Ukraine stays in financial boondocks
Ukraine’s stock market along with those of the rest of the world has recently seen an abrupt slump. Last week the index of share prices at the First Stock Trade System (FSTS), this country’s most popular exchange, fell to 48.18, the lowest since the beginning of this year. But it turned out that New York blasts have absolutely nothing to do with our situation. The point is that “our cabin is too far away in this village.” Not a single chunk of World Trade Center debris landed on our market. Most experts believe the world crisis will in no way affect our economy. As to the plummeting Ukrainian FSTS index, it only shows a declining interest in shares as an instrument to make profits. In other words, we have plenty of our own factors that have the bears chasing the bulls. What reduces the activity of our brokers is inter alia the reluctance of the government to meet the demand of regional electric authorities to raise rates. For the profit-making efficacy of power companies is the prime factor that sets the value of their shares. The market situation is also being affected by the now trendy shadow privatization. Indeed, why should one buy stock if one can get a factory by making it bankrupt due to artificially inflated debts? As a result, setting the shares aside, market operators are enthusiastically handling other speculative instruments, such as public and corporate debt instruments. FSTS President Iryna Zaria, told us in more detail about what caused this strange, but quite natural, tendency:
“For you to understand the figures properly, I must say that the FSTS base index, which reflects the prices of Ukraine’s largest companies, is 100 points. It was set at the end of 1997. The lowest index value, 17-16 points, was recorded in 1999. Now it is a little over 48 points, by no means the lowest figure in the history of tenders.”
“Does the abrupt fall of the index in the past few days have anything to do with the situation in Ukraine?”
“This drop was not caused by any political or macroeconomic events. It’s simply a long-term tendency.”
“Judging by your reaction, tender organizers have not been very alarmed by the index drop.”
“We haven’t been scared by the index drop because in a normal market any up or down movement of the index reflects quite specific tendencies. Market operators can take advantage of this movement. A declining market can also be a place to make money. So what really worries both the organizers of and participants in transactions is the reduced liquidity of the market rather than reduced prices. About 60% of the FSTS index value is being formed today by the shares of electric companies, as well as Ukrnafta, Stirol, Zaporizhstal, and other entities. These are the most liquid securities. We are most worried by the fact that the number of operations with first-echelon shares has dropped drastically.”
“This tendency, which has lasted several months, was caused, above all, by the fact that blue chip stocks are becoming less attractive. In other words, they are no longer attractive as a financial instrument. Enterprises are not paying big dividends, so the owners of these shares cannot cash in on the growing exchange rate. At the same time, instruments other than shares have emerged, which makes it possible to solve problems of corporate control. This includes the closing of businesses via bankruptcy and the not terribly transparent procedures of privatization. This will, of course, force the so-called portfolio investor to withdraw.”
“And what then?”
“Dwindling interest in stocks brings forth a rather positive process: the market gets new financial instruments. For instance, we have recently held a conference, where as many as three banks presented their new corporate bonds. But these instruments are not yet part of the index. They are gradually entering a not yet liquid market. This means that old shares are gradually going off the market, while new instruments are coming on slowly. In this sense we are today in a kind of transition.”
“Is the current index drop a coincidence of tendencies?”
“It is. There are first echelon or blue chip and second-echelon shares. The latter are taking the lead. This applies not only to Ukraine but to Russia as well. Hitherto ugly ducklings are turning into swans. The trouble is that this is happening too slowly in this country. For Ukraine to keep its reputation as an attractive market, we must speed up these processes. As to the old instruments, they clearly need judicious corporate management. The issuer must have a justification for entering the capital market.”
“Can’t enterprises gain from this now?”
“The point is not the enterprises. The state and we all are doing too little to make the market interested precisely in a transparent market. Most often transactions are conducted behind the scenes. This trend is also growing.”
