World-wide surge in state sell-offs to bring in $100bn

World-wide privatisation receipts could reach an-all time high of $100bn this year, according to a report from the Organisation for Economic Co- operation and Development released today.

The report says that a global surge in selling off state assets is having a profound effect on capital markets, particularly equity markets: "Due to its high profile, privatisation may facilitate a switch from investment in bonds to investments in equities."

However, in a separate analysis in the same publication, the OECD warns that new investors in equity markets who have little experience of shares could be "driving equity prices up to unsustainable levels".

Just as the British privatisation programmes have ebbed, selling off state assets has become a global phenomenon. The OECD research, published in the March issue of Financial Market Trends, reveals that over the past six years the UK has run up higher privatisation receipts than any other country: a total of $58.5bn, with a further $3.3bn expected in 1997. France has raised $26.8bn in the last six years, and Australia $24.9bn.

The largest single privatisation offering ever took place in 1996: the sale of the first part of Deutsche Telekom, the German telecommunications company, raised DM20.1bn ($13.3bn).

The report says: "Partly as a consequence of large-scale privatisations, domestic equity markets are developing rapidly in non-OECD countries, becoming deeper and more liquid. At the same time institutional investors in many OECD countries, where bond markets have traditionally played the main role, are slowly becoming more interested in equities."

The report says that although privatisation offerings constitute a small fraction of equity market capitalisations, high-profile privatisation can act as a catalyst for equity issues. "It is quite likely that privatisation issues have helped pave the way - along with rallying stock markets - for the rise in private equity issues."

The OECD maintains that as government budget deficits are declining, limiting the supply of new bond issues, investment will need to switch from bonds to equities. At the same time, it says that the reform of pension provision in OECD countries will require well-functioning capital markets. "In this context, privatisations may be an important element in reinforcing equity markets."

The OECD warns against new and inexperienced investors driving equity prices to an unsustainable level. It says new investors in equity markets may mistakenly believe that equities always outperform fixed-income investment.

Such activity "runs the risk of out-running equity supply and thereby driving equity prices to unsustainable levels. Thus as stock markets test their current high levels, it will be important for both market participants and officials to be vigilant in view of the risk of speculative excesses."

Meanwhile the OECD says the flow of privatisations is unlikely to ebb. Portugal and Spain continue to pursue vast privatisation programmes.

Part of the Portuguese telecommunications company was sold last year, whilst Spain sold 20 per cent of Telefonica, its telecoms company, at the beginning of this year. The telecoms sector is likely to continue to dominate privatisation next year, as France, Australia and Italy have sales in the pipeline.

So far the emerging markets in eastern Europe have not had a big impact on global privatisation receipts. Hungary has clocked up the highest figure so far, raising $6.7bn between 1990 and 1996, with a further $1bn expected this year. Poland has raised $4bn, with $3.5bn on the cards for 1997.