EU expansion benefits
The EU’s decision to open entry talks with Turkey dominated the Greek press over the weekend for a good reason. Encouraging the pro-reformist forces in Turkey with the promise of future EU admission should normally translate into better relations with Greece. From the economic point of view though, Greece should be more pleased with the second wave of EU’s eastern enlargement. The entry of Romania and Bulgaria into the EU block in 2007 or 2008 should set in motion the convergence process, benefiting hundreds of local firms which have invested in these two countries while convincing others with large amounts of money to finally extend their reach beyond Greece’s borders. Although the EU’s deal with Turkey may be important from a political point of view, offering hope for closer economic ties in the future, the truth of the matter is that the two countries are still far apart on realizing these mutual benefits. This despite a reported pickup in contacts and talks between Greek, Greek-Cypriot and Turkish businessmen seeking to find areas of cooperation. At this point, economic relations are underpinned by imports-exports, since very few local companies sought to increase their presence in the neighboring country by buying equity stakes in Turkish firms hit by a severe financial crisis a few years ago despite a noticeable improvement in the relations of the countries over the same period, culminating in Greece’s endorsement of Turkey’s EU aspirations. Of course, better relations between the two historic adversaries translates into lower risks for international investors, widely regarded as positive for financial assets. Even though Greek markets belong to the developed club and Turkish markets to the emerging, appealing to different types of international investors, their stocks and bonds should benefit, even marginally, from the prospect of better relations, say analysts. In this respect, the start of EU-Turkish talks aimed at future entry may provide the catalyst for a surge in M&A and other deals between corporations in the two countries. If the realization of future economic benefits from the expected normalization of Greek-Turkish relations is an assumption, the green light provided by the EU to Bulgaria and Romania to join the EU in the next few years is a big boost for hundreds of local companies operating in the two countries. The EU agreed on Friday to sign the accession treaty with the two countries in April next year and admit them in 2007. The entry could be extended in 2008 if reforms to combat corruption, strengthen their judicial system and abolish aid to certain industries are not implemented on time. This development, while expected, should be music to the ears of Greek firms which were bold enough to set up operations or acquire companies in the two countries in the last decade or so. Banks should be among the prime beneficiaries given their established presence in Bulgaria and Romania. But the time may be ripe for others, such as cash-rich Hellenic Exchanges (EXAE), to take the plunge and extend their reach. The major Greek banks were wise enough to invest in Bulgaria and Romania and have started reaping the benefits of this approach. In Bulgaria, a country with a population of 7.5 million people, a projected GDP growth of 5.0 percent this year and 5.2 percent next according to EBRD, a GDP per capita of 2,500 dollars at end-2003 and an estimated 3,600 dollars this year, National Bank of Greece (NBG) and EFG Eurobank Ergasias were smart enough to go in relatively early. National Bank controls 90 percent of United Bulgarian Bank (UBB), Bulgaria’s third largest with a market share of more than 10 percent in terms of assets. NBG bought the stake in the summer of 2002. EFG Eurobank Ergasias holds an 86 percent stake in Bulgarian Post Bank, the country’s sixth largest, buying first in 1998. EU membership is widely expected to provide a boost to Bulgaria’s low GDP per capita, sustain high GDP growth rates and maintain buoyant loan growth, which rose 40 percent in real terms in 2003. With credit penetration to households and firms at very low levels, below 10 and 20 percent respectively, the prospects for hefty increases in interest and commission income from the Bulgarian operations in the years to come is very likely. Romania is an even more compelling prospect given its population of 22.4 million people, similar GDP growth rates in the area of 5.0 percent, a similar GDP per capita of 2,500 dollars in 2003 and an estimated 2,900 dollars in 2004. Clearly under-banked, with total credit penetration below 16 percent of GDP and high loan growth at over 40 percent, the country offers a good base for growth to both EFG Eurobank Ergasias and Alpha Bank. EFG Eurobank has controlled 53 percent of Banc Post, the country’s sixth largest with a market share of 4.1 percent, since November 2003 while Alpha Bank has raised its stake to 96 percent in Alpha Bank Romania, the seventh largest with a market share of 3.6 percent. In addition to banks, other Greek companies, for example in the food, textiles and telecommunications sectors, operate in the two countries. Given their presence, one would also expect Hellenic Exchanges, the holding company of Greece’s cash and derivatives stock exchange, to be more active in the area. Despite earlier promises though, its ELPIS certificates, something close to ADR’s, designed to make it possible for Balkan companies to trade on the Athens bourse, did not take off. Analysts and others, including bankers, think the time has come for Hellenic Exchanges to consider either the acquisition of a stock exchange in the Balkans, or the offer of incentives to persuade Romanian and Bulgarian firms to pursue a primary or dual listing in Athens. Given the fact that the subsidiaries of many Greek companies operate in Bulgaria and Romanian, EXAE’s strong cash position – with more than 90 million euros in hand from the sale of equity holdings in November and the increased presence of international investors in the local stock market – either option could be realized. This would also strengthen the Athens bourse’s hand in negotiating a deal with a major European stock exchange in the future. The entry of Bulgaria and Romania into the EU in 2007 or 2008 is a good development for both countries and the region. It is also a boost for Greek companies which had the vision and the courage to invest in these countries in the past. The time to reap the benefits has come and is set to extend well into the future. Still, there is time for other cash-rich local firms to design and implement their expansion strategies to diversify their holdings and strengthen their negotiating hand at European level.
