasian stock exchanges (FEAS) two decades ago, recently reiterated aspirations to become both a conventional and Islamic financial center. Romania is among the two dozen members heavily concentrated in the Balkans and Caucuses, and stretching to Central Asia and the Middle East. Dow Jones has launched a FEAS Titans 50 index of the largest companies, and task forces work to align operating and regulatory standards. Poland now faces multiple competitors in the hub race as it lost investor favor from poor policy decisions and complacency. The lackluster New York reception and presidential election share crash argue for immediate adjustments on privatization, pensions and cross-border alliances to repair the spokes.
Originally published on Business News Europe bne.eu
