Six months ago, investment bankers were confidently pitching Belarusian companies on the virtues of privatization and capital markets. State-run was out, private was in. Now, with western governments privatizing their own banks and credit markets in the worst state since the Great Depression, it seems a more measured approach to privatization and capital market development could be wiser than many bankers had thought.
The government is serious about entering the global community, reforming its economy and accessing international markets. Investors may have been disappointed in July when the government postponed publishing a list of strategically important enterprises that it would liberalize stock trading in, but it has announced a three-year privatization plan and relinquished its right to be a “golden share” in firms. The amount of foreign capital in the banking sector grew from 10% in January to roughly 24% by February. And deals involving mobile phone operator BeST, the Belarusian Bicycle Factory and Lido Brewery prove the state is serious about welcoming foreign investment.
Capital gains and dividend taxes have been cut from 40% to 20%, while taxes on interest income from both government and corporate bond issuers was eliminated. Trading in these assets is carried out by well capitalized banks and volumes were a substantial $3.47bn in the first quarter. Corporate fixed-income issues are still small, but grew by 4,590% in the first quarter to $155m. Of equal importance, the government has carried out a series of reforms that gave it a place on the World Bank’s “ease of doing business” rankings and there is a healthy open dialogue with investors. The “golden share” rule, which gave the government a deciding vote in certain enterprises, was annulled (in actuality, this affected 11% of enterprises) and a list of 147 companies that could be privatized was published.
Preventing fire sales
The most controversial reform of the securities market was a decision on July 17 that all traders must be registered on the exchange between two professional brokers. The difference between traders must not exceed 20%. The purpose of this is to prevent the wide-scale fire sales of assets that took place in Poland, Ukraine and Russia. Also, trades either higher or lower than 20% of the price of the previous transaction are prohibited. Of 65 registered capital market participants, few of them are very active. Most transactions are simply one buyer registering a transaction with another. Mainly, this is because most volumes offered are piecemeal sizes of $5,000 or less. Building a book in Belarus takes deeper pockets than most local brokers have and more time than most investors are interested in spending. Equity trading volumes this year were $90.64m by the end of the second quarter, suggesting a downturn from last year’s privatization-driven total of $4.74bn.
But the law preventing transactions off the exchange is a double-edged sword. Whereas it prevents the stripping of Belarusian assets at low prices, it makes it impossible for some individuals to sell their shares, as the cost of the trade is higher than the value of the small packages they are trying to sell. Preventing brokers and investors from buying discounted assets protects the value of the companies, but it also makes it more difficult for portfolio investors to make the bold leap into a new market. They want a discount for the additional risk they are prepared to take.
A lack of clarity over taxation regarding ADR/GDR programmes makes it difficult for companies to enter the international markets. Tax laws don’t specify if tax must be paid on the ADR issue or on the local shares that have been used to create the programme. Belarus would do well to sort out this problem in advance, before they encounter the same conflicts that arose with Bank of New York in Moscow, or have the same difficulty that Ukrainian investors have had in receiving their dividends. Lastly, there is a vague law still on the books preventing podozretelny zdelky, or “extraordinary transactions” or “unusual transactions”. The wording is dangerously ambiguous.
Overall, there is a future for Belarusian companies and the local equity market, but we are still a few years from seeing significant volumes. Six months ago, investors and bankers would have been crying in their beers over that news. Now, it look like it might be okay if we have to wait a little longer.
The government was also ready to open up, announcing a three-year privatization plan and relinquishing its right to a “Golden Share.” The amount of foreign capital in the banking sector grew from 10% in January to roughly 24% by February and transactions in Best, the Belarusian Bicycle Factory and the Lido Brewery proved the government is serious about welcoming foreign investment.
Now, with Western governments privatizing their own banks and credit markets the worst the world has seen since the Great Depression, it seems that the measured approach to privatization and capital market development might be wiser than bankers thought.
Belarus is carefully moving toward international and domestic capital markets
From disappointment to sobriety
Investors were disappointed in July when the Belarusian government postponed publishing a list of strategically important enterprises that would liberalize trading in local stocks. Now, the market slowdown gives Belarus a chance to carefully lay out its plans to develop its domestic and international capital markets.
The most important sign is that Belarus is serious about entering the global community, reforming its economy and accessing international markets. Capital gains and dividend taxes have been cut from 40 percent to 20 percent, while taxes on interest income from both government and corporate bond issuers has been cut to zero.The “golden share” rule which gave the government a deciding vote in certain enterprises was annulled (in actuality this affected 11% of enterprises) and a list of companies that can be privatized was published listing 147 companies.
The fixed income market has already been opened up and taxes on interest income from investment in T-bills and government debt has been annulled. Trading in these items is carried out by well capitalized banks and volumes are a substantial $3,470 bln in 1Q08. Corporate fixed income issues are still small, but grew by 4,590% in 1Q08 to $155 mln, according to the exchange.
Of equal importance, the government has carried out a series of reforms to be placed on the World Bank’s ease of doing business rankings and there is a healthy open dialogue with investors.
No skupka for you
The most controversial reform for the securities market was a decision on July 17, 2008 that all trades must be registered on the exchange between two professional brokers. The difference between trades must not exceed 20%.
The purpose of this decision is to prevent the wide-scale, fire sales of assets as took place in Poland, Ukraine and Russia. All transactions need to be conducted over the exchange between two registered brokers, as of July 17, 2008. Also, trades either higher or lower than 20% off the price of the previous transaction are not allowed. This is meant to cut down on what other brokers in Eastern Europe would call skupka.
Of 65 registered capital market participants, few of them are very active. Most transactions are simply one buyer registering a transaction with another. Mostly, this is because most volumes offered are piecemeal sizes of $5,000 or less. Building a book in Belarus takes deeper pockets than most local brokers have and more time than most investors are interested in spending. Equity trading volumes this year were $90.64 mln by the end of the second quarter, suggesting a downturn last year’s total, privatization-driven $4.74 bln.
The law preventing transactions off the exchange is also a double-edged sword. Whereas it prevents the stripping of Belarusian assets at low prices, it also makes impossible for some individuals to sell their shares as the cost of the trade is higher than the value of the small packages they are trying to sell. Preventing brokers and investors from buying discounted assets protects the value of companies, but it also makes it more difficult for portfolio investors to make the bold leap into a new market. They want a discount for the additional risk they are prepared to take.
Hesitation to publish a list of strategically important enterprises that will be excluded from trading is also frustrating for local market players.
Clarity over taxation in regards to ADR/GDR programs will make it difficult for companies to enter international markets as well. Tax laws do not specify if tax must be paid on the ADR issue, or on the local shares that have been used to create the program. Belarus would do well to sort out this problem in advance, before they encounter the same conflicts that arose with the Bank of New York in Moscow, or have the same difficulty Ukrainian investors have had receiving their dividends.
Last, there is a vague law on the books preventing “podozretelny zdelky” or “extraordinary” or “unusual transactions.” The wording is dangerously ambiguous.
Overall, there is a future for Belarusian companies and the equity market, but we are still a few years from significant volumes. Six months ago investors and bankers would have been crying in their beers over this news. Now, it looks like it might be ok if we have to wait.
Still missing some information:
The numbers provided by the Finance Ministry on the Open-Joint-Stock company landscape, suggests a sea of undervalued opportunities, but the inability to obtain information on free float makes it difficult to assess opportunities. There were roughly 1,680 companies, excluding banks, with $22.5 bln in sales, $729.4 mln in earnings, and implied total market capitalization of $4.18 bln, based on 2007 and excluding the banking sector. The relatively low market Mcap is due to the fact that many shares are offered at a discount to their true value, creating an opportunity for investors. Most volumes at low valuations are extremely small, with offerings on the exchange as small as $5,000. The banking sector adds roughly $2-3 bln in terms of capitalization. While most value investors would jump at the opportunity to invest in these implied multiples, the lack of an substantial market makes it impossible to value them and low margins suggest most companies are not profitable enough to be of interest.
