By Eric Jansson
Published by Financial Times, 12 November 2007
Published by Financial Times, 12 November 2007
Even by the dynamic standards of central and eastern Europe, Croatia's capital markets have lately been growing at an extraordinary pace.
Nowhere has this been more evident than at the Zagreb Stock Exchange, a floorless exchange quartered in one of the capital's new glass office towers.
Within the past 18 months, the ZSE has risen out of obscurity to claim a place alongside exchanges in Warsaw and Prague as one of the few in the region to attract the attention of big fund managers worldwide. Trading in Zagreb is tiny when compared with big markets, but it is accelerating at a clip.
"At the beginning of the year, we had between 300 and 800 trades per day. Now, we have 3,000 per day, with a peak volume of 8,000," says Roberto Motusic, the ZSE's managing director.
Just a handful of big sales brought about this surge in trading, driven by both foreign and domestic demand.
The first of these was a prolonged bidding war last year for Pliva, a drugs company co-listed at the ZSE and London Stock Exchange, during which Barr Pharmaceuticals of the US outbid Actavis, an Icelandic company, to acquire Pliva for $2.5bn. Later in 2006 came an initial public offering of shares in INA, the state-owned oil company in which Hungary's MOL was already the strategic investor. Recent months brought big share offerings from Pliva, which sold its veterinary arm Veterina through the exchange, and local construction giant Ingra, among others.
By far the latest, greatest lure for local retail investment through the ZSE came one month ago, when the state privatised 32.5 per cent of T-Hrvatski Telekom (T-HT), the former state-run fixed-line and mobile operator controlled since 2001 by Deutsche Telekom.
The state targeted citizens in T-HT's sell-off, and 358,406 of them purchased shares, making this the largest initial public offering in the country's history. Such was the clamour for a slice of the company that roughly one-third of citizen buyers took out loans to buy shares, says Tomislav Vuic, deputy president of the management board at Erste Bank in Zagreb.
The telecom sale immediately became a milestone in the development of local retail stock trading, as "sophisticated investors who really understood the market" combined with first-time investors "opening their eyes" to generate a bonanza, says Mr Motusic.
Buyers purchased shares from the state at 265 kuna each and then watched as the price jumped to 419 kuna on the first day of public trading. The price soon settled closer to 380 kuna - still an overnight gain of 43 per cent.
For many who bought shares with borrowed money, payback was therefore quick and easy.
Yet here controversy creeps in. Critics of the T-HT sale quickly questioned the initial share price set by Croatia's government. "Telecommunism," squawked the Feral Tribune, a weekly newspaper, portraying the IPO as a thinly-disguised cash handout from the governing Croatian Democratic Union in advance of parliamentary elections.
Indeed, government ministers had transparently promoted the sale beforehand, as an opportunity for a "good experience" akin to the INA sell-off 11 months ago, in which citizen buyers also made a tidy overnight profit.
Yet whatever the T-HT sale's political dynamics, Mr Motusic argues against seeing it primarily in these terms. At a time when some local political leaders still mutter Marxist misgivings about private investors in stocks and shares, calling them "crooks" and "speculators", he says the current HDZ-led government is the first in Croatia's post-communist era to back the ZSE enthusiastically. "How can I say I am not happy with that?" he adds.
Capital market growth is restrained by central bank rules on commercial credit growth. Alarmed when domestic credit expanded by 24.7 per cent last year, central bankers this year require lenders to place substantial deposits with the bank, for any money lent in excess of 12 per cent growth this year.
Bankers grumble about this intervention, but Mr Motusic says it is helping to shift demand to the ZSE.
"If you have such a restrictive monetary policy and such a hunger for new projects, such a booming real estate market and other sectors, then it is just a question of time when some other type of capital will start seeking ways to invest. It can only be done through venture capital or through the capital market. This really gives a push to our development," he says.
Public share offerings are therefore increasingly common, alongside the privatisation of state-owned companies. Meanwhile, the growing base of active buyers - in contrast to the one-off buyers of INA or T-HT shares - makes the market more liquid.
"Five years ago we had 5,000 to 10,000 Croatian households actively investing in stocks. After INA, it was about 35,000. Now it could be 100,000," Mr Motusic says.