12th February 2022, Skopje – Finance is the lifeblood of the economy – the economists often say, explaining the significance of the financial sector for the economic growth. As blood nourishes organs so they can function, finance fuels the economic activity. Hence, availability of finance is closely linked to the economy’s vitality, i.e the level of economic activity, thus the economic growth and development. Over the broad sweep of history, contribution of financial markets to economic development has been characterized as “important” by Stiglitz, “pivotal” by Shumpeter, even “too obvious for serious discussion” by Miller.
Since the very beginning of my term of office as Minister of Finance, I have been indicating the accelerated economic growth as a clear objective to be attained for the development of our economy. Continuous higher rates of economic growth, of around 5% annually, will provide for achieving the desired and the needed economic development and ensuring better living standard for our citizens.
Vision and plan to achieve the goal are clearly set. They are translated in the Growth Acceleration Plan, proposing a comprehensive and viable strategy for accelerated and sustainable economic growth.
New Strategy: Mobilizing Capital to Accelerate Economic Growth
Growth Acceleration Plan places special emphasis on access to capital, to be used to finance projects in both the public and the private sector, all to the end of scaling up total investments, boosting the economy’s competitiveness and encouraging the growth.
Mobilizing capital and allocating it to more productive spending: new projects, start-ups, export-oriented companies, SMEs, underpin economic activity and encourage growth. Hence, capital market development will play a crucial role in accelerating the economic growth.
In the light of this context, the Government, upon proposal by the Ministry of Finance, has adopted Financial Market Development Strategy, the implementation of which is expected to create more possibilities for financing companies’ projects, increased offer of investment instruments, as well as attracting foreign investors. The Strategy has been prepared through an inclusive process of exchanging ideas and consultations within the Capital Market Development Council managed by the Ministry of Finance, having representatives of the Ministry of Economy, the National Bank, the Securities and Exchange Commission, the Central Securities Depositary, the Insurance Supervision Agency, MAPAS, the Macedonian Stock Exchange, the Macedonian Banking Association, as well as representatives of investment funds, pension companies, chambers of commerce and investors, as its members.
Strategy’s goal is to make the capital market more dynamic, thus attaining the development level of EU average. Many advanced economies or developing countries apply such strategies. As regards Europe, Ireland, Luxembourg, Latvia, Hungary, Slovakia and Bulgaria have adopted such strategies in the recent years.
Rigid Market in a Changing Environment
Before I explain the Financial Market Development Strategy, I would first like to turn to the financial market in our country – to present its current setup in more details and to closely explain the vital necessity for the newly adopted Strategy.
Like in the other developing countrues, financial sector in our country is bank-centric, with insufficiently developed capital market, as a result of the background of socio-economic system.
The banking sector is the driving force of economic growth, while credits are the main source of financing the companies’ development. Banks’ assets in 2020 comprised 82.5% of the total assets of the financial sector. Banking system’s assets increase in average by 7%, while share of credit accounts for slightly more than 50% of country’s GDP, i.e. 56% in 2020 in particular.
Activities of other segments of the financial system, except for the mandatory fully funded pension funds, are relatively scarce. Still, average annual growth accounts for 9% and 28% in the insurance sector and at the investment funds respectively, speaking of increased demand for the products of non-banking financial institutions.
Substantial concentration of turnover with shares of only few companies, underdeveloped primary market and lack of foreign investors are landmarks of the stock market in North Macedonia. Macedonian Stock Exchange AD Skopje, like the rest of the stock markets in the region, springs from the transformation into market economy. During the global and the regional economic expansion in 2005-2007, the stock market experienced boom for a short while, in particular turnover from trading in best amounted to around EUR 109 million in 2005, picking up to EUR 177 the following year, reaching its maximum of around EUR 497 million in 2007 (total turnover that very year exceeded EUR 680 million), when the global financial and economic crisis started, which led to drastic bust. Since 2012 onwards, turnover on the Stock Exchnage has had its peaks and troughs, with the highest turnover in the amount of EUR 209 million registered in 2021, droping to around EUR 133 million during the crisis in 2020. Unlike during the short stock exchange boom, primary capital market in the Republic of North Macedonia has not experienced any expansion in particular. New issues of shares of the existing joint stock companies are most often in the form of private investmen, rarely as public offers.
From the point of view of investors’ structure, interest of foreing investors in our capital market is negligible. If one observes the percentage share of foreign investors in total purchase transactions, downward trend is registered, i.e. it accounted for 15%, 6% and 1.2% respectively in the total transactions in 2018, 2019 and 2020. Moreover, declining trend of the share of foreign investors in purchase and sale orders can be observed, indicating that the interest in our market drops, as well as the capacity to mobilize foreign capital.
Yet another element in the structure of participants in the capital markets is the domination of the older population. 60,907 accounts are registered in the Central Securities Depositary, 84% out of which belong to persons aged older than 50 years, with only 1.4% owned by persons aged younger than 30 years. This indicates to a disbalance opposing the economic logic in terms of risk preferences, i.e. that young investors are risk loving, and the older generations are risk averse.
Government bonds dominate the bond market in North Macedonia. Participants in this market comprise institutional investors which, due to their high liquidity, regulatory limitations and limited offer of additional possibilities to invest in debt securities, allocate large amount of funds. On the other hand, individuals practically make no investments in debt securities issued by the Government. Secondary market is underdeveloped, mainly as a result of the dominance of the financial institutions as buyers as regards these instruments. Corporate bond market comprises a very small portion of the overall debt securities market, with EUR 19 million bonds issued by the banks in the period 2016 – 2020. Municipal bonds are not issued.
Trend of increased interest of the domestic investors in foreign securities, in particular the new alternative instruments such as cryptocurrencies, is striking. It implies the need to increase the offer of innovative solutions on our market in order to attract this investment capacity, as well as to put more intensive efforts in educating the broader public in recongnizing the features of the funds they invest in.
Alternative Sources – They Do Exist, But Are Insufficiently Used
No remarkable progress was observed in organizing the venture capital funds or the development of crowdfunding platforms.
A possibility exists for linking the companies which seek to raise funds and the investors looking for venture capital opportunities in companies in their early stages of development. Such possibility has been available since 2016 when Macedonian Stock Exchnage, in cooperation with Zagreb Stock Exchnage, through SEE link regional trading platform, joined a global platform for alternative ways of raising additional capital for startups and their potential transformation into companies sutiable for future listing on the Stock Exchange. Many groups of domestic individual entities, among which the platform for financing creativity in North Macedonia, put efforts to that end. However, despite the efforts being made to develop this segment, no great success can relate thereto yet.
Venture capital funds are not recognizable in our economy. Few private funds operate to date, structured as so-called business angels, however they are rare and with limited technical, operating and financial capacity to have any effect on the development of this segment and the economy in general.
Financial Market Development Strategy geared towards Liberalization, Innovative Solutions and New Instruments
All the aforementioned undeniably implies the need to make the financial markets in the country more dynamic. Against a background of scarce financial resources, economic growth should be financed with a more efficient allocation of funds. This implies increased possibilities to finance more risky projects which the banks (due to objective limitations) are not able to participate in more intensively, and the efforts for economic development should be aimed at other segments of the financial markets with such mechanisms already put in place. The more the national capital market is developed, the easier and more successfully the companies will cope with each new situation, they will not depend on the banking financing alone and will boost their international competitiveness.
Four strategic guidelines are identified in the Strategy, translated into specific goals and measures (part of which are in preparatory stage already). They include 1) increased participation of individual and institutional investors by expanding the demand for domestic securities, 2) broadening the investment alternatives by increased offer of equity securities and debt securities, 3) strengthening the regulations for the purpose of their harmonization with the EU Directives, and 4) raising the awareness and advancing the financial education of the corporate sector and the households.
As regards the Strategy’s first guideline – encouraging the demand – it is envisaged to be encouraged through generating higher returns as a result of the measures aimed at reducing transaction, information and tax costs. Furthermore, changes are envisaged in the regulatory limitations on availability of important information in support of expanding the investment portfolio of domestic and foreign institutional investors, as well as advancing the corporate management of the companies listed on our Stock Exchange.
As regards increased offer, issuance of new instruments by the Government is envisaged, which are geared towards the accomplishment of the goals under the Growth Acceleration Plan, and will also add value to the offer on our capital market and the manner of financing of the Government. Moreover, introduction of development, inflation-indexed, green, project and regional bonds is envisaged. Likewise, procedure is planned to be streamlined, together with introducing significant regulatory and tax incentives and stimulations to increase the number of companies listed on the Stock Exchnage, initial public offering including the ones of state-owned companies and their full or partial privatization.
Changes in terms of the regulatory framework are in support of increased efficiency in the operations of the regulatory bodies, comprehensiveness, as well as fast adjustment to the changeable and innovative environment in the financial sector. By recognizing the good practices of the developed countries, a need to merge the regulatory bodies of the non-banking institutions has been acknowledged, all to the end of enhancing their capacities and operating efficiency.
Considerable number of legal amenemdnets and new legal solutions are planned as well, to the end of facilitating the functioning and the achieving of the goals set in the Strategy. Some of the respective legal solutions are in preparatory stage or have been already prepared, such as the Financial Instruments Law, Law on Securities Prospects and Transparency Obligations for Issuers, Law on Investment Funds, legal solutions in the area of alternative investment funds, Law on Payment Services and Payment Systems, Law on Financial Undertakings, Law on Financial Stability, as well as launching the preparation of legal solution for using and investing in cryptocurrencies. Such new legal solutions, in addition to the harmonization with the good practices of the developed countries and the EU Directives, offer specific solutions to address the detected drawbacks.
The new draft Law on Payment Services and Payment Systems offers entry of new institutions on the market, in particular the FinTech sector, which offer payment services through innovative and digitalized solutions, contributing to boosted competitiveness on the market from point of view of both the quality of the service and the costs. Moreover, it contributes to reducing the use of cash, implying better control and more efficient fight against informal economy. Preparation of the Law on Cryptocurrencies is aimed thereto as well, which is to introduce a framework on use and control of cryptocurrency, as a new innovative financial product, together with prospects of developing them as means of payment in future.
Financial sector and instruments, subject to continuous improvement and adjustments responding to the new needs, require good knowledge by the investors. Therefore, the last defined strategic commitment incorporates raising the public awareness through financial education. Various programs are being envisaged geared towards strengthening the capacities, such as establishing an interinstitutional body for implementation of activities to increase the level of financial education, as well as long-term implementation of comprehensive programs focusing in particular on the young people, all to the end of encouraging their participation on the capital market.
Challenges and Prospects
In addition to their benefits, complexity, dynamized changes, increased international integration and accelerated digitalization on the capital markets also come with a number of challenges. Spillover of shocks from the international capital markets, regulatory difficulties, as well as protection against cyber attacks, are just some of the risks the markets face. It implies to the need for greater capacity and readiness of the institutions to prevent and manage such risks.
Benefits from liberalization of financial markets and mobilizing financial resources are considerable for both the business sector and the economy. Diversifying the sources of financing for the enterprises, providing access to instruments in support of the risk management policices, creating more investment alternatives, attracting considerable amount of fresh funds for investments, will contribute to the goals related to accelerated growth, job creation and improved living standard of the citizens.
Coordinated institutional approach, inclusiveness and harmonization with the global trends we adhere to when designing the solutions envisaged in this Strategy, as well as the strong commitment of the Ministry of Finance to implement them, will be recognized and reflected through increased confidence in the financial markets and by utilizing their potential in the economy.
Fatmir Besimi, Minister of Finance