In the wake of massive bank heists, fraudulent elections and increasing tensions between the EU and Russia, a flurry of articles have been written on how to best liberalize Moldova. The focus is generally political in nature: cleaning up elections, strengthening the balance of power, and getting rid of entrenched corruption. But the country’s capital markets are often left out of the discussion, despite them being a force for liberalization in other countries. Since the political realm has proven itself to be difficult to change from outside, markets may the next best place to look to enact systemic change.

Integrating Moldova’s equity and credit markets into world capital markets would grease the wheels of the country’s economy, and benefit citizens by lowering the cost of capital and goods. But more importantly, liberalizing capital markets would force market participants, namely corrupt companies and officials, to clean up their behavior, or risk being blatantly caught. The opening, therefore, can be seen as a different method to weed out inefficiency and the oligopoly that has plagued the country since its independence.

Private Appetite

Since the EU-Moldova Association Agreement was signed in 2016, the country’s investment environment has arguably become more attractive, though corruption still persists. Low operating costs, attractive tax rates, and relatively free trade with both the EU and CIS have provided Moldova with unusual selling points for a European country.

Private transactions have also been booming of late. The EBRD bought a 41% stake in Moldova’s largest commercial bank—Moldova Agroindbank (MAIB)—for $26.2M in October 2018. The deal came only months after Banca Transilvania, Romania’s 9th largest bank acquired a majority stake in Victoriabank, then Moldova’s third largest bank. In February, Doverie-United Holding—a Bulgarian firm—bought a 64% stake in the country’s second-largest bank, Moldindconbank (MICB) for $44.5M.

This demonstrates that an appetite for Moldovan assets endures, although the high barriers to entry and opaque informational channels have kept non-regional capital allocators away.

The Public Markets Puzzle

Recent injections of capital into the private sphere has not translated into activity in country’s public markets. Although there are close to 1,000 companies registered for trading in Moldova, the amount of listed companies is a puzzlingly-low 17.

Trading volumes are also wafer-thin: in 2013, the total number of transactions was 4,104, and the total value of transactions stood at a trifling $100M. Though data from 2014-2018 has been published on the Moldovan Stock Exchange’s (MSE) rather antediluvian website, the numbers are both unverified and incredulously high – the last verified trade figures cited hark back to 2013.

Browsing the MSE for information is also bafflingly complex. Legal ownership of publicly traded stocks is underpinned by 14 registrars as opposed to one central registry. The MSE has a dematerialized exchange that is not supported by a traditional central securities depository—a structure unlike that of any other emerging or frontier market system.

Unsurprisingly, Moldova barely has a bond market. There is negligible activity corporate credit market activity, and although there are several multi-year sovereign bond issuances, they are issued in very low quantities and have little secondary market activity. They are also only issued in Lei, Moldova’s local currency, adding an extra layer of difficulty for foreign capital allocators.

The main securities available are money market instruments in the form of very short term, two week National Bank of Moldova (NBM) certificates and Treasury Bills of up to one year, which are both issued every other week. The notes, like other Moldovan assets, are extremely illiquid. For instance, on February 5th 2019, only $3M worth of 91 day notes were issued. This exceedingly low volume bleeds the  secondary market dry, which in turn only adds to market opacity.

The Virtues of Capital Markets

What if the Moldovan securities market was not created with the intention of raising, deploying, and selling capital, but as a deliberate window-dressing byproduct of the country’s botched privatization reforms? The unnecessarily complicated infrastructure of the secondary securities market, paired with overbearing laws stemming from multiple regulatory agencies makes for a convoluted and unappealing system—almost as if it were designed to keep foreigners out.

A good indicator of capital market activity lies in the number of new joint-stock companies in the region, as these imply interest in capital allocation and investment projects. In 2014, only 2 new companies were registered, totaling a pitiful $28,700. Similarly, investment funds, trust management companies, and virtually all institutional ownership is ostensibly non-existent in the region.

It is scarcely surprising that stocks and bonds are the only instruments traded in Moldova, as many of the investment institutions required to provide other assets are absent nationally. Lack of agency transparency, non market-friendly regulation, and low public trust in the country’s financial institutions will likely continue to act as a moat against foreign influence and control in Moldovan markets, keeping the levers of power firmly in the hands of the power-brokers of Chisinau.

Transparent, consolidated, and regulated public markets not only raise capital for companies, but also increase visibility and accountability on a micro and macro scale. By creating a standardized and regulated public market, Moldova would encourage foreign investment and root out many of the bad practices that take place behind the closed doors of their shadowy corporations.