Albania’s new stock exchange, the Albanian Securities Exchange (ALSE), has racked up a year of trading in government paper and is poised to start accepting the country’s first ever private sector IPOs this year.
ALSE, launched by a group of financial markets specialists, is a fresh start for the Albanian capital market after the dismal record of the Tirana Stock Exchange (TSE), which in its 18 years of operation never had a single listed security or carried out a single transaction.
The decision to start anew was made back in 2014. “ALSE was an idea of a bunch of financial markets guys who studied abroad. We came together with a project and tried to raise funds from domestic sources to make it happen,” says the exchange’s CEO Artan Gjergji in an interview with bne IntelliNews.
“The support from Credins Bank was critical as we wanted support from reputable financial institutions and not just anybody who has some money. We needed to be serious and we succeeded. We managed to attract even the interest of the American Bank of Investments (a bank with US capital operating in Albania) and that of AK-Invest, one of the biggest domestic non-banking financial institutions.”
ALSE received its licence from the Albanian financial markets regulator in July 2017. This was followed by a period of interfacing and testing with the central depository system for government securities administered by Albania’s central bank, the Bank of Albania, after which, says Gjergji, “for the first time in the economic history of Albania we started trading securities officially on February 22, 2018”.
Turnover on the exchange amounted to €16.5mn between February 22 when trading started and the end of October, with over 100,000 securities units bought and sold in 85 transactions.
In the last few days, ALSE announced that it had received its Market Identifier Code (MIC), and on April 25 it reported the first transaction by a brokerage firm (rather than a bank).
For its first year of operation, ALSE was restricted to trading in government paper, but should be able to start trading corporate paper before long, once the infrastructure is in place. “One hurdle to be overcome was the lack of a central depository,” explains Gjergji.
At the end of January, the Albanian Financial Security Agency (AFSA) licensed the Albanian Securities Registry (ALREG), in an important step for the market. “ALREG’s licensing was a necessary step to enable the trade of corporate securities in ALSE, because this process is impossible without a registry where securities ownership data are held (a central depository) and transactions are executed with them,” says Gjergji.
“However, ALREG will also need a second licence, before starting the activity, therefore it will also apply to the Bank of Albania for a licence to operate as a settlement system for payments executed at ALSE. After having the additional licence from the central bank, ALREG will perform the whole process of clearing and settlement of corporate securities transactions, by providing to ALSE the path to trade shares and corporate bonds.”
IPOs on the way
This should pave the way for Albania’s first ever IPOs by the end of the year. “Hopefully we will succeed in having the first IPO, let’s say within 2019,” says Gjergji. The exchange is already talking with potential IPO names and while Gjergji can’t disclose which companies are interested, he says they come from Albania’s fast-developing construction sector, broadcasting and the financial sector.
Back in March 2018, Prime Minister Edi Rama talked of a possible listing by state energy utility OSHEE. However, while ALSE would be happy to see big state companies use the new exchange, Gjergji says: “We are focused more on private companies because there is not much left to be privatised in Albania, maybe six or seven big companies. If the government decides at the same time to carry out an IPO of any state-owned enterprises, that would be a big help.”
In addition, some of the major corporates in Albania have already issued bonds, and listing bonds on the exchange may be a more natural step for them.
This would be a major step in a country where the capital market development has been stymied by the lack of an effective stock exchange. Albania was a few years behind the other former communist countries in creating its stock exchange in 1996, but the real problem with the TSE was that unlike in the cases of virtually all the other states in the region, it didn’t benefit at all from the post-communist wave of privatisations.
“From Moscow in the north to Macedonia in the south, even when companies were privatised to investors, a small package of shares was sent to the local stock exchange, which provided stock exchanges with their first instruments, and gave them the chance to build trust. Later, when businesses tried to launch the first IPOs on the stock exchanges, their way had been paved by the privatised state-owned enterprises,” explains Gjergji.
“This never happened in Albania. We privatised companies 100% to strategic investors, and never sent a single company to be listed to the Tirana Stock Exchange, even though the finance ministry was its 100% shareholder.”
Without a functioning stock market, companies have mainly depended on banks for finance until now. But while this was for a long time an adequate source of funding, things began to change with the international financial crisis of 2008.
“Albania’s economic development in the past was based on the banking sector, but as businesses matured, the need for a capital market started to grow. For the first two decades [after the fall of communism] the banking sector could cover all the needs of business, but after the crisis in 2008 the central bank needed to become more prudential and started putting more conditions on the banks so they became more careful in granting new loans,” says Gjergji. “Like other countries in the region, Albania has a non-performing loan problem. This brought banks to a position where they cannot serve all the needs of business any more.”
Blodin Cuci of the Albanian Securities Trading Association (ASTA) notes a recent tightening. “In the last three to four quarters there has been a decrease in the traditional credit facilities offered by the banks,” he tells bne IntelliNews. “If we analyse from a macro point of view, all this pressure being created on the banking system has somehow to be addressed, and in my opinion it can be addressed through the stock exchange or corporate bond issuance … There is a lot of room in terms of potential market development.”
Albania’s international partners including the International Monetary Fund (IMF) and the European Commission have pointed to the need to develop Albania’s capital market, with the EC writing in a 2018 report on Albania, “There is significant scope for expanding equity and corporate bond finance,” adding “provided the supervision capacity is strengthened and transparency and governance in the private sector is improved”. The IMF had a similar message, saying that, “Developing capital market institutions requires high transparency and governance standards.”
Corporate governance among large corporates has improved in recent years, as they have sought loans from professional lenders including international financial institutions (IFIs) to expand, though corruption and lack of confidence in financial institutions remain perennial problems in Albania.
ASTA’s Cuci says he sees Albania as a “land of opportunities” in financial markets. He outlines the way financial assets are overwhelmingly concentrated in bank deposits, with a smaller share in government papers and a “very fragmented market in terms of corporations issuing private corporate bonds”. “Albania is a developing country and as such a lot of financial infrastructure is missing,” he says. This means the early bird initiatives like ALSE, “are the ones that … expand the financial instruments available, create trading infrastructure and all the infrastructure around financial services.”
The market for potential investments into listed paper, including among retail investors, is strong. There is a substantial pool of money in pension and investment schemes, not to mention around €8bn of time deposits in the banking system from individuals, according to central bank data.
However, the legacy of the failed TSE could act as a brake on potential investment. “Albania was in a kind of trap because we already had a stock exchange in the past. Everybody has heard of the TSE and knows it failed,” says Gjergji. On top of that, he added, “There also is still the bad taste from the pyramid schemes back in 97 —everyone who doesn’t understand an instrument thinks of pyramid schemes. We are trying to inform, to convince people all the time.”
ALSE has been reaching out in particular to university students, seeing them as the investors of the future. “The whole market needs huge financial education for every kind of product. We are working intensively with universities, where we hold conferences at least once a month in cooperation with their economic faculties. Investing in younger generations is a mid-term investment because in a few years, when we are ready and these guys might be ready to start investing, they will all know there is a stock exchange and how to invest in it.”