ESTONIA'S STOCK MARKET CORRECTS; OUTLOOK STILL STRONG

UNCLAS TALLINN 000163 SIPDIS DEPT FOR EEB/CBA AND EUR/NB SIPDIS E.O. 12958: N/A TAGS: EFIN ECON EN SUBJECT: ESTONIA'S STOCK MARKET CORRECTS; OUTLOOK STILL STRONG Ref: (A) TALLINN 92 (B) RIGA 166 ¶1. (U) During the month of February, the Tallinn Stock market hit an all time peak and then fell just over 20%. According to Embassy contacts and local analysts, the slide was driven by the profit-taking of local investors. It is not a harbinger of underlying weakness in the local or regional economy, or a reaction to broader global market trends. The economy is basically sound, (ref A) and the bulk of trading volume has been among individual investors rather than larger institutions, suggesting that this is not part of a larger flight of capital. With February's declines, the OMXT has given up nearly half of the gains it made since October 2006, when it began a rise of just over fifty percent in four months. Overall in 2006, the OMXT rose 48 percent, and it has averaged returns of 30 percent per year since it opened in 1996. Analysts expect that the Tallinn market may now fall all the way back to the October 2006 level, but nevertheless do not see this as a "crash" so much as "letting air out of the tires". ¶2. (U) Opened in 1996, the Tallinn stock exchange is a fully electronic exchange, and one of eight stock exchanges within the OMX Group comprising the Nordic Exchange. There are only fifteen (15) companies listed on the Tallinn exchange currently, and a relatively small percentage of the population is invested in the market. Thus, movements in the OMXT do not have the same impact on the Estonian economy that say, a 20 percent drop in the Dow Jones average would have on the U.S. economy. According to exchange officials, perhaps 100,000 Estonians (or less than 10% of the population) have securities accounts dating back to the GOE's privatization spree of the mid-1990s, however, there are only about 10,000-20,000 "active traders" today. The October 2006 start of the market's current gains coincided with the Initial Public Offering (IPO) of the exchange's most recently listed company, Olympic Casinos. This heavily promoted IPO coincided with a period of rising disposable income and living standards in Estonia. The combined effect was to push the whole market up - a relatively easy task given the OMXT's small size and low liquidity. ¶3. (U) The Tallinn Stock Exchange seems curiously insulated from regional and global market movements - such as the trends from China affecting other markets in Europe and the U.S. Exchange officials have pointed out that the OMXT is not particularly sensitive to interest rate changes by the European Central Bank in Frankfurt, because there are no banks or financial institutions listed on it. (Note: Tallinn Water, Olympic Casinos, retail & telecomm companies, and the Tallink ferry company are among the largest listed companies. End Note.) During recent speculation about whether the Latvian currency, the Lat, would have to be devalued, (ref B) both the Riga and Tallinn markets registered virtually no reaction to the news. This may be due in part to the fact that all trades are already cleared in Euros rather than local currency. ¶4. (U) The Tallinn exchange has plans for expansion later this year. Management Board Chairman Andrus Alber told us that by the end of the year he hopes to have an alternative market up and running, along the lines of the London-based Alternative Investments Market (AIM). This would permit "more entry points into the market" and greater access to capital for small companies by creating a market with lower capitalization requirements, simplified rules for company prospectuses, and fewer restrictions on the number of issued shares. (as well as fewer protections and greater risk for investors). Alber expressed confidence that regardless of what coalition comes out of Estonia's recent parliamentary elections, the new government will eventually pass the legislation needed to establish this new exchange. GOLDSTEIN