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Cablegate: Warsaw Stock Exchange Booming but Faces Challenges

VZCZCXRO4858
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHWR #1723/01 2201454
ZNR UUUUU ZZH
R 081454Z AUG 07
FM AMEMBASSY WARSAW
TO RUEHC/SECSTATE WASHDC 4929
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHKW/AMCONSUL KRAKOW 1777
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 WARSAW 001723

SIPDIS

SENSITIVE, SIPDIS

DEPT FOR EUR/NCE, EUR/ERA, EEB
EUR/NCE FOR BPUTNEY
COMMERCE FOR 4232/ITA/MAC/EUR/JBURGESS, JKIMBALL, MRODGERS
TREASURY FOR MGAERTNER

E.O. 12958: N/A
TAGS: ECON EINV ETRD PL
SUBJECT: WARSAW STOCK EXCHANGE BOOMING BUT FACES CHALLENGES

REF: Septel

WARSAW 00001723 001.2 OF 002


1. (U) Summary: Until a long-expected correction in July 2007,
Warsaw Stock Exchanges (WSE) indices have been breaking new records
and reaching new highs for over three years. The WSE is central
Europe's leader in IPOs with 39 in less than 7 months. The number
of foreign companies on the WSE is also increasing. Despite the
fact that the exchange's status as one of the few state-owned
exchanges in the EU has proven problematic, the GOP's desire to
retain ownership and control is strong. End Summary.

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Background
----------

2. (U) The Warsaw Stock Exchange is the largest stock exchange in
Central and Eastern Europe. As of June 2007, its total market
capitalization amounted to $322 billion with 314 listed companies.
The WSE is a member of the World Federation of Exchanges and the
Federation of European Securities Exchanges. Stocks, bonds,
subscription rights, allotment certificates, investment
certificates, and derivative instruments, futures, options and index
participation units actively trade on WSE.

---------------------------------------
Organizational and Regulatory framework
---------------------------------------

3. (U) The Warsaw Stock Exchange is a non-profit joint-stock
company founded by the Polish State Treasury. The company has a
share capital of PLN 41,972,000 ($ 15,425,211.32) divided into
59,960 registered shares. At the end of June 2007, WSE's members
included 39 entities including banks, brokerage firms, an Exchange
company and the State Treasury. The General Meeting is the WSE's
highest decision-making body. Its role is to implement changes to
the Statutes and Rules and to elect members of the Supervisory
Board. It consists of representatives of the State Treasury, banks
and brokerage houses and WSE's shareholders. The Supervisory Board
controls the operation of the exchange, admits securities for
trading, and grants and recalls stock exchange membership. It
consists of 12 members appointed by the General Meeting. The
Management Board co-ordinates the WSE's day-to-day operations. The
Management Board consists of five members. The President, elected
by the General Meeting for a three-year term, directs Management
Board activities.

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History
-------

4. (U) The WSE was established in 1817 and was the first stock
exchange in Poland. It was closed with the outbreak of the 2nd
World War. Attempts to reactivate the WSE operation after 1945
failed under the Communist regime. It was reestablished by the
State Treasury on April 16, 1991. At the same time, the Polish
Securities Commission, with a chairman appointed by the Prime
Minister, was created. The legal framework establishing the WSE and
capital markets activities, the Act on Public Trading in Securities
and Trust Funds, was adopted in March 1991. From the
reestablishment of the WSE, electronic paperless trading was
utilized. On the first trading day only 5 stocks were listed with a
turnover of $2,000.

-----------------------------------
Warsaw Indices Breaking New Records
-----------------------------------

5. (U) 2006 was the third subsequent year that the WSE's main
indices achieved positive rates of return. The index of the
smallest listed companies, the sWIG80, recorded the highest return
of 132%. The runner up was the mWIG40 with a growth rate of 69%.
The broad market index, the WIG, climbed by 43%, while the WIG20,
the index of major companies grew by 24% throughout the year.

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Warsaw as IPO leader
--------------------

6. (U) With its 20 IPOs in the second quarter of 2007, the WSE
ranked second in Europe for new issues after the London Stock
Exchange which posted 36 IPOs. The WSE expanded drastically in the
first half of this year. There have been 39 IPOs year to date, more
than the 38 IPOs recorded in 2006. The two IPOs issued in late July
set a new WSE record of nine IPOs in a single month, beating the
previous record set in July 2005 of six IPOs. The value of this

WARSAW 00001723 002.2 OF 002


year's IPOs has been close to PLN 16 billion ($ 5.87 billion),
including PLN 13.7 billion ($5.03 billion) of new share issues.
This sets a historical record for the WSE as the value of IPOs in
the record-breaking year 2004 was PLN 13.1 billion ($4.81 billion),
including only PLN 1.5 billion ($.55 billion) of new share issues.
Mr.Sobolewski, the President of the WSE, predicts that the WSE may
host 60 IPOs this year. However, with 39 IPOs already launched and
many more in the pipelines, that estimate may be conservative.

------------------------
Foreign company presence
------------------------

7. (U) The presence of foreign companies on the WSE is increasing.
Mr.Sobolewski is upbeat about the WSE's future activity as five
more foreign companies are expected to list this year. He notes
that the WSE may have more foreign listings before the end of the
year than all companies listed in Vienna combined. There are 16
foreign companies listed on the WSE as of July 24, 2007.

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GOP control
-----------

8. (SBU) The current GOP's desire to retain ownership of the WSE
as a strategic asset is unwavering. The State Treasury's stake is
currently 98.81%, which Mr. Sobolewski described as an "exotic
structure". The WSE's status as one of the few state-owned
exchanges in the EU has been nothing but problematic for the
institution. State ownership was the key reason that the WSE lost a
bid to purchase the Vilnius exchange. (The private Nordic exchange,
OMX, won the bid.)

9. (SBU) The Polish government has been considering selling a
minority stake of approximately 40% in the exchange, possibly later
this year. However, Treasury Minister Jasinski is only interested
in selling to Polish investors. The European Commission recently
told the GOP that it may not discriminate among EU Member States.
This played into President Sobolewski's hands as he supports
privatization. Sobolewski told us that "we have to aggressively
strengthen our position. We can't think of ourselves as only a
national market." Sobolewski plans to buy stakes in other central
European exchanges in addition to brining in new listings from other
countries in the region. Market analysts agree that it is important
for the WSE to expand, especially to be able to attract Polish firms
which are large enough to list on bigger and more liquid regional
exchanges.

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Vienna Rivalry
--------------

10. (SBU) The Vienna stock exchange is Warsaw's biggest rival due
to its similar size and regional expansion plans. Sobolewski
questions whether Vienna even belongs to the CEE region. However,
he stresses that Warsaw has a leg up on Vienna due to its "special
expertise in former communist countries transitioning to
capitalism." Market analysts agree that his ambitions for expansion
are realistic and stress that Warsaw is a more natural place for
Ukrainian or Bulgarian firms to list, as Vienna is perceived as a
Western exchange.

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Comment
-------

11. (SBU) The WSE has been crucial in building the foundations of
a market economy in Poland over the last 17 years. Listings and
prices have been booming as Polish pension funds can invest up to 40
% of the value of their assets in shares in Poland. However, the
WSE CEO's dream of becoming the main regional stock exchange will
only come true if the GOP allows a partial privatization. In the
current political situation there seems little likelihood the
current GOP will give up control of the WSE as it is considered one
of its most important institutions.

Hillas

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