News & Analysis

Developing a pan-Baltic capital market

The Ministries of Finance (MoFs) of Estonia, Latvia and Lithuania, the European Bank for Reconstruction and Development (EBRD), and the European Commission’s Structural Reform Support Service (SRSS), have been working closely with each other to support the development of a pan-Baltic capital market.

A Memorandum of Understanding (MoU) – initially signed in 2017 – focused on the development of a common framework for the issuance of covered bonds blending mortgages from the Baltic region. But the initiative has now expanded beyond this initially modest goal. The Baltic states face challenges independently because of their relatively small size which undermines capital market depth and secondary market activity. These size constraints and the modest inventory of investment products have led to their individual Frontier Market classifications by leading index providers such as FTSE Russell and MSCI. However, “when looking at the Baltic states from an economic perspective, they more display the features of developed economies,” Razvan Dumitrescu – Capital Markets Development Associate at the EBRD – tells Emerging Europe.

“We have successfully started implementing projects funded by the European Union via the Structural Reform Support Programme and several of these incorporate pan-Baltic approaches demonstrating that local authorities, in particular MoFs, and key stakeholders such as Nasdaq Baltic are aware of their size limitations and constructively addressing the issues,” adds Mr Dumitrescu.

Noteworthy approaches include:

  • Promoting the concept of a pan-Baltic asset class under a single index classification – similar to the MSCI WAEMU Index;
  • Developing a regional legal and regulatory framework for covered bonds and other structured products;
  • Commissioning action plans and strategies aimed at expanding international investment in the region;
  • Encouraging access to capital market financing for small and medium enterprises (SMEs) including pre-listing support programs – in line with the Capital Market Unions (CMU) Action Plan proposed by the European Commission.

“The EBRD are combining policy dialogue with investments as a way to support the regional approach and develop much needed investment products” Mr Dumitrescu says. And indeed one can notice the wide range of products the EBRD subscribed to in the region in the last 18 months. These include:

  • Port of Tallinn IPO – a successful case study for the Baltic states in terms of listing of state owned enterprises (SOEs);
  • Auga SPO – triggering an increased equity free float, allowing the company to be featured under the Nasdaq Baltic Main List;
  • Lietuvos Energija a milestone green bond issuance in compliance with the Green Bond Principles of ICMA – and EBRD’s first investment in such a product; and
  • Maxima Grupė – a debut bond issuance dual listed on the Euronext Dublin and Nasdaq Baltic.

“I would say that the Baltics provides an excellent demonstration of how smaller markets can approach the issue of capital market development in a constructive fashion. The momentum is there and I have little doubt that the current regional approach will not be successful,” concludes Mr Dumitrescu.

The EBRD is hosting the Pan-Baltic Capital Market investors conference on October 18 at their headquarters in London.

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