Poland Plots Market Fix, Shuts Eyes to Elephant on Trading Floor

(Bloomberg) -- First the good news: Poland’s government is coming to grips with Warsaw’s once high-flying capital market being broken and wants to fix it. Now the bad: Its plans don’t address the elephant on the trading floor -- the government’s own strong-arm tactics.

In a bold election-year acknowledgment, the Finance Ministry said in a draft strategy for the capital market last week that there were “lots of signals for concern” despite the Warsaw bourse’s celebrated upgrade to developed-market status by FTSE Russell. A few days earlier, business groups publicly complained of an air of “intimidation and suspicion.”

“The document is the clear signal that government has finally recognized problem with the lack of offerings,” said Dariusz Gorski, the head of equity analysts at Santander Bank Polska SA’s brokerage. “The plan gives hope that the stock exchange’s needs are getting some sort of priority now. However, it will be difficult to reverse the negative trends quickly.”

Poland Plots Market Fix, Shuts Eyes to Elephant on Trading Floor

“It’s tough to talk about the stock exchange fulfilling the role for which it was created -- to provide financing to Polish companies,” the ministry said in the 83-page document. Even with 5 percent annual economic growth over the past two years, the market’s value and the number of traded companies has shrunk, while the diminishing role of local investors bodes badly for “liquidity and market stability,” it said.

The proposed remedy is to ease requirements for issuers, introduce tax incentives for investors and companies, lower costs and potentially add central bank help with the intraday settlement of transactions.

If implemented, the strategy would be a breakthrough for the government, which in the past three and a half years increased its control over the economy, placing politically connected managers atop state-run companies and buying banks and utilities from foreign owners in the name of “re-Polonisation.” Meanwhile, repeated tax changes and a string of arrests of executives, regulators and asset managers have spooked investors.

Intimidation, Suspicion

Six Polish business lobbies issued a rare joint statement in protest to the arrests of senior executives, including former managers of state-run companies PKN Orlen SA, Lotos SA and PKP Cargo SA, saying the spectacle undermines trust in “companies, their owners, managers as well as in the country’s institutions.”

“We do not prejudge the liability of these people,” the lobby groups said on Feb. 22. “However, the atmosphere of intimidation and suspicion, which is fueled by the wave of arrests is not conducive to running a business and increasing investment.”

Risk aversion is also running high on the Warsaw Stock Exchange, which is struggling to end a drought in initial public offerings. Last year, seven companies raised a combined 114 million zloty ($26 million) in Warsaw, while 22 companies delisted. Investors also witnessed the country’s biggest corporate default, which stoked outflows from mutual funds.

Reviving Capitalism

Poland, the biggest economy on the European Union’s post-communist eastern edge, isn’t alone in trying to revive capital markets. From the Baltics to the Balkans, the 30-year transition to a market-based economy hasn’t translated into stable and reliable stock markets. Lacking the liquidity and ease of access seen on nearby German and U.K. markets, small companies en masse choose banks, not the stock exchanges, to raise cash. The lack of IPO prospects also limits potential buyers from private equity and venture capital investors.

Poland Plots Market Fix, Shuts Eyes to Elephant on Trading Floor

Poland’s strategy, which is independent of plans to introduce a new pension system this year, seeks to increase market capitalization of Warsaw-traded companies to 50 percent of the country’s gross domestic product by 2023 from about 35 percent now, while doubling the liquidity of stocks and bonds.

The government, which owns about 70 percent of the assets in the bluechip WIG20 index, should be the “trailblazer” in establishing and keeping corporate governance standards, it said. Contentiously, the plan also suggests setting price-to-earnings targets for managers of state-controlled firms, even though their valuations are often more closely related to government policy or comments from ministers than actions taken by executives.

“The most important thing now is for market participants to push for changes,” Marek Dietl, the Chief Executive Officer of the Warsaw Stock Exchange, told reporters. “We can’t be sure whether the proposed set of measures will bring back offerings, but it’s surely a step in the right direction.”

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