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Sarajevo Stock Exchange Needs a Boost

16 11 2006  Buyers came easy when there was nowhere to go but up, but as market expectations have matured in the region the Sarajevo Stock Exchange has suffered.

By Erol Mujanovic in Sarajevo (Balkan Insight, 16 Nov 06)          

In its infancy, one of the Sarajevo Stock Exchange's defining advantages was investors' presumption that business performance in Bosnia and Herzegovina had nowhere to go but up.

A bit glib perhaps, but the presumption held true, and the Sarajevo exchange posted the results to prove it. Founded in 2001, and headquartered in a glass tower overlooking the battered Bosnian capital, the "floorless" electronic exchange capitalised early on galloping investor interest in Balkan economic regeneration.
 
The exchange's first index, the Bosnian Investment Funds Index, BIFX, rose sharply and consistently. Trading volumes on the exchange, known by its initials SASE, grew by an average of 144 per cent annually from 2002 to 2005, as the country's economic regeneration gathered pace. Stock brokerages proliferated in Sarajevo, many of them under the umbrellas of the foreign-owned institutions that have moved in swiftly to dominate the country's banking sector.
 
These and other positive signs encouraged analysts to cite the SASE as a catalyst for the development of the more fluid market economy hoped for in Bosnia and Herzegovina and across southeast Europe.
 
Indeed, this is the upbeat message that Zlatan Dedic, the SASE's director, delivers today. Bosnia's nascent capital markets are an engine for the "betterment" of the citizenry, he says. The exchange is a hub of "creativity and innovation", as he describes it, riding on the energetic contributions of a youthful staff.
 
But whereas previous SASE directors had the luxury of promoting the exchange in such euphoric terms when it was steadily trumping expectations, Dedic, in the director's post for the past 15 months, does not. He has been tasked with restoring investors' confidence after last year's sudden dip in performance.
 
Today the BIFX's value is 18 per cent lower than its high point in March 2005 - a peak that was followed by a steep valley and then no significant recovery.
 
This in itself does not suggest a fundamental weakness on the SASE; many emerging market investment indices fell in early 2005 after hitting new peaks. In a securities market as young as Bosnia and Herzegovina's this can have a positive impact. Eldar Dizdarevic, a prominent business journalist, says demand has dipped in part because investors are more discerning than they once were. The era of "buying everything they could get" has given way to an era of caution and more careful research.
 
But the performance of SASE-listed stocks in comparison to those on competing exchanges indicates there are more fundamental issues at play. Whereas the BIFX has failed to recover from its fall in early 2005, major indices at stock exchanges in all neighbouring countries and elsewhere within Bosnia and Herzegovina, namely the Banja Luka Stock Exchange, have gone on to post new record highs.
 
By contrast, BIFX performance has been flat. On the day Dedic took office, August 12 last year, the index closed with a value of 4661. At this article's time of writing its value remained just shy of 4630. Similarly the SASX-10, an index measuring performance of the ten largest SASE-listed companies, was the only official stock index in the former Yugoslavia to lose value through the first three quarters of 2006.
 
The disappointing results muffle the SASE's efforts at self-promotion. Dedic is keen to advertise the exchange's potential as a trading centre for new investment products heretofore unavailable in the Federation, the post-war "entity", or sub-state, of which Sarajevo is also the capital.
 
"There is great potential for the SASE's development, especially through the issuance of new products such as state, corporate and municipal bonds but also through new share releases for the financing of company investments and the privatisation of state property via the exchange," said Dedic.
 
But the Sarajevo exchange is stymied, in part, by legal impediments that Dedic and others would like to see removed.
 
Long deliberations in the Federation parliament have so far failed to produce a deal to update a 1998 law on securities, which precludes investment outside the Federation by Federation-based investment funds. The restriction means, for example, that a Bosnian brokerage running an investment fund registered in Sarajevo cannot purchase shares listed in Banja Luka or outside Bosnia and Herzegovina. Inflexibility mutes demand.
 
Additionally, a legal framework for the creation of a Bosnian bond market does not yet exist, nor does obligatory support from the key financial institutions. Central bankers have refused thus far to offer guarantees to the many competing levels of government in Bosnia's unwieldy post-war system that, given a chance, would like to sell debt.
 
"One of the main reasons why the Sarajevo Stock Exchange is experiencing a downward trend is the weakness of legal regulation," said Tarik Sirbegic, a broker at Raiffeisen Brokers, a brokerage within the Bosnian banking subsidiary of Austria's Raiffeisen Zentralbank.
 
Another source of concern is a lack of transparency that some observers blame on public offices wielding regulatory authority over securities trading. Dizdarevic says a "mentality change" is needed at two key public institutions, the Securities Commission and Securities Registrar. "These institutions should be fostering the development of a transparent marketplace, but unfortunately they are mostly obstructing it," he said.
 
"For example, for years now the Securities Commission cannot or will not compel shareholder-owned companies to publish their business results, although there is a clear legal basis for that. For another example, at the Securities Registrar one cannot get the simplest piece of information about the ten biggest shareholders of any company registered in the Federation. By contrast, these things function perfectly in Republika Srpska [Bosnia-Herzegovina's other post-war entity]."
 
Almir Mirica, Dedic's deputy at the SASE, acknowledges that this undermines the exchange's ability to compete. "Lack of transparency in the capital market of Bosnia and Herzegovina is an important problem," he said.
 
"SASE members listed on the exchange's Free Market are not compelled to inform the SASE about their financial results, although they are obliged to legally under the rules and procedures of the Securities Commission. The problem is that Commission has no means of implementing the law, and there is no sanction for enterprises who do not publish financial data."
 
The SASE, Mirica added, has resorted to sidestepping the Securities Commission, reaching an agreement instead with the AFIP, the state agency for financial information, which now provides semi-annual and annual financial reports for companies on the Free Market. Key outstanding issues related to transparency now involve information on company ownership structure and non-financial data.
 
The risk for the Sarajevo exchange is that, at a time when foreign investors' interest in the Balkan region has risen, it is prevented from riding the same tide of demand on which its competitors are rising.
 
"For all other stock exchanges in the region and elsewhere, transparent information about companies is an elementary and basic condition for the functioning of the market," said Ahmed Hodzic, director of FIMA, a Sarajevo brokerage.
 
Sharp gains on exchanges elsewhere in the former Yugoslavia - most dramatically at the exchanges in Zagreb and Podgorica, but also in Belgrade, Skopje and Banja Luka - give the SASE an appearance of being behind the curve.
 
The answer in the short term, SASE officials say, is to put Bosnia and Herzegovina's house in order through "more coordinated action of all the actors on the securities market", including public institutions and the Sarajevo exchange itself.
 
Failure to do so will introduce the risk of further divergence from the positive investment trend broadly impacting the region, with the vast majority of trading attributable to large, one-off block share-issues in a market that, by European standards, suffers from acute illiquidity, under-regulation and consequent fragility.
 
Dedic, the SASE director, emphasises the exchange's success in maintaining trading volume. By this measure, it occupies the "golden middle" among stock exchanges in the former Yugoslavia - with the fifth-highest trading volume of nine exchanges, he says.
 
Undoubtedly volume is important to the exchange. But for investors, without value and growth, volume is irrelevant.
 
Erol Mujanovic is a Balkan Insight contributor. Balkan Insight is BIRN's online publication.