Developing Croatia's financial system

Marinka Papuga
Chairman, Zagreb Stock Exchange

Historic overview

The Republic of Croatia won its independence in 1991, and has had little experience of setting up and running a sovereign financial system. The National Bank of Croatia, founded as an independent central bank only at the end of 1991, has been the engine of financial system development, as well as undertaking its central role as monetary authority. The development of the Croatian financial system has taken place during a period of major economic imbalances, mainly due to the war and Serbian aggression, but also the result of the poor management of the economic system inherited from the Communist regime.

With war damage estimated at US$15 billion, more than half a million refugees and displaced persons, both from Croatia and Bosnia-Hercegovina, a steep decline in GDP, high unemployment and real wages more than halved, the Government in October 1993 took the tough decision to launch a stabilisation programme. The primary objective of the programme was to bring inflation down to an acceptable level and to tackle the restructuring of the economy and the banking sector.

The Zagreb Stock Exchange was founded in July 1991. The major impetus for growth has come with the pharmaceuticals company Pliva's full listing on the exchange, and on the London Stock Exchange in April 1996.

Before Pliva

One of the most critical functions in developing capital markets in transitional economies is the quality and speed of the privatisation process. The management of the exchange has therefore taken a strategic view, and acted to promote and encourage privatisation, and subsequent listing on the exchange. The result has been a unique method of selling a state stake in companies before a listing was granted. The exchange, in conjunction with the Croatian Privatisation Fund, set up methods, rules and procedures for 'one-way auctions' run on behalf of the fund. Auctions themselves were run in the same way as auction houses around the world sell paintings. Turnover peaked in 1994 and 1995, when nearly 91 per cent of total turnover to date was sold, either for cash or for 'certificates of frozen foreign currencies'. This method of privatisation accounted for some 20 per cent of total privatisation revenue (DM519.9 million in absolute terms).

However, the privatisation process has not contributed greatly to the development of capital markets and securities investments. With an underdeveloped financial sector, capital outflow from previous Communist times, high interest rates, and - a main obstacle - the war, foreign and domestic investors could not be counted on to be interested in Croatian companies. Moreover, companies privatised at that time were mostly of a size that would not spark the interest of foreign fund managers, and big companies remain either family-owned or closely held. Nevertheless, some large stakes in big and famous Croatian companies have been left with the Privatisation Fund. The companies that went through privatisation were in most cases bought into by previously employed or current employees of these companies. Management in many cases holds significant, if not majority, stakes in their companies. This has been one of the major obstacles to attracting more listings on the exchange.

After Pliva

The end of the war and the liberation of almost all previously occupied territories boosted the Croatian economy, which began to attract the interest of world fund managers. UBS, as a lead manager with the local Zagrebaèka; Bank did an excellent job and, by the beginning of April 1996, Pliva had been listed, both in Zagreb and in London. Pliva became the first-ever Eastern or Central European company with a full-listing status. The sellers of Pliva shares, the Croatian Privatisation Fund and two state-owned pension funds, were net beneficiaries in terms of cash received. But the more important aspect of the Pliva offering, which was oversubscribed 18 times, was its effect in boosting interest in investing in securities markets.

The successful Pliva story built on favourable macroeconomic figures. Interest rates started falling and domestic savings rising as deposits with foreign banks, mostly in Germany, Austria, Switzerland and Italy, returned to Croatia. Shortly after the Pliva flotation, Zagrebaèka; Bank, one of the most progressive and the largest Croatian banks in terms of capital, floated ten per cent of its outstanding ordinary shares. Zagrebaèka; shares are listed on the London Stock Exchange in GDR form and are fully listed with the Zagreb Stock Exchange.

The Zagreb Stock Exchange

The exchange's regulatory framework, under the Securities and Trading Act, is enforced by the Croatian Securities Commission. The exchange firmly believes that self-regulatory powers would help the regulatory system to work smoothly; such a proposal will soon be presented to the Croatian Securities Commission. The exchange's regulations have been recognised by the London Stock Exchange.

The exchange is particularly interested in deepening the market and therefore keen on the successful implementation of the public awareness programme, which aims to popularise securities investments. The programme is part of a wide-ranging project to reform the capital market, which is being undertaken by the Government and the World Bank. It is estimated that, overall, some 450,000 to 550,000 Croatians own shares in various Croatian companies. The exchange closely co-operates with and educates the whole investment community, as well as schools and universities.

Recently, the exchange launched a clearing and settlement project designed as an interim measure until the Central Depository Agency is up and running. The CDA will keep all investors' accounts, as well as the register of all securities issued in Croatia, in book-entry form. It will also perform the sole clearing function.

There are currently only two fully listed companies, Pliva and Zagrebaèka; Bank. Much effort has been made to attract more companies to full-listing status. The exchange envisages attracting companies with a clear strategy, significant shareholder distribution and the readiness to co-operate closely with the exchange. The management and the listing pay the closest attention to disclosure policy: because several of the largest companies remain under the control of the Croatian Privatisation Fund, talks have begun on mutual actions to privatise such companies and to list them on the exchange.

In relation to other emerging markets, particularly in Eastern and Central Europe, investors on the Zagreb Stock Exchange will have the opportunity to invest in a broad variety of companies from different sectors. The pharmaceutical and banking sectors, along with food processing and confectionery, will make the exchange different from others in this region. In two years, possibly sooner, current listings will be joined by oil and distribution companies and, later, telecommunications and utilities firms. On the government bond market the Government will actively start to seek for capital, issuing mid- and long-term bonds. Two issues are already listed with the exchange.

Total turnover in 1996 up to 31 October amounted to DM278.4 million. The ten most actively traded companies account for 99 per cent of total turnover, with some 86 per cent related to two fully-listed stocks and the rest to free-market listings, the bulk of them candidates for full-listing status. The market capitalisation of the ten actively traded issues amounts to 14.6 per cent of GDP (US$2.6 billion in absolute terms).

Finally, the Zagreb Stock Exchange is very proud to be one of the very few to develop and build its own electronic, order-driven, decentralised trading system. The system currently runs off-line, but in October 1996 work on a new on-line trading system called TEST-2 began.

Further information on the bourse can be found on one of the oldest stock exchange internet servers in the world - - and daily trading and quotes on Reuters screens and in local newspapers.

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