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Hemetsberger:
couldn't be more
optimistic |
International investors in eastern European debt and equity are increasingly analyzing specific countries rather than grouping all the region's emerging economies together. "Market performance varies widely, and investors are starting to differentiate between countries," says Todd Berman, head of emerging market coverage at Salomon Smith Barney. The first group of EU applicants are being favoured by investors looking for convergence trades, now that easy Emu convergence trades in western Europe have become a fond memory. This new level of discernment may well diminish losses in future emerging-market shocks.
Even within the first wave of EU applicants, a variety of political and economic forces are at work. Hungary has for some years enjoyed stable growth conditions and most of its main industries are now private-sector dominated. The Czech Republic, on the other hand, is failing to pull itself out of recession. It has ceased to be the main beneficiary of foreign direct investment in the region and its privatization programme has hit several problems.
The big winner, and the battleground for foreign strategic and portfolio investors, is Poland. Poland has emerged as the region's most economically stable country and the main recipient of foreign direct investment ($3 billion of FDI entered the country in 1998). Recent privatization deals have enhanced the capital markets and hastened the transition to a market economy. Poland sees itself as closer to the German markets than to Russia, and has adeptly shaken off most of the ill-effects of last year's crisis. "A stronger economy in Germany would have a much bigger effect on the markets than the situation in Russia," says Shirish Apte, chief country corporate officer at Citibank in Poland. Italy is also an important trading partner.
GDP growth has slowed to an estimated 3% this year but is expected to pick up to 4.5% in 2000. Inflation has been reduced to under 7% from over 13% in 1997. One area of concern is the current account deficit, which is running at about $9 billion for 1999. This has been caused more by a slowdown in the economies of the EU, particularly Germany, than any loss of trade from the Russian crisis. The EU takes 70% of Poland's exports, and it is expected that the trade deficit will narrow as EU growth and consumption picks up in the next few years. "I couldn't be more optimistic about the outlook, the growth figures are very good," says Willi Hemetsberger, chief executive and chairman of CA IB Investmentbank.
Privatization back on track
Against this improving macroeconomic background, Poland's large privatization programme is finally gaining momentum. From the start of the transition process in 1989, a large number of small and medium-sized companies were rapidly privatized. However, the government has been slower to privatize larger companies and utilities such as telecoms, airlines, banks, mines and steelworks.
Targets to privatize the national airline, LOT, and one of the major banks, Pekao, by the end of 1998 were not kept. But this year several larger deals have been completed and privatization appears back on course. "The government has been very clear and aggressive in the way that it has privatized," says Apte at Citibank. "It is doing a lot to bring the major state assets into the private sector."
Three state banks have now been sold and Glaxo Wellcome of the UK has just bought into the pharmaceuticals sector. In the next 12 months the sugar industry, electricity companies, the railways, steel makers and insurance companies including Powszechny Zaklad Ubezpieczen (PZU) are among the businesses that will be sold by the state. An initial public offering for petrol company Plock-CPN is expected before the end of the year.
The recent successes in Polish privatization were kick-started in 1998 by the region's biggest IPO, national telecoms company Telekomunikacja Polska (TPSA). In April 1998, the scramble for the IPO mandate ended in controversy. After a complicated tender procedure, the government chose UK house Schroders as global co-ordinator over heavyweight international banks such as Merrill Lynch, JP Morgan and CSFB and local stalwart Bank Handlowy. The bitter losers complained of bureaucratic nightmares and government conspiracies.
As the date of the IPO approached, the Russian crisis deepened and there were calls to postpone the deal. "Lots of people had doubts that it could be done," says CA IB's Hemetsberger. In November 1998, however, the deal went ahead and was a great success despite market circumstances. "Both in the [Polish] treasury and in the company there was no hesitation about the deal," says Jacek Peszkowski at TPSA. "It was seen as a kind of challenge to test the company."
The deal raised the equivalent of $923 million in three tranches of shares, listing 15% of TPSA on the Warsaw and London stock exchanges. Most of the other deals from the region had been cancelled or postponed because of the Russian crisis, and this meant TPSA picked up most emerging-Europe investors. The deal's success also illustrated the strength of demand for telecoms stocks.
Rather than chasing the highest possible price for the issue, the government took a long-term view. "As the figures of the last few months show, the price of the shares could have been a lot higher," says TPSA's Peszkowski. The TPSA stocks have risen from the IPO price of Z14.5 to over Z26. One reason for the relatively low price apart from economic uncertainty was that the new communications minister, Maciej Srebno, had indicated he would end TPSA's monopoly on long-distance calls before the previously announced deadline of 2003. Since this would be likely to damage future revenues, investors were relatively cautious. Srebno has since confirmed that the demonopolization will go ahead on the original planned date, and the share price has risen.
In December 1998, TPSA braved the markets again with a $1 billion two-tranche Eurobond issue led by JP Morgan and Salomon Smith Barney. This was the largest-ever corporate offering from central and eastern Europe and was twice oversubscribed. Spreads on the bonds have tightened considerably since December. Salomon Smith Barney and Deutsche Bank have been mandated for another large Eurobond deal, expected to be e1 billion.