Bosnia’s two bourses show divide

SARAJEVO – The unassuming offices of the stock exchange in Banja Luka, Bosnia’s second capital, conceal a bright spot in the country’s struggling postwar economy. The bourse is booming with foreign money, its index has more than doubled from a year ago, and trading volume for this year looks set to double the 280 million Bosnian marka ($180 million) of last year. «There is enormous interest from foreign investors,» bourse director Milan Bozic told Reuters, noting the 1,000 hits its website ( gets every day. Such performances are rare, almost surprising, in Bosnia. The country has had less than $3 billion in foreign direct investment in 10 years, roughly the period since the end of the 1992-95 war, and still has a reputation for instability. It also ranks in the bottom third of the World Bank’s global «Doing Business» study when it comes to starting businesses, issuing licenses or registering property. The war split the country into two ethnic-based parts, the Serb Republic and the Muslim-Croat Federation. And while the Banja Luka Stock Exchange in the Serb Republic is booming, the larger Sarajevo Stock Exchange in the Muslim-Croat Federation is stagnating at the same trade volume as last year. Traders and analysts say that the coordination among the securities commission, registrar and bourse is very good in Banja Luka, and poor in Sarajevo. «In Banja Luka you have a very well-organized stock market, very good information, transparency, they publish shareholder lists frequently, and they have all the financial statements of the companies published on the website,» said Adam Cleary, the chief executive of a London-based investment fund. Cleary said that his Monte Cristo Capital investment fund does business on the Banja Luka Stock Exchange but found it difficult to penetrate the Sarajevo exchange. «It is very hard to break the power of the oligarchs (in Sarajevo), whereas in Banja Luka things are more open,» Cleary told Reuters, referring to the managers of big state companies, who are often political appointees with little business experience. The diverging performance of the two bourses is at odds with the political image of the two halves of the country that host them. The Muslim-Croat Federation is seen as more West-leaning and liberal, the Serb Republic as isolationist and bellicose. But on the economic front, it’s a different picture. Tale of two cities Since Milorad Dodik became prime minister of the Serb Republic in February, the legal and business environment has flourished. Dodik kicked off a US-sponsored and much-praised program to scrap hundreds of regulations that delay the process of registering companies and doing business. He also prepared the ground for a new four-year investment cycle in the region. «The Serb Republic has gone further with reforms than the Federation,» a senior EU diplomat told Reuters. Traders point to two key laws on the capital market passed by the Serb Republic: regulating the status and operation of the securities market and of privatization-investment funds (PIFs). These funds were set up before 2000 to collect and invest voucher-like certificates issued to citizens to make up for lost pension and social security payments during the war. The new legislation turned the PIFs into real investment funds allowed to hold majority stakes in companies, making them more attractive. These same laws are blocked in the parliament of the Muslim-Croat Federation, and PIF transactions fell 50 percent there this year. The complex, canton-based structure of the Muslim-Croat Federation, in which the Muslim and Croat ethnic groups often have conflicting economic interests, is a big obstacle to pushing reforms through. «The biggest problem is that few people here recognize how much the capital market can contribute to overall economic growth,» said Zlatan Dedic, president and CEO of the Sarajevo Stock Exchange. Market analyst Drazen Simic said that a key advantage of Banja Luka over Sarajevo was transparency: The securities registrar in the Muslim-Croat federation declines to publish shareholder lists and information on firms’ financial situation. «Everything is a business secret,» Simic said. «Of 650 shareholding associations in the federation, at least 50 are solid. But how can we know which ones, without this information?» And while the Banja Luka Stock Exchange controls the securities registrar and has access to the company information required by its clients, in the Muslim-Croat Federation the registrar must get clearance from the securities commission before disclosing information. «There is too much formality in the regulators’ approach. The interests of market and investors are not the priority,» Dedic, of the Sarajevo Stock Exchange, said. Their different approaches aside, both bourse directors hope business will boom further with the reform of state pension funds and the sell-off of larger companies via their bourses. Ultimately, they see their future in the integration of a regional stock market with the Vienna Stock Exchange. Western officials have also warned that the country must unify its economies to eventually proceed toward EU membership. «The region is too small to be further divided,» the Banja Luka exchange’s Bozic said. «Only a unified and harmonized system can be attractive to investors.»