Latvia, Estonia and Lithuania are working with the EBRD on receiving a single index classification shared between the three states, helping to promote a closer capital markets union. This accompanies work to develop a shared covered bond framework.
At present, Lithuania and Estonia are frontier markets while Latvia is not classified. The EBRD is working with the countries to have the Baltic region classified as a frontier market initially, and it could after that work towards the emerging market classification. Assets under management directed to the frontier markets reach $75bn, while for emerging markets it is $1.5tr.
One of the requirements for being classified as an emerging market involves having a certain number of blue-chip firms, and by joining up, the Baltic states would have more between them.
The idea behind the merger is that receiving a single index classification would encourage foreign investment from a broader range of actors, as some buyers skip constituents with a low weight.
The states are looking at the West African Economic and Monetary Union (WAEMU) as a model. WAEMU consists of eight countries and received a single classification from MSCI as a frontier market in 2017. None of the countries would have met the size and liquidity criteria on an individual basis.
Market trading and post-trading is already harmonised in the Baltics with a single platform and post-trading infrastructure.
As well as advisory work, the EBRD provides anchor investments for capital markets transactions: recently in the Baltics this included the Port of Talinn IPO and a green bond from the Lietuvos Energija. The move would be the next step in a process of capital markets harmonisation between the three nations.
The EBRD has been working closely with the countries on a pan-Baltic area covered bond framework, allowing assets from the three member states to join a single cover pool.
Lithuanian finance minister Vilius Šapoka said that the common legislative proposal and harmonised system would allow banks “to reach a critical mass in order to issue”.
“In the capital markets, size matters,” said André Küüsvek, director for local currency and capital markets development at the EBRD. Luminor Bank is considered the most likely first name to issue under the new regime.
Küüsvek also said that the framework would entice a completely new investor base to the region. It would allow investors looking for very safe assets to hold securities in the region’s banks.
However, one worry for the EBRD is that the new Estonian government, formed last month, could give citizens more power to pull money out of the second pillar pension system in the country. Küüsvek said that this could result in less long-term investment in local securities, as people taking investments out of the system might not put them back into this type of savings.