COMPARITIVE ANALYSIS OF THE STOCK MARKETS OF ALBANIA, BELGIUM,
BULGARIA, CANADA & CROATIA
Kameshwar Teja Bhagwaty, Ishita Kumar, Supragya SInha, Ankita
Agarwal, Chaitanya MuraliBusiness Law Honours, VIII Semester, NLU
Jodhpur
Table of ContentsComparative Evaluation of stability of the
stock markets and the factors contributing to stability or
instability in Croatia1Overview of the Stock Market in Croatian
Economy1Factors responsible for the stability or instability of
Stock market in Croatia1Existence of Company Stocks that trade with
a very low free float:1Relatively Undeveloped Financial
Market:2Rapid Growth of Stock Market and valuation concerns and the
risk of a correction3Co-movements and spill over effects between
American and Croatian stock markets:3Foreign Owners of Croatian
Stock Market Stability and the Single Pact Market4Comparative
Analysis with Stock market in other jurisdictions4COMPARATIVE
STABILITY ANALYSIS OF THE ALBANIAN STOCK MARKET6INTRODUCTION6THE
PRIVATIZATION REGIME7REFORMS IN THE FINANCIAL
SYSTEMS8CONCLUSION10THE HEALTH OF THE CANADIAN STOCK
MARKET11INTRODUCTION11FACTORS AFFECTING STABILITY IN CANADIAN STOCK
MARKET:15Business Activity in the Canadian Economy15Movement of
International Investment16Speculative Trading & the Canadian
Dollar17GOVERNMENTAL FACTORS:17What is Monetary Policy?17Bank of
Canada & Monetary Policy18Regulating the Money
Supply18Manipulating Interest Rates19Controlling Inflation
Rates20Ensuring Political Stability21CONSEQUENCES OF THE
INSTABILITY/STABILITY FACTORS:21International Trade & the
Economy21International Trade & the Cost of
Living22International Tourism & Travel23Exchange Rates &
Foreign Debt24THE STABILITY OF THE STOCK MARKET IN BELGIUM24General
developments24Funding review26Conclusion26Cautious growth
estimate29INTRODUCTION TO THE ECONOMY OF BULGARIA:29REFORMS OF
1990s AND EARLY 2000s:30REFORM FROM THE CRISIS OF 1997:31ECONOMIC
DOWNTURN OF 2009:31NEW GOVERNMENT AND FISCAL DISCIPLINE:32CURRRENCY
OF BULGARIA:32BULGARIAN STOCK EXCHANGE:33SECTORAL ANALYSIS:
INDUSTRY AND CONSTRUCTION:34SECTORAL ANALYSIS: ENERGY36SECTORAL
ANALYSIS: SERVICES AND TOURISM37SECTORAL ANALYSIS: Agriculture,
forestry and fishing38SECTORAL ANALYSIS: Mining and
minerals40SECTORAL ANALYSIS: INFRASTRUCTURE41SECTORAL ANALYSIS:
SCIENCE AND TECHNOLOGY41TAXATION, STATE BUDGET AND DEBT:42FOREIGN
ECONOMIC RELATIONS:43CURRENT SCENARIO IN BULGARIA:45EU
CRITICISM:46STATUS QUO: STILL VULNERABLE47
Comparative Evaluation of stability of the stock markets and the
factors contributing to stability or instability in CroatiaOverview
of the Stock Market in Croatian EconomyCroatias capital markets
have experienced very rapid growth, but the market continues to
lack depth and liquidity. Equities have been the key driver of the
rapid capital market growth. The favorable tax regime applied to
equities likely also contributes to the popularity of the market.
Investor education of the risks in the system, which the
authorities have started addressing after the Financial System
Stability Assessment Report update, is indeed to temper
over-enthusiasm and herd behavior.Factors responsible for the
stability or instability of Stock market in CroatiaExistence of
Company Stocks that trade with a very low free float: In Croatia,
while market capitalization has more than tripled since 2001 to 133
percent of GDP, the overall turnover ratio averaged 8.1 percent of
capitalization, one of the lowest in the region. The existence of a
number of company stocks that trade with a very low free float (the
estimated amount of shares not readily and freely available for
resale) contributes to low market liquidity and to the possibility
that large orders generate significant price
volatility.[footnoteRef:1] [1: Republic of Croatia: Financial
System Stability Assessment Update, IMF Country Report No. 08/160,
(2008) p.19, 16-17 available at
http://www.imf.org/external/pubs/ft/scr/2008/cr08160.pdf (last
visited on March 29, 2015).]
It must be explained here what is meant by the low free float
stocks in a market. The "float" of a stock is the number of shares
available to the public for trading. It doesn't count shares owned
by company officers and insiders. In this case, it boils down to a
question of supply and demand. Because of their limited supply,
stocks with small floats can make major moves-either to the upside
or downside.[footnoteRef:2] [2: David Zeiler, Risk in low float
stocks, available at
http://econintersect.com/b2evolution/blog3.php/2012/05/14/risk-in-low-float-stocks
(last visited on March 29, 2015). ]
While lowfree-float stockscan be a good investment bet because
their prices can move up quickly. If such a stock attracts the
attention of even a few investors, the demand supply mismatch can
push up its price.However, the low free-float stocks tend to have
lesser liquidity, which can result in a possible mispricing of the
stock. Investors with a low ticket size can capitalise on this
mispricing. Besides, low-float companies are prime candidates for
de-listing.Experts also flag further issues related to low
free-float stocks. There are very few that are good for investment.
Typically, shares with a higher float are associated with better
governance since the promoter has lesser influence and other
shareholders have more power to exercise their rights. The stocks
with a low public float are open to the promoters' whim. The
promoters who hold their stocks closely for the purpose of
exercising control over the company find it easy to manipulate the
stock price for their gain. Therefore, Companies that keep their
stock float low, however, never shed the risk of a rapid loss in
value. And it's investors who pay the price.[footnoteRef:3] [3:
Ibid.]
Relatively Undeveloped Financial Market: In Croatia, it has been
noted by the IMF Financial System Stability Assessment Report, that
the interbank money market is shallow and segmented, with the
market unable to recycle liquidity efficiently across banks. Only
20 percent of all transactions take place in the market with the
remaining bilaterally. The FX market is more active and less
volatile. Daily turnover has increased more than fourfold since
2003 to an average of 500 million in 2007. Although spot
transactions have traditionally represented the bulk of FX
transactions, the volume of FX swaps has increased recently, with
the share rising to 60 percent of total transactions in 2007. The
weaknesses and absence of longer tenor quotations in the money
market along with exchange rate stability, hinder the development
of longer term hedging markets for managing interest and exchange
rate risks. Capital markets have recently boomed, with market
capitalization one of the highest in the region (133 percent of
GDP). However, the market continues to lack depth and liquidity and
is dominated by equities; the overall size of the bond market
remains small (15 percent of GDP).[footnoteRef:4] [4: Supra note 1
at p.38, 55. ]
Rapid Growth of Stock Market and valuation concerns and the risk
of a correctionThe very rapid growth of the stock market has raised
valuation concerns and the risk of a correction. The limited supply
of securities coupled with increasing demand has exerted
substantial pressure on the process, though significant price
correctionn has indeed taken place since early 2008. Co-movements
and spill over effects between American and Croatian stock markets:
Despite the fact that intra-sectoral connections between Croatian
and American business sectors are rather weak, it is clear that the
investors on the Croatian stock market dominantly rely on American
indices movements. This was especially apparent during the
beginning of the World Financial Crisis in October 2008 when the
prices of Croatian companies had almost nothing to do with their
business results. The behaviour of Croatian investors was largely
based on the psychological effects of the crisis, and this is why
behavioural finance is introduced to explain what pure financial
reasoning could not. High correlation and co-movements between
Croatian and American indices could be explained by three concepts;
global factors, contagion and irrational escalation.[footnoteRef:5]
[5: Domagoj Sajter Tomislav ori, (I)rationality of Investors on
Croatian Stock Market Explaining the Impact of American Indices on
Croatian Stock Market, Working Paper Series, Paper No. 09-01 (2009)
available at http://web.efzg.hr/repec/pdf/Clanak%2009-01.pdf (last
visited on March 29, 2015); See also Beltratti, A. & Morana C.
(2008) "Comovements in international stock markets" in Journal of
International Financial Markets, Institutions and Money, 18 (2008)
3145.]
Foreign Owners of Croatian Stock Market Stability and the Single
Pact MarketForeign owners are taking hold of an increasing portion
of Croatian economy with the help of Croatias political, banking,
and trade clusters. Small shareholders are losing shares because
their companies are being handed over to the stock exachange
manipulations, to the Darwinist entrepreneurship and management.
They have no knowledge of the anonymous forces which depreciate
their ownership. At all times and in all cases, they lose. Those
who buy their shares win, due to non-transparent nature of capital
relations and due to anonymous capital which buys the
shares.[footnoteRef:6] [6: Davorka Vidovic, Davor Paukovic,
Globalization and Neo-liberalism: Reflections on Croatian Society,
(Zagreb: 2007), p. 132. ]
Thus, the non-conceptual privatization and the stock market
transactions are truly a part of the forced redistribution of
ownership in Croatian economy.[footnoteRef:7] [7: Id at 133.]
Comparative Analysis with Stock market in other
jurisdictionsCroatia joinedEuropean Unionon 1 July 2013, and in
spite of the rather slow post-recession recovery, in terms of
income per capita it is still ahead of some European Union member
states such asBulgaria,Romania, and Latvia.[footnoteRef:8] At the
same time, Croatias capital markets have experienced very rapid
growth, but the market continues to lack depth and liquidity, as
noted above. [8: Eurostat Statistics Explained, available at
http://ec.europa.eu/eurostat/statistics-explained/index.php/Main_Page
(last visited on March 29, 2015). ]
One of the important factors explained above contributing to the
risks and liquidity issues in Croatian stock market is that
regarding the existence of a low free float stocks in the market.
It is pertinent to note that while the low free float maybe a
distinguishing feature of the Croatioan capital market in the
Eurozone, however, as far as India is concerned, traditionally,
promoters of Indian companies have been wary of sharing their
prized asset with public. In fact, the free-float capitalisation of
Indian firms is among the lowest in both the developed and emerging
markets. Many companies are managed by families, which prefer to
exert control by way of a higher level of ownership in the firm.
While this leaves very little in the hands of the small investor,
careful stock selection can help them benefit from companies with a
low free float, or limited number of actively traded
shares.[footnoteRef:9] [9: Should you invest in a low free float
stock?, available at
http://articles.economictimes.indiatimes.com/2014-12-08/news/56839487_1_public-float-free-float-stocks
(last visited on March 29, 2015).]
As far as the relationship and comparison between Croatia and
other Eastern European markets is concerned, it is pertinent to
note that the EBRD is working to strengthen local capital markets
and encourage the use of local currencies in the countries where it
works, to counteract major weaknesses in their transition to
open-market economies. The SEE Link is a prominent initiative aimed
at increasing liquidity in southern and eastern Europe. The EBRD,
through its Local Currency and Capital Markets Development
Initiative, is proposed to support these regional integration
efforts that will contribute to improving the options for raising
funding through capital markets. SEE Link is proposed to
standardise and develop financial services in the region, making it
more attractive to international investors, including the
EBRD.[footnoteRef:10] [10: ViktorijaMelohina, EBRD supports
development of regional capital markets in Bulgaria, Croatia and
FYR Macedonia, (July, 2014) available at
http://www.ebrd.com/news/2014/ebrd-supports-development-of-regional-capital-markets-in-bulgaria,-croatia-and-fyr-macedonia.html
(last visited on March 29, 2015).]
In the light of the factors discussed above that are responsible
for the stability or instability of Stock market in Croatia; it has
been noted that further deepening of the capital market in Croatia
should be supported by:[footnoteRef:11] [11: Republic of Croatia:
Financial System Stability Assessment Update, IMF Country Report
No. 08/160, (2008) p.19, 18 available at
http://www.imf.org/external/pubs/ft/scr/2008/cr08160.pdf (last
visited on March 29, 2015).]
(i) Stronger enforcement of disclosure requirements;(ii)
Strengthening shareholder rights by revising provisions in the
Companies Act regulating conflict of interest;(iii) Enhanced market
surveillance and analysis;(iv) An adequate legal framework and
de-mutualisation of the stock exchange to enhance market
integrity;(v) Addressing the legal framework for the finality of
settlement; (vi) Furthermore, it has also been noted that increased
sale and privatization of public enterprise could add to market
liquidity.
COMPARATIVE STABILITY ANALYSIS OF THE ALBANIAN STOCK
MARKETINTRODUCTION It is submitted that the Tirana Stock Exchange
(referred to henceforth in the assignment as TSE) is the first
exchange ever established in Albania. The Bank of Albania (referred
to henceforth in the assignment as BoA) was instrumental in its set
up with the goal of setting up a metamorphosis of the financial
market system of Albania. The Tirana Stock Exchange dealt as an
intermediary for trading of treasury bills which were issued by the
Albanian government. However, it also acted as the primary market
for auctioning of the same until 1998 where this role was taken
over completely by the Bank of Albania. It is submitted that the
Stock Exchange separated from the Bank of Albania in 2002 to
function as a joint-stock company operated by the
State.[footnoteRef:12] It further developed by obtaining a final
license to operate as a securities market in 2003[footnoteRef:13]
and hired a panel of experts to draft the development of the Tirana
Stock Exchange.[footnoteRef:14] [12: Page 13, Annual Report of the
Tirana Stock Exchange, 2002.] [13: Page 17, Annual Report of the
Tirana Stock Exchange, 2003.] [14: Page 33, Report of the Albanian
Securities Commission., 2005.]
It is submitted that by far the most important economic reforms
undertaken in Albania is the privatization process. It started
since 1991 and by the end of 1994, the first phase of it was
already completed where light industry sector small and medium
enterprises (SMEs) and state farms were privatized. In 1995, the
second phase of privatization started. An investment voucher scheme
was used to privatize companies larger than SMEs. Despite its
philosophy to distribute the common property to the people, this
process resulted to be a failure. Indeed, most of the people sold
their vouchers in the informal market from 10 to 20 percent of face
value. Hence, these huge amounts of vouchers were concentrated in
the hand of certain individuals which became the major shareholders
in the privatized companies.
THE PRIVATIZATION REGIMEHowever, it is submitted that it is
important to stress out that, different from Czech Republic, one of
the main reasons why the privatization process through vouchers
failed, was the lack of a stock exchange and other capital market
institutions in Albania. After year 1997, only strategic
state-owned companies and few non-strategic ones were left to
privatize. During this period of time, Albanian government, under
the consulting of donors and foreign experts privatized many of
these companies to strategic investors by selling the major stake
of shares. Among these companies can be mentioned National
Commercial Bank, Albanian Mobile Communication, Savings Bank etc.
The method used by the government on the privatization of these
companies, indirectly counted out the Albanian population.
Differently from the experiences on CEE or SEE countries, in
Albania never were made any initial public offer (IPO) for
state-owned companies to be privatized. For this reason Albanians
never had the chance to be owners) in strategic companies. In 1997,
the fall of the informal saving schemes brought Albania to an
anarchical situation and a drastic cut of 7% in countrys GDP and
inflation increasing to over 40%. The inadequacy of the financial
system, especially its regulatory and supervisory framework, led to
the proliferation of informal financial arrangements including
pyramid schemes, the collapse of which triggered the civil crisis
of early 1997, and the subsequent fall of the
government[footnoteRef:15]. However, after agreement signed between
Albanian government and IMF, very tough programs were implemented
and the economy started to recover in very short period of time.
Thus, GDP growth started since 1998 and till 2004 Albanian economy
grew up in at a yearly average of 7.5% [15: Irving Jarvis,
2000.]
From central planning economy, Albania inherited a banking
system which was underdeveloped. After 90s, for the new democratic
government, one of the most important means to accomplish the
objectives on macroeconomic development and stabilization was the
reform on banking and financial sector. Thus, strong efforts were
made to develop especially banking sector by making an independent
central bank as well as establishing few commercial banks.
REFORMS IN THE FINANCIAL SYSTEMS Also, reforms were undertaken
to establish nonbank financial sector. Hence, Insurance Institute
(INSIG) was established to pave the way for a modern insurance
sector and in 1995-96 important steps were made to establish a
capital market as well as its necessary institutions. Only after
1998, insurance sector started developing when private capital
companies entered the market, while capital market remains still
undeveloped with a formal stock exchange which never was backed by
the state and has no listed companies so far. Efforts were made in
compilation of legal infrastructure to make possible the financial
system work efficiently. Donors helped the government establish a
comprehensive legal framework for the financial sector and
strengthen the independence of the Bank of Albania (BoA), which
manages monetary policy. Also, work continues on introduction of an
International Accounting Standards (IAS) based accounting system
for both the banking and enterprise sectors, including a uniform
chart of accounts for enterprises, leading to enhanced transparency
and increased intermediation. Regulatory framework has been
improved and continues to be subject of changes even for banking or
non-banking system. However, as a matter of fact, donors funds have
been concentrated more in the banking sector than on the other side
of the system.[footnoteRef:16] The main factor threatening the
soundness of the Albanian financial system is the high level of
informality in the countrys economy. [16: Implementation Completion
Report, The World Bank, 2005.]
In Albania, about half of total economic activity is considered
informal. The predominance of such informality contributes to low
levels of credit from the formal banking sector and wipes out any
possibility to use capital markets as an financing alternative, as
enterprises seek to avoid drawing attention to themselves from tax
and other regulatory authorities. Also, governance and management
remain weak in the real sector. Private companies are often subject
to poor standards of governance and management, and therefore
represent serious credit risks. Business accounting practices are
particularly weak, reducing bank capacity to assess
creditworthiness and, consequently, their willingness to lend. The
lack of professional capacity in the accounting and audit fields
means full movement to accounting standards is still several years
away. Strengthening internal audit functions at enterprises,
ensuring the independence of auditors, enforcing a code of conduct
that is consistent with international standards, and observing more
open standards of transparency and disclosure would contribute to
more and better information for market purposes. In spite of the
up-mentioned problems, Albania has a relatively sound financial
system. Prudent monetary and fiscal policies have contributed to a
stable macroeconomic environment. The system does not appear to be
highly vulnerable to any immediate macroeconomic or financial
sector shocks. The financial system is at an early stage of
development Likewise, even other donors such as EU, USAID, IFC and
EBRD concentrated their financial system technical assistance
programs in the development of banking sector and while the core
legal and regulatory framework is in place, several recommendations
are made that aim to broaden and deepen markets to encourage
financial intermediation.[footnoteRef:17] [17: Albania: Financial
System Stability Assessment - FSSA, IMF Country Report, August
2005]
Even there is an undeveloped capital market, in Albania there
are active operators in the market which create the demand and
supply on securities. The main securities supplier is Albanian
Government issuing public debt securities. No local government debt
securities (Municipality Bonds) issued so far. Companies are
another important supplier issuing only ownership securities. Thus,
shares of state companies are privatized to strategic investors,
while private companies sell their shares in informal market. The
demand for securities is committed generally by financial
institutions such as commercial banks, brokerage houses (generally
invest on government papers), insurance companies, pension funds as
well as international financial institutions (i.e. IFC, EBRD,
American Enterprise Fund etc. which invest in private company
shares). Another important securities demander is public, generally
individuals who invest their savings in T-Bills, and businessmen
who buy shares in informal market to take-over companies they
privatized from the state. CONCLUSIONThere are financial
institutions carrying out the intermediary services in Albanian
securities industry. Thus, despite the sole stock exchange, ASC
provided with license SRC which makes possible the settlement of
share transactions; brokerage houses which are supposed to carry
out any securities public offer or secondary market trade (actually
there are 10 subjects licensed by ASC to intermediate in
securities. There are no specialized intermediaries such investment
banks, custody banks or depositaries for securities, however, given
the actual development stage of the market, it is not considered as
a problem in a mid-term.[footnoteRef:18] All securities in Albania
are kept in book-entry form. Only privatization vouchers were in a
physical form. [18: Gjergji Artan, (2004), Financing of Albanian
business through Exchange, MONITOR Economic Magazine]
It is submitted that the biggest reason for the stumbling and
nascent development of the stock exchange is that there is complete
lack of financial transparency and tendency of the local business
to avoid taxes. Hence, even though the banking system doesnt
fulfill their financial needs, local companies do not see stock
exchange as a financing alternative in the short run. They are
afraid of testing new financial alternatives, different from
classical banking system, and wait for state to make the first step
by listing a state-owned company in exchange. However, it is worth
to mention that, there are many companies which comply with the
listing requirements of TSE. Meanwhile, besides banking system,
private companies in Albania continue to rely primarily on their
own retained earnings and informal market as the means of financing
their activities. However, it is also submitted that secondary
market for government papers remains undeveloped because of the
over-liquidity of the main actors, commercial banks, which hold
these instruments in their portfolios until the maturity. Even
though BoA made efforts to increase the participation of individual
investors in the primary market by opening a retail
window[footnoteRef:19], it doesnt brought any change in making
active the secondary market for public debt securities. [19:
Albania: Financial System Stability Assessment , IMF Country
Report, August 2005]
THE HEALTH OF THE CANADIAN STOCK
MARKETINTRODUCTIONCanadiansecuritiesregulationis managed through
laws and agencies established by Canada's 13 provincial and
territorial governments. Each province and territory has a
securities commission or equivalent authority and its own piece of
provincial or territorial legislation.Unlike any other major
federation, Canada does not have a securities regulatory authority
at the federal government level. Provincial governments began to
establish regulatory agencies in 1912 (in Manitoba), and the Privy
Council decided in Lymburn and Mayland, [1932] A.C. 318 that such
legislation is authorized under the provincial property and civil
rights power.Notwithstanding the lack of a federal regulator, the
majority of provincial security commissions operate under apassport
system, so that the approval of one commission essentially allows
for registration in another province. However, concerns with the
system remain. For example, Ontario, Canadas largest capital
market, does not participate in the Passport regime. Concerns with
the provincial system of securities regulation has led to repeated
calls for a national securities system in Canada. Currently, the
Government of Canada is working towards establishing a national
securities regulatory system that it says will provide: better and
more consistent protection for investors across Canada; improved
regulatory and criminal enforcement to better fight
securities-related crime; new tools to better support the stability
of the Canadian financial system; faster policy responses to
emerging market trends; simpler processes for businesses, resulting
in lower costs for investors; and more effective international
representation and influence for CanadaEach province has its own
securities regulator, which is either a self-funded commission or
an entity funded within a larger government department. The
securities regulator administers the provinces securities act and,
correspondingly, promulgates its own set of rules and regulations.
The securities regulator relies on the work of two national
self-regulatory organizations, the IIROC (Investment Industry
Regulatory Organization of Canada) and the MFDA (Mutual Fund
Dealers Association) for most aspects of regulation of the
organizations' member firms and their employees. Accountability for
securities regulation extends from the securities regulator to the
Minister responsible for securities regulation and, ultimately, the
legislature, in each province. The largest of the provincial
regulators is theOntario Securities Commission. Other significant
provincial regulators are theBritish Columbia Securities
Commission, theAlberta Securities Commissionand theAutorit des
marchs financiers (Qubec).The provincial and territorial regulators
work together to coordinate and harmonize regulation of the
Canadian capital markets through theCanadian Securities
Administrators(CSA). The major provincial securities regulators
also participate in various international co-operative
organizations and arrangements.The CSA has focused its efforts on:
developing uniform rules and guidelines for securities market
participants; coordinating approval processes; developing national
electronic systems through which regulatory filings can be made
with and processed by all jurisdictions; and coordinating
compliance and enforcement activities.The most important CSA effort
is the implementation of the passport system. Under the passport
system, a market participant can obtain a decision from its
principal regulator and, through a simple filing, have the same
decision deemed to be issued under the legislation of all other
participating jurisdictions, in essence providing a passport to
undertake capital markets activity across Canada. The passport
system covers prospectus filings, registration of securities firms
and individuals, and certain types of discretionary exemptions.
Ontario is recognized by the other jurisdictions as a principal
jurisdiction for passport decisions but the Ontario Securities
Commission has not adopted the passport rule itself. As a result,
Ontario market participants have access to other jurisdictions
through the passport system but participants from other
jurisdictions do not have access to Ontario. Instead, the Ontario
Securities Commission follows a "mutual reliance" policy in which
it decides in each case whether to accept the decision of the
principal regulator. Ontario says it supports the harmonization and
improved coordination of securities regulation in Canada; however,
it does not wish to participate in the passport system because it
would prefer creation of a national securities regulator.Public
education on financial literacy, investment and financial decision
making is a secondary focus of the provincial regulators. The
Ontario Securities Commission (OSC) set up the non-profit
organization Investor Education Fund (IEF) for this sole purpose.
Funded by the OSC but acting independently, IEFs primary goal is to
provide Canadians with financial tools and information to improve
financial literacy.On February 21, 2008, the Government of Canada
appointed an Expert Panel on Securities Regulation to provide
advice and recommendations on securities regulation in Canada.On
January 12, 2009, the Expert Panel on Securities Regulation
released its final report, in which they highlighted several
concerns with the current structure.First, the Panel was concerned
that the fragmented structure, requiring decisions to be
coordinated across up to 13 jurisdictions, makes it difficult for
Canadian securities regulators to react quickly and decisively to
capital market events. One illustration of this difficulty was the
adoption in September 2008 by some of Canadas international
counterparts, including the United States and United Kingdom, of
restrictions of short-selling of certain stock as a temporary
stability measure. The Canadian response lagged behind the
coordinated efforts of the United States and the United Kingdom,
and was not uniform across the provinces. A second illustration was
the delay between the freezing of the non-bank Asset Backed
Commercial Paper (ABCP) market in August 2007 and the release of a
consultation paper by the Canadian Securities Administrators to
seek input on a number of proposals that aim to prevent similar
capital market failures in the future.The Panel found that the
fragmented Canadian securities regulatory structure is prone to
foster slow securities regulatory responses, which makes Canada
vulnerable to market and reputational risks.Second, the Panel
expressed concern that the Canadian system of provincial mandates
is incongruent with the national response required to address
developments in capital markets that are increasingly national and
international in scope. They found that one of the important
lessons from the recent capital markets crisis throughout 2008-2009
is that systemic risk is increasingly presenting itself in capital
markets rather than being solely confined to banking institutions.
The Panel reported that effectively addressing systemic risk
requires the coordination and collaboration of all financial sector
regulators in Canada. It also requires working effectively with
international counterparts. The Panel did not believe that the
multiple provincial and territorial securities regulators are able
to work effectively as part of a national systemic risk management
team, as structural challenges will likely compromise its ability
to be proactive, collaborative, and generally effective in helping
to address larger capital market issues on a timely basis. A
delayed response, which is poorly managed by any one of the
securities regulators, could have a detrimental impact on the
integrity of Canadas capital markets as a whole.Finally, the Panel
reported that the current structure fundamentally misallocates
resources, causing securities regulation to be less efficient and
effective. Resources must be devoted to keep 13 separate securities
regulators operating in Canada. This is inefficient since each
jurisdiction dedicates a different level of resources to securities
regulation, which causes the intensity of policy development,
supervision, and enforcement activities to vary across Canada. In
addition, most efforts are duplicative, which results in
unnecessary costs, overstaffing, and delays. Canadians, in turn,
are afforded different levels of investor protection depending on
the jurisdiction in which they reside or invest. Second, market
participants will continue to be burdened with undue compliance
costs, even with the full implementation of the passport system.
Market participants will still have to pay fees in up to 13
jurisdictions. They will still have to deal with the general
inefficiencies associated with differences between provincial
statutes and regulations, the ongoing use of local rules, and
variations in the interpretation of national rules.The value of the
Canadian dollar relative to other national currencies plays an
important role in the political and economic life of the nation.
However, it is not often clear exactly how the price of the dollar
is determined, or what role governments and other financial actors
play in this process. This article provides an introduction to the
process of valuing the Canadian dollar relative to other nations'
currencies. Specific topics discussed include the modern system of
currency exchange, market and government influences on the value of
the dollar, as well as important economic, political, and social
consequences caused by changes in the dollar.FACTORS AFFECTING
STABILITY IN CANADIAN STOCK MARKET:Business Activity in the
Canadian EconomyOne of the most important forces affecting the
supply and demand for the Canadian dollar is the general level of
business activity in the economy. Increases or decreases in the
level of business activity, relative to other national economies,
can often have a corresponding impact on supply and demand for the
dollar and its value relative to other currencies. When business
activity increases (there are more businesses operating, producing
and selling more goods and services, and employing more workers),
demand for the Canadian dollar rises in order to cover the higher
levels of activity. If supply is not adjusted accordingly, then the
price of the dollar relative to other currencies may also increase.
Similarly, if the level of business activity decreases, then demand
for the Canadian dollar follows suit. If the supply is not adjusted
accordingly, then the value of the dollar may fall relative to
other currencies.Movement of International InvestmentAnother
closely related factor is the movement of investments in and out of
the Canadian economy. Every day companies, financial institutions,
and individuals make investments around the world, be it purchasing
foreign stocks and bonds, buying foreign exports, or engaging in
business activities in another country. Changes in the flow of
these investments between Canada and other countries can, in turn,
impact the value of the Canadian dollar.Take the following example:
an American investor decides to sell his/her American stocks and
buy Canadian ones. S/he begins by liquidating his/her American
stocks into American currency. In order to buy the Canadian stocks,
however, s/he must first acquire Canadian dollars which takes place
by exchanging the American dollars for Canadian ones in the
currency exchange markets. Once those Canadian dollars are in hand,
Canadian stocks can be purchased accordingly.A similar process
occurs whenever any foreign investor makes an investment in Canada,
be it the buying of stocks or bonds, making a business investment,
or purchasing Canadian exports. In order to make these investments
in Canada, the foreign investor must first acquire the necessary
Canadian dollars in the international currency markets. Growth in
the level of foreign investments, therefore, result in increased
demand for the Canadian dollar. If the supply of the dollar is not
adjusted accordingly, then its price may also rise in value
relative to other currencies.An opposite effect can occur whenever
investments leave the country. This happens when there is a
downturn in foreign purchases of Canadian stocks, bonds, businesses
or exports, or when there is growth in Canadian investments in
other parts of the world. This causes lower demand for the Canadian
dollar and an increase in its supply, resulting in a lower price
unless the currency supply is adjusted accordingly.Speculative
Trading & the Canadian DollarJust as in stock markets, there is
also a high level of speculative activity in international currency
markets. Many investors trade national currencies not because they
need them to make actual business investments, but because they
looking to make profits on changes in the value of currencies over
time. These investors will buy large amounts of a currency on the
speculation that it will increase in value over time, and that they
will be able to sell the currency for a profit at a later
date.These speculative activities can impact the price of the
Canadian dollar relative to other currencies. When speculative
investors believe the price of the Canadian currency will increase
over time, they will change their holdings from other currencies to
the Canadian dollar. This, in turn, increases demand for the
Canadian dollar and will consequently increase its price relative
to other currencies, if the supply is not adjusted accordingly.
Similarly, if speculative investors believe the dollar is weak and
will lose value over time, then demand will fall and supply will
rise as investors sell off their investments. This, in turn, can
result in a sharper decrease in the price of the Canadian dollar
relative to other currencies.GOVERNMENTAL FACTORS:What is Monetary
Policy?While the Canadian government participates in a floating
exchange system, this does not mean it is a complete bystander in
regard to the value of its currency. In fact, the Government of
Canada regularly intervenes, both directly and indirectly, in the
currency exchange markets to influence the supply and demand of its
currency and also, in turn, the price of the Canadian dollar
relative to other currencies.These government policies and
activities regarding its currency are commonly referred to as
monetary policy. While the Canadian government today no longer
pursues a monetary policy in which it attempts to keep the price of
the Canadian dollar fixed or pegged relative to other currencies,
it nevertheless has important monetary objectives. For example, it
is usually the case that the government will prefer slow and
moderate changes in the market value of its currency rather than
drastic and extreme ones. The government may also prefer the
Canadian dollar to be neither too weak nor too strong relative to
the currencies of important trading partners or foreign
investors.Bank of Canada & Monetary PolicyWho exactly in the
Canadian government oversees the nations monetary policy? The
answer is the Bank of Canada, the nations central bank. The Bank of
Canada observes and analyzes domestic and international
economic/financial trends and highlights important national goals.
Moreover, it has the authority to manipulate important financial
levers, such as the money supply and interest rates, in order to
achieve these goals and objectives. As such, the Bank of Canada
plays a significant role in the economic and financial life of the
country, and has a great influence on the value of the Canadian
dollar.Regulating the Money SupplyHow exactly does the Bank of
Canada influence the price of the Canadian dollar? One way is
through direct manipulation of the money supply in currency
exchange markets. The Bank of Canada accomplishes this by buying
and selling Canadian currency in the market in order to adjust the
supply of dollars available for investors and speculators.Take, for
example, a situation in which market investors and speculators are
selling off their holdings of Canadian dollars in large quantities.
Such a situation could lead to a drastic fall in the price of the
Canadian dollar, as demand weakens and a flood of Canadian dollars
hit the market. In order to moderate this change in price, the Bank
of Canada will intervene by using its foreign currency reserves to
buy massive quantities of Canadian dollars. This, in turn, reduces
the supply available and should stabilize the dollars price.It is
important to note that, in some cases, individual governments and
central banks simply do not have the financial reserves necessary
to cope with drastic fluctuations in the value of their currencies.
As a result, central banks will often work closely with one another
when such interventions become necessary. This may include lending
money to one another, or coordinating interventions in the currency
markets in order to stabilize a vulnerable currency.Manipulating
Interest RatesAnother important factor is the level of interest
rates in Canada. Interest rates constitute the amount lenders
charge individuals and businesses to borrow money. Suppose the
interest rate in Canada is higher than in the United States
(particularly after each countrys rate of inflation is taken into
account). This means that lenders can get a higher rate of return
for lending in Canada than in the United States. In order to take
advantage of this higher rate of return, international investors
will shift their portfolios (for example, government bonds) from
the United States to Canada.These sorts of shifts cause an increase
in demand for Canadian dollars. In order to buy Canadian government
bonds, investors first have to purchase Canadian dollars; the
result is an increase in the demand for Canadian currency.
Meanwhile, the demand for the US currency would fall as investors
divest themselves of US government bonds in order to reinvest that
money in Canada, where they can gain a higher rate of return. The
overall result: a rise in the value of the Canadian currency
relative to its US counterpart.As such, the Bank of Canada can
attempt to influence Canadian dollar exchange rates by manipulating
the interest rates. If the Bank wishes to stop or slow a drop in
the value of the Canadian dollar, it may raise interest rates to
levels higher than in other nations; this, in turn can spur
investment in Canada relative to other nations and demand for the
dollar. Conversely, if the Bank wishes to stop or slow a rise in
the value of the dollar, it can do so by lowering interest rates
below other countries, thus causing lower relative investment and
demand for the dollar.It is, however, important to note that
manipulation of interest rates for monetary policy is a very
complex task. For example, while higher interest rates may spur
higher demand for the Canadian dollar amongst lenders, it can also
reduce demand amongst other economic actors. As explained earlier,
the value of the dollar depends in large part on the level of
business activity and foreign investment. High domestic interest
rates often have the result of slowing down general economic
activity and investment, as businesses and consumers cannot cheaply
borrow the money they need to continue or expand their operations
or make consumer purchases. This economic slowdown can, in turn,
reduce domestic and international demand for Canadian
dollars.Controlling Inflation RatesAnother important tool in
monetary policy is controlling inflation rates. Inflation is the
rate at which prices for goods and services rise over time. For
example, in the 1950s, a bottle of soda pop cost Canadians a dime,
while today that same bottle costs nearly two dollars. This
increase in price over time (inflation) represents a long-term
erosion of the purchasing power of the Canadian dollar; whereas one
Canadian dollar used to be able to purchase 10 bottles of pop, now
it can only purchase half a bottle.While every modern economy
experiences a certain level of inflation, businesses and investors
generally prefer an economy with low and stable levels of
inflation. Not only does this protect their investments from
eroding substantially in value, it also allows for long-term
business planning and investing. With low and stable levels of
inflation, businesses can predict what their production costs (for
equipment, technology, and labour) will be over the long-term.
This, in turn, makes those investments safer and encourages
companies and individuals to do business in the economy.It is at
this point that we can see the importance of inflation and the
value of the Canadian dollar. If inflation in Canada is higher than
in other countries, domestic and foreign investors will prefer to
do business in other nations. This, in turn, causes lower demand
for the Canadian dollar and a downward pressure on its value in
international currency markets. The exact opposite is true if
inflation in Canada is low relative to other countries; low
inflation will spur the flow of investment dollars into Canada,
increase demand for the Canadian dollar, and place an upward
pressure on its value.In order to control inflation, the Bank of
Canada actively pursues inflation targets, and does so by
manipulating interest rates (or the cost of borrowing) and
consumers' spending habits. Take, for example, a situation in which
inflation is rising at high levels (meaning that prices for goods
and services are increasing substantially each year). To combat
such increases, the Bank of Canada will raise interest rates. These
higher rates will lead to lower consumer demand in the economy, as
it becomes much more expensive to borrow in order to purchase goods
and services. Lower consumer demand should, in turn, cause prices
to stabilize over time, thus bringing inflation under control.The
housing market is a useful illustration of this. Higher interest
rates mean that home mortgages become more expensive. This leads to
lower demand in the housing market, as many buyers cannot afford
the higher mortgage payments. With fewer home buyers, the housing
market usually cools down, meaning that home prices stabilize or
even fall.Ensuring Political StabilityWhile not a part of monetary
policy, another important method of influencing the value of the
Canadian dollar is by ensuring political stability. Investors
generally prefer economies that are very stable politically, as
this allows for long-term business planning and investing. If a
nation becomes politically unstable, domestic and international
businesses tend to become more cautious in their investments. This,
in turn, can reduce demand for Canadian dollars and lower its value
in international currency markets.CONSEQUENCES OF THE
INSTABILITY/STABILITY FACTORS:International Trade & the
EconomyAlmost every country in the world engages in trade with one
another; countries import goods and services from other nations, as
well as export their own domestic products. Exchange rates have an
important role in this process. When Canadians import goods and
services from the United States, for example, they usually do so in
American currency. Canadian importers must first exchange their
Canadian dollars for American funds, and then use those funds to
buy American products. The same is also true with regard to
Canadian exports: when buying Canadian goods and services, foreign
consumers must first exchange their currencies for Canadian
dollars.Changes in exchange rates, therefore, can causes changes in
the price of Canadas imports and exports. If, for example, Canadas
currency significantly increases in value relative to the
currencies of its trading partners, then importing foreign goods
and services becomes much cheaper. Canadians gets a bigger bang for
their buck when exchanging their Canadian dollars and purchasing
foreign products. At the same time, however, Canadian exports also
become more expensive for other countries to purchase, as foreign
importers must exchange more of their currencies in order to buy
Canadian products. The exact opposite effect can occur when Canadas
currency drops significantly in value relative to its trading
partners. Foreign imports become more expensive, while the nations
exports become cheaper for other nations to buy.These changes in
exchange rates and import/export costs can have significant
consequences for Canadas economy. When the Canadian dollar rises in
value, Canadian producers are often faced with stiffer foreign
competition at home, as the cost of foreign imports becomes
cheaper. A higher Canadian dollar also means Canadian exporters
must deal with higher prices for their products abroad, with the
possibility that foreign consumers may look elsewhere for cheaper
prices. There are, however, some benefits to a higher Canadian
dollar. Many Canadian producers depend on foreign imports when
producing their goods or services (such as raw materials,
machinery, or technology). A higher Canadian dollar means lower
production costs and greater competitiveness for these Canadian
producers.Again, the exact opposite effect can occur when the
Canadian dollar drops in value. A lower Canadian dollar means less
competition for Canadian producers at home, as foreign imports come
more expensive for Canadians to purchase. Canadian producers that
depend on foreign imports when producing their goods and services,
however, face higher production costs. Finally, Canadian exporters
gain a price advantage internationally, as their products become
cheaper for foreign consumers to purchase.It is important to note,
however, that recent improvements in technology and international
transportation have made it possible for modern economies,
including Canadas, to reduce the risks of currency fluctuations.
Many North American companies, for example, have developed networks
of domestic and international suppliers for many components of
their products, or stages of their production processes. Factors
such as the rising import content of Canadian exports and
just-in-time inventory management systems have allowed many
Canadian producers to withstand the drastic increase in value of
the Canadian currency relative to the US dollar that took place in
the late 1990s and early 2000s something that might have put them
out of business in an earlier era.International Trade & the
Cost of LivingThe relationship between exchange rates and
international trade impacts not only Canadian producers, but also
Canadian consumers; in particular, the cost of living for consumers
(or the average cost of basic goods and services, such as food,
shelter, and clothing). Canadians today depend on many foreign
imports for their basic needs, be it agricultural products,
building supplies, manufactured garments, and so forth. Changes in
Canadian exchange rates can make these foreign goods and services
more or less expensive to import, which, in turn, influences how
much Canadians must pay to cover their basic needs.For example,
during the winter months, Canadians usually depend on fruits and
vegetables imported from the southern United States. If the
Canadian dollar decreases in value relative to the US dollar, then
Canadians are forced to pay more in their domestic currency to
purchase these basic goods imported from the US. As a result, the
daily food cost for Canadians rises and they experience an upward
pressure on their cost of living.These sorts of changes can have
important social impacts, especially for low-income or fixed-income
earners. Drastic increases in the cost of living means that persons
have less purchasing power to pay for imported goods and services
they depend upon. For those close to the poverty level, this can
have dire consequences. Conversely, a rise in the value of the
Canadian dollar means cheaper foreign imports, and a decrease in
the cost of living. As a result, persons have a greater financial
capacity to buy their basic goods and services.International
Tourism & TravelAnother area where exchange rates have an
impact is international travel and tourism. A fall in the Canadian
dollar, for example, has the dual effect of making international
travel for Canadians more expensive, while making vacationing in
Canada for foreign tourists cheaper. Such a situation can spur
Canadas tourism industry, as more Canadians vacation at home
instead of abroad, and as more foreign tourists come to Canada to
take advantage of the cheaper exchange rate.A rise in the value of
the Canadian dollar, however, can have a negative impact on the
tourism industry. Such a rise means that foreign tourists must pay
more than before to vacation in Canada, with the possibility that
they may look elsewhere for cheaper vacations. Moreover, a higher
Canadian dollar means that it is cheaper for Canadians to travel
abroad, making it easier for them to take vacations outside of the
country.Exchange Rates & Foreign DebtExchange rates also can
have an important impact on government finances. Canadian
territorial, provincial and federal governments, like most
governments in the world, have some level of foreign debt that is,
debt they owe to foreign financial institutions or governments. In
many cases, this foreign debt is held in a foreign currency (be it
that of the lender or of a major foreign currency, such as the
United States or the European Unions). As such, changes in exchange
rates can have considerable implications for the costs associated
with maintaining and paying back this foreign debt.In this context,
lets look at another example. Say, for instance, the Canadian
federal government borrows $1 billion in American currency from a
US bank when the Canadian dollar is valued at US $0.90 (meaning one
Canadian dollar is worth 0.90 American dollars, or 90 cents). The
cost of paying back that loan (without interest) would be around
$1.1 billion in Canadian currency. If, however, the value of the
Canadian dollar was to drop to US $0.62 (so that one Canadian
dollar equaled only 62 American cents), then the cost of paying
back that same loan in Canadian currency would climb to CAN $1.6
billion, an increase of $500 million Canadian dollars. The exact
opposite holds true when the dollar increases; loans taken out at a
lower exchange rate become much cheaper to maintain and pay back as
the currency value rises in relation to the lenders currency.These
sorts of changes can have further political and social impacts. If
the value of a nations currency were to fall, and the cost of
maintaining loans (held in foreign currency) were to rise
substantially, then governments must find ways to compensate. This
may mean increasing taxes, reducing social spending, or running a
deficit. The opposite is true if the currency rises; with lower
loan costs, additional funds are available for cutting taxes or
investing in social programs.THE STABILITY OF THE STOCK MARKET IN
BELGIUMGeneral developmentsFollowing a onedirectional move lower
during 2012, Belgian bond yields showed a more diverse pattern in
2013. In early 2013, the downtrend resumed and the 10year Belgian
yields reached a record low of about 1.9% in early May.The start of
thedebate in the US about the tapering of its QE asset purchase
programme triggered a turnaround in the trend , which lifted
Belgian bond yields too. The Belgian 10year yield reached a year
high around 2.90% at the end of June. In the general climate of
rising yields, Belgian 10year yield spreads versus the German
anchor widened from about 60 basis points to 100 basis points. Also
the French 10year spread widened , but to a lesser extent, notably
from about 45 to 65 basis points. Following a downward correction
during summer, Belgian yields climbed again to about 2.90%in early
October, but the 10 year yield spread topped now at a lower level
of about 80 basis points and the spread to the French 10year yield
amounted to about 25 basis points from 35 basis points at the June
peak.Since early 2014, there is again a one directional move lower
in yields. The Belgian 10year yield dropped from about 2.55% early
January to 1.70% going toward the end of June, which resulted in
juicy returns on bonds in the first half of this year. Weakness in
US eco data during the winter months, expectations that the Fed
would still wait long before tightening policy,a sharp drop in EMU
inflation, a further easing of ECB monetary policy all conspired to
push yields and yield spreads lower. Looking forward, it is
unlikely that Belgian bonds will repeat their outstanding
performance since the start of the year. There is maybe still a
window of opportunity of a few months in which yields may decline
slightly more, but by autumn, stronger US economic data may
rekindle fears that In depth review: Belgium Economic recovery
takes further shape Growth outlook however remains surrounded by
doubts Public finances unlikely to derail, but still a lot of
austerity ahead Risk from a protracted government formation is the
lack of structural reform Rating outlook Belgian bonds upgraded
Average term to maturity lengthens to above 7.5 years Belgian bonds
remain interesting in relative value perspective the start of the
Feds tightening cycle is coming closer. So, US yields may turn
higher. This will exercise upward pressures on German (and Belgian)
yields too. However, these upward pressures should be less intense
than in previous cycles, due to the sharply different economic
situation and monetary policy stance. So, USGerman 10 year spread
widening should continue. From a relative value perspective though,
we still see opportunities to invest in Belgian bonds. The Belgian
fundamentals are solid and improving. The sovereign deficit is
below 3% and debt has stabilized, albeit at a high level (about
100%). The economic growth potential isa bit higher than the euro
area averagedue to demographic developments. The country has
certainly some handicaps like the loss of competiveness due to high
wage costs, the ageing of the population and a fairly rigid labour
market. However, consciousness that they need to be tackled has
grown raising chances that the government effectively will take
measures. More in particularly compared to France, the Belgian
situation is better and thus its debt may still outperform Frances.
S&P lowered last year Frances rating to AA, at par with the
Belgian one. Moodys and Fitch rate France still 2 and 1 notch
higher. Funding review The Belgian debt agency successfully
launched two syndicated deals this year: 10yr OLO 72 (5B 2.60%
Jun2024) and 20yr OLO 73 (5B 3% Jun2034). Together with the regular
taps, this lengthensthe average term to maturity of Belgian debt.
At the end of 2013, this indicator stood at 7,59 years, the highest
of the past ten years and one of the highest in the whole euro
area. The Finance Minister asked the Debt Agency in the 2014
guidelines to keep the average term to maturity above 7.5 years.
The Debt Agency recently stated that it expects a further increase
of the average term to maturity, which means that the guideline
will certainly be respected. At the end of June, the Belgium
treasury already completed 71% (21.39B) of this years funding
target (30B) by OLO issuance. Because of this advantageous
situation, the Belgian treasury will most likely complete this
years funding through the 5 remaining OLO auctions. In past years,
the Belgian debt agency launched at least 3 new OLOs each year.
ConclusionBelgium is highly rated at the big three rating
agencies: Aa3 at Moodys, AA at S&P and Fitch (all stable
outlook). S&P and Moodys raised the outlook earlier this year.
S&P stated in its last reportthat Belgium strengths outweigh
sporadic political stalemates. It singled out the gradual
consolidation of Belgiums multilayered governance framework in the
context of the ongoing state reform and the implementation of
economic and structural measures, coupled with stabilizing credit
as positive developments. Moodys cited a stabilization of the
banking sector, leading to receding risks on the governments
balance sheet as justification of its outlook upgrade. Accordingly
to the new rule book on rating agencies, EU sovereigns will be
reviewed at least twice a year.The next possible rating reviews are
scheduled forJuly 4 (Moodys), July 25 (S&P), November 7
(Moodys) and November 14 (Fitch). The Belgian national elections
ended with a big victory of the right wing NVA (New Flemish
Alliance) in Flanders at the expense of the farright parties.
However, the three traditional parties (ChristianDemocrats,
Socialists and Liberals) all in all kept their composure and
together have a majority in both Flanders and Wallonia. In
Wallonia, the Socialist party, traditionally the dominant party in
the region, lost 78% of the popular vote, but still keeps, albeit
narrowly, the leading place in the region ahead of the MR
(Liberals) who made good progress. The King mandated Mr. De Wever,
head of the NFA , with an information remit. He tried to form a
government composed of his party, the Walloon liberals and the
Christian democrats of both regions. In the meantime, in Flanders,
the NVAstarted coalition talks with the Cristian democrats, while
in Wallonia, the Socialists and the Christian democrats are in
talks to form a regional government. The different composition of
the formation talks on the regional and on national level proved a
too difficultexercise and Mr. De Wever had to abort his effort to
form a national government. The King asked Mr. Michel, leader of
the Walloon liberals, to look how the deadlock can be solved.While
Belgian politics offer regularly surprises, it looks like the
formation of the new national government will again be
timeconsuming. Currently it is having no impact on the Belgian bond
market and we expect this to remain the case for the time being.
Ultimately a solution will be found, however we cannot but consider
the deadlock as a potentialsmall negative for the sovereign
standing in the market. The recovery that started in spring 2013
has gradually gained strength. In Q1 2014, the economy grew 0.4%
M/M, compared with 0.2% Q/Q in Q2 2013 and 0.3% Q/Q in Q3 and Q4
2013. With these figures Belgium is doing better than neighbouring
France and the Netherlands, but less well than Germany.
Cumulatively the Belgian economy has grown since spring 2013 by
1.2%, compared with 2.3% in Germany, 0.8% in France and 0.9% in the
Euro Area. The Dutch economy continued to struggle, with a further
contraction of 0.3% since the beginning of 2013. The growth figures
for the individual EMU member states continue to diverge widely.
Notwithstanding the differences most of the economic indicators
continue to point to a further recovery of the European and also
Belgian economy. In Belgium private consumption has clearly been
contributing to growth for a longer time. After the growth of
consumption had slipped in H2 2013, following the strong revival in
H1, it rebounded again in Q1 2014. Net exports and corporate
investment showed the most notable movement in Q1 2014, the former
in a negative sense, the second in a positive. Since exports fell
more than imports, the contribution of net exports to growth turned
negative. Corporate investment surprised with quarteronquarter
growth of no less than 2.2%. Household investment in residential
building, finally, continued its tentative recovery of autumn 2013.
Recovery of investment from a low level The recovery of corporate
investment follows the improved demand prospects. Since the
beginning of this year, the capacity utilisation ratio of
industrial production capacity has risen above the longterm
average. That has given rise to expansion investment. Despite the
recovery, corporate investment still remains over 8% below the peak
level of spring 2008. The rebound from a low level has moreover not
been coupled with stronger demand for credit. This may be partly
explained by the fact that companies are in general less dependent
on credit for their investments, as they are able to meet their
financing requirements out of their ample cash balances and/or are
also increasingly resorting to the bond markets for debt finance.
Also investment in housing has been growing again since summer
2013, in line with the recovery of consumer confidence. The revival
in construction of new dwellings nevertheless remained highly
limited and took place from a low level. In Q1 2014 housing
investment remained 16% off its peak reached at the end of 2007. In
the years preceding the financial crisis, residential building had
expanded vigorously. In recent years it has gone through a very
difficult period, with just a shortlived period of visibly higher
activity in 2010. Leaving the recovery phase of 2010 out of the
count, investment in housing shrank in every quarter between the
beginning of 2008 and mid2013. The modest recovery of investment in
residential building in recent quarters was initially coupled with
a gradual improvement in the economic barometers . From autumn 2013
onwards, however, sentiment among contractors once again
deteriorated, thereby illustrating that the climate in construction
remains uncertain. This uncertainty is also being fed by the
uncertainty surrounding the tax treatment of mortgage loans now
that the regions in Belgium are taking over responsibility from the
federal government. This could induce households to postpone their
building plans a little longer. We believe that, as the situation
on the labour market improves, investments by households in
residential buildings are likely to continue recovering in 2014 and
2015, albeit at a moderate pace. Cautious growth estimateTogether
with investment, private consumption will support GDP growth this
year and next. The potential for consumption to grow will however
be restricted by the limited increase in incomes as a result of the
wage restraint and sluggish improvement of the labour market. The
inconsistent pattern of consumer confidence in the spring reflects
the uncertainty of households over the employment situation.
Although there have been clear signs of improvement for some time
now including the number of vacancies, temporary employment and the
youth unemployment rate the picture in the labour market remains
diffuse. Employment may have been on the increase again since
summer 2013, but at an underlying level the developments in this
area are less favourable than the raw figures might suggest, as the
dynamic of employment is highly flattered by the increase in the
number of governmentsubsidised jobs. In industry and construction
the job market generally remains weak. That is also reflected in
the subcomponent of the NBB indicator for employment expectations.
These have improved in construction, but the level remains very
low. In manufacturing industry the expectations for the coming
months have again deteriorated. Only in market services there has
been a clear improvement. INTRODUCTION TO THE ECONOMY OF
BULGARIA:The economy of Bulgaria functions on the principles of the
free market, having a large private sector and a smaller public
one. Bulgaria is an industrialised upper-middle-income country
according to the World Bank. It has experienced rapid economic
growth in recent years, with an average monthly wage of 812 leva
(554 USD). GDP per capita is estimated at $14,400 (PPP, 2013).Since
2001, Bulgaria has managed to attract considerable amounts of
Foreign Direct Investment (FDI). During the Financial crisis of
20072010, Bulgaria marked a decline in its economy of 5.5% in 2009,
but quickly restored positive growth levels to 0.2% in 2010, in
contrast to other Balkan countries.The currency of the country is
the lev (plural leva), pegged to the euro at a rate of 1.95583 leva
for 1 euro. The lev is the strongest and most stable currency in
Eastern Europe. The strongest sectors are energy, mining,
metallurgy, machine building, agriculture and tourism. Primary
industrial exports are clothing, iron and steel, machinery and
refined fuels. Low productivity and competitiveness on the European
and world markets alike due to inadequate R&D funding and a
lack of a clearly defined development policy remain a significant
obstacle for foreign investment and economic growth.REFORMS OF
1990s AND EARLY 2000s:Members of the government promised to move
forward on cash and mass privatization upon taking office in
January 1995 but were slow to act. United Nations sanctions against
Yugoslavia and Iraq (19902003), two of the country's most
significant trading partners, took a heavy toll on the Bulgarian
economy. The first signs of recovery emerged in 1994 when the GDP
grew and inflation fell. The first round of mass privatisation
finally began in January 1996, and auctions began toward the end of
that year. The second and third rounds were conducted in Spring
1997 under a new government. In July 1998, the UDF-led government
and the IMF reached an agreement on a 3-year loan worth about $800
million, which replaced the 14-month stand-by agreement that
expired in June 1998. The loan was used to develop financial
markets, improve social safety net programmes, strengthen the tax
system, reform agricultural and energy sectors, and further
liberalise trade. The European Commission, in its 2002 country
report, recognised Bulgaria as a functioning market economy,
acknowledging the progress made by Prime Minister Ivan Kostov's
government toward market-oriented reformsREFORM FROM THE CRISIS OF
1997:In April 1997, the Union of Democratic Forces (SDS) won
pre-term parliamentary elections and introduced an IMF currency
board system which succeeded in stabilizing the economy. The triple
digit inflation of 1996 and 1997 has given way to an official
economic growth, but forecasters predicted accelerated growth over
the next several years. The government's structural reform program
includes:1. privatization and, where appropriate, liquidation of
state-owned enterprises (SOEs);2. liberalization of agricultural
policies, including creating conditions for the development of a
land market;3. reform of the country's social insurance programs;
and4. reforms to strengthen contract enforcement and fight crime
and corruption.Despite reforms, wea1k control over privatization
led many successful state enterprises to bankruptcy. The SDS
government also failed to stop the growing negative account
balance, which has since then continued to increase, reaching a
negative of $12.65 billion in 2008. The government elected in 2001
pledged to maintain the fundamental economic policy objectives
adopted by its predecessor in 1997, specifically: retaining the
Currency Board, implementing sound financial policies, accelerating
privatisation, and pursuing structural reforms. Both governments
failed to implement sound social policies.The economy really took
off between 2003 and 2008 and growth figures quickly shot up,
fluctuating between figures as high as 6.6% (2004) and 5.0% (2003).
Even in the last pre-crisis year, 2008, the Bulgarian economy was
growing rapidly at 6.0%, despite significantly slowing down in the
last quarter.ECONOMIC DOWNTURN OF 2009:The country suffered a
difficult start to 2009, after gas supplies were cut in the
Russia-Ukraine gas dispute. Industrial output suffered, as well as
public services, exposing Bulgaria's overdependence on Russian raw
materials. The global financial crisis started to apply downward
pressure on growth and employment in the last quarter of 2008. The
real estate market, although not plummeting, ground to a halt and
growth is expected to be significantly lower in the short-to-medium
run. During the course of 2009, the grim forecasts for the effects
of the global crisis on the Bulgarian economy largely materialized.
Although suffering less than the worst-hit countries, Bulgaria
recorded its worst economic results since the 1997 meltdown. GDP
shrank by around 5% and unemployment jumped. Consumer spending and
foreign investment dropped dramatically and depressed growth in
2010 to 0.3%. Unemployment remains consistently high at around
10%.NEW GOVERNMENT AND FISCAL DISCIPLINE:The Government of Boyko
Borisov elected in 2009 undertook steps to restore economic growth,
while attempting to maintain a strict financial policy. The fiscal
discipline set by Finance Minister Djankov proved successful and
together with reduced budget spending it placed Bulgarian economy
on the stage of steadily though slowly growing in the midst of
world crisis. On 1 December 2009, Standard & Poor's upgraded
Bulgaria's investment outlook from "negative" to "stable," which
made Bulgaria the only country in the European Union to receive
positive upgrade that year. In January 2010 Moody's followed with
an upgrade of its rating perspective from "stable" to
"positive."Bulgaria was expected to join the Eurozone in 2013 but
after the rise of some instability in the zone Bulgaria is
withholding its positions towards the Euro, combining together
positive and realistic attitudes.[39][40] The Bulgarian lev is
anyway bound to the euro. Bulgaria regards becoming a member of the
Eurozone at present as too risky. The 2012 Transatlantic Trends
poll found that 72 percent of Bulgarians did not approve of the
economic policy pursued by the government of the (then) ruling
center-right GERB party and Prime Minister Boyko Borisov.CURRRENCY
OF BULGARIA:Bulgarias unit of currency is the lev (pl., leva). In
October 2006, the U.S. dollar was worth 1.57 leva. In 1999 the
value of the lev was pegged to that of the German Deutschmark,
which was replaced by the euro in 2001. Following the Bulgarias
admission to the EU, the lev is scheduled to be replaced by the
euro. In 2003 Bulgarias inflation rate was estimated at between 2.3
and 3 percent. The rate was 6 percent in 2004 and 5 percent in
2005.BULGARIAN STOCK EXCHANGE:The Bulgarian Stock Exchange Sofia is
a stock exchange operating in Sofia, the capital of Bulgaria. It
was originally founded as Sofia Stock Exchange on 15 April 1914
through a tsar's decree, but ceased to operate after the Second
World War as Bulgaria became a communist state. It was
re-established in late 1991. As of November 2011, the total market
capitalization of the Bulgarian Stock Exchange is around $8.5 bln.
The exchange has pre-market sessions from 09:00am to 09:20am,
normal trading sessions from 09:20am to 01:45pm and post-market
sessions from 01:45pm to 04:00pm on all days of the week except
Saturdays, Sundays and holidays declared by the Exchange in
advance.The Bulgarian Stock Exchange publishes the following
indices: SOFIX BG40 BGTR30 BGREITAs of May 2010, the Bulgarian
Stock Exchange is 44% owned by the Bulgarian government, which is
looking for potential worldwide investors, some of them being the
Frankfurt Stock Exchange, Athens Stock Exchange, OMX, the Prague
Stock Exchange, etc. BSE-Sofia operates within the framework of the
national legislation. The Stock Exchange internal organization and
structure ensures the execution of its activities in compliance
with the provisions of the law. BSE-Sofia organizational structure
and management are in accordance with the Rules and Regulations of
the Exchange, adopted by the BSE-Sofia Board of directors.The main
acts regulating the local capital market and the BSE-Sofia
activities are the Markets in Financial Instruments Act and the
Public Offering of Securities Act. Taxation of income from trading
in financial instruments admitted to trading on a regulated market
is governed by the Personal Incomes Tax Act and the Corporate
Income Tax Act. Capital gains from securities transactions realized
on the local regulated market are not subject to withholding tax
and tax on dividends and liquidation proceeds is 5%.BSE-Sofia main
mission is to facilitate the establishment and development of an
organized capital market which guarantees the Exchange members and
their clients equal access to market information and equal
conditions for participation in the trading in financial
instruments.BSE-Sofia organizes and maintains a system for trading
in financial instruments and offers additional products and
services to investors. BSE-Sofia trading system Xetra was
introduced on June 16, 2008 and replaced the RTS trading system
which was used in the period 2000-2008. Xetra is one of the most
modern and technically advanced systems in the world and its
implementation is a significant step in the development of the
local capital market. Xetra offers a wide variety of functions,
supports a large number of order types and provides investors with
the opportunity of using different investment strategies.BSE-Sofia
developed a unique internet-based system for electronic placement
of orders (COBOS) allowing the end users (investors) to place
orders to buy and sell financial instruments that were admitted to
trading on the exchange. Since its implementation in 2003 the
system has beensubject to ongoing change and improvementin order to
meet investors expectations - new modules and functionalities have
been implemented, system performance has been improved.SECTORAL
ANALYSIS: INDUSTRY AND CONSTRUCTION:Much of Bulgarias communist-era
industry was heavy industry, although biochemicals and computers
were significant products beginning in the 1980s. Because Bulgarian
industry was configured to Soviet markets, the end of the Soviet
Union and the Warsaw Pact caused a severe crisis in the 1990s.
After showing its first growth since the communist era in 2000,
Bulgarias industrial sector has grown slowly but steadily in the
early 2000s. The performance of individual manufacturing industries
has been uneven, however. Food processing and tobacco processing
suffered from the loss of Soviet markets and have not maintained
standards high enough to compete in Western Europe. Textile
processing generally has declined since the mid-1990s, although
clothing exports have grown steadily since 2000.Oil refining
survived the shocks of the 1990s because of a continuing export
market and the purchase of the Burgas refinery by the Russian oil
giant LUKoil. The chemical industry has remained in good overall
condition but is subject to fluctuating natural gas prices. Growth
in ferrous metallurgy, which is dominated by the Kremikovtsi Metals
Combine, has been delayed by a complex privatization process and by
obsolete capital equipment. Non-ferrous metallurgy has prospered
because the Pirdop copper smelting plant was bought by Union Minire
of Belgium and because export markets have been favourable.The end
of the Warsaw Pact alliance and the loss of Third World markets
were grave blows to the defence industry. In the early 2000s, the
industrys plan for survival has included upgrading products to
satisfy Western markets and doing cooperative manufacturing with
Russian companies. The electronics industry, which also was
configured in the 1980s to serve Soviet markets, has not been able
to compete with Western computer manufacturers. The industry now
relies on contract agreements with European firms and attracting
foreign investment. The automotive industry has ceased the
manufacture of cars, trucks, and buses. Manufacture of forklifts, a
speciality in the communist era, also has stopped. In the early
2000s, shipbuilding has prospered at the major Varna and Ruse yards
because of foreign ownership (Ruse) and privatization (Varna).Only
in recent years electronics and electric equipment production has
regained higher levels. The largest centres include Sofia, Plovdiv
and the surrounding area, Botevgrad, Stara Zagora, Varna, Pravets
and many other cities. Household appliances, computers, CDs,
telephones, medical and scientific equipment are being produced. In
2008 the electronics industry shipped more than $260 million in
exports, primarily of components, computers and consumer
electronics.Many factories producing transportation equipment
currently still do not operate at full capacity. Plants produce
trains (Burgas, Dryanovo), trams (Sofia), trolleys (Dupnitsa),
buses (Botevgrad), trucks (Shumen), motor trucks (Plovdiv, Lom,
Sofia, Lovech). Lovech has an automotive assembly plant. Rousse
serves as the main centre for agricultural machinery. Bulgarian
arms production mainly operates in central Bulgaria (Kazanlak,
Sopot, Karlovo).Construction output fell dramatically in the 1990s
as industrial and housing construction declined, but a recovery
began in the early 2000s. The sector, now dominated by private
firms, has resumed the foreign building programs that led to
prosperity in the communist era. The Glavbolgostroy firm has major
building projects in Kazakhstan, Russia, and Ukraine as well as
domestic contracts.SECTORAL ANALYSIS: ENERGYBulgaria relies on
imported oil and natural gas (most of which comes from Russia),
together with domestic generation of electricity from coal-powered
and hydro plants, and the Kozloduy nuclear plant. The economy
remains energy-intensive because conservation practices have
developed slowly. The country is a major regional electricity
producer. Bulgaria produced 38.07 billion kWh of electricity in
2006 (in comparison, Romania, which has a population nearly three
times larger than Bulgaria, produced 51.7 billion kWh in the same
year). The domestic power-generating industry, which was privatized
in 2004 by sales to interests from Europe, Japan, Russia, and the
United States, suffers from obsolete equipment and a weak oversight
agency. To solve the latter problem, in 2008 the government set up
a state-owned energy holding-company (Bulgarian Energy Holding
EAD), composed of gas company Bulgargaz, Bulgartransgaz, power
company NEK EAD, Electricity System Operator EAD, Kozloduy nuclear
power station, Maritza-Iztok II thermal power station, the Mini
Maritza Iztok (Maritza Iztok mines), and Bulgartel EAD. The state
holds a 100% stake in the holding company. Most of Bulgarias
conventional power stations will require large-scale modernization
in the near future. Bulgaria has some 64 small hydroelectric
plants, which together produce 19 percent of the countrys power
output. The Kozloduy nuclear plant, which in 2005 supplied more
than 40 percent of Bulgarias electric power, will play a
diminishing role because two of its remaining four reactors (two
were closed in 2002) must be closed by 2007 to comply with European
Union (EU) standards. Kozloduy, which exported 14 percent of its
output in 2006, was expected to cease all exportation in 2007.
Construction of the long-delayed Belene nuclear plant resumed in
2006 but will not be complete until at least 2011. Belene, planned
in the 1980s but then rejected, was revived by the safety
controversy at Kozloduy.Oil exploration is ongoing offshore in the
Black Sea (the Shabla block) and on the Romanian border, but
Bulgarias chief oil income is likely to come as a transfer point on
east-west and north-south transit lines. Burgas is Bulgarias main
oil port on the Black Sea. Bulgarias largest oil refinery,
Neftochim, was purchased by Russian oil giant LUKoil in 1999 and
underwent modernization in 2005. Bulgarias only significant coal
resource is low-quality lignite, mainly from the state-owned
Maritsa-Iztok and Bobov Dol complexes and used in local
thermoelectric power stations. A $1.4 billion project for the
construction of an additional 670 MW block for the 500 MW Maritza
Iztok 1 Thermal Power Station is expected to be completed by the
middle of 2010.Bulgaria ranks as a minor oil producer (97th in the
world) with a total production of 3,520 bbl/day. Prospectors
discovered Bulgaria's first oil field near Tyulenovo in 1951.
Proved reserves amount to 15,000,000 bbl (2,400,000 m3). Natural
gas production halted in the late 1990s. Proved reserves of natural
gas amount to 5.663 bln. cu m. The LUKOIL Neftochim oil refinery is
Bulgaria's largest refining facility with annual revenues amounting
to more than 4 billion leva (2 billion euro).Recent years have seen
a steady increase in electricity production from renewable energy
sources such as wind and solar power.[53] Wind energy has
large-scale prospects, with up to 3,400 MW of installed capacity
potential.[54] As of 2009 Bulgaria operates more than 70 wind
turbines with a total capacity of 112.6 MW, and plans to increase
their number nearly threefold to reach a total capacity of 300 MW
in 2010.[55]SECTORAL ANALYSIS: SERVICES AND TOURISMAlthough the
contribution of services to gross domestic product (GDP) has more
than doubled in the post-communist era, a substantial share of that
growth has been in government services, and the qualitative level
of services varies greatly. The Bulgarian banking system, which was
weak in the first post-communist years, was fully reformed in the
late 1990s, including stronger oversight from the National Bank of
Bulgaria and gradual privatisation. In 2003 the banking system was
fully privatised, and substantial consolidation began making the
system more efficient in 2004. Several smaller banks grew
substantially between 2004 and 2006. These processes increased
public confidence in the banks. Although the system still requires
consolidation, loan activity to individuals and businesses
increased in the early 2000s. The insurance industry has grown
rapidly since a market reform in 1997, with the help of foreign
firms. An example is the Bulgarian Insurance Group (BIG), a
pension-fund and insurance management company owned by the
Dutch-Israeli TBI Holding Company and the European Bank for
Reconstruction and Development (EBRD). The introduction of health
and pension insurance plans has expanded the private insurance
industry. A series of reform laws in the early 2000s enabled the
Bulgarian Stock Exchange to begin regular operation. As of 2005,
stock market activity was limited by lack of transparency, although
the growth rate increased beginning in 2004.After a decline in the
1990s, in the early 2000s the tourism industry has grown rapidly.
In 2004 some 4 million foreigners visited Bulgaria, compared with
2.3 million in 2000. This trend is based on a number of attractive
destinations, low costs, and restoration of facilities. Most of the
industry had been privatised by 2004. Infrastructure items such as
recreation facilities and booking services require improvement.
Development of Bulgarias retail sales sector was slow until the
early 2000s, when a large number of Western-style outlets began to
appear, and Sofia developed as a retail center. By 2006 several
major European retail chains had opened stores, and others planned
to enter the Bulgarian market.Bulgaria has attracted considerable
investment from foreigners buying property either for their own use
or for investment. In 2006, more than 29% of property deals were
signed by foreigners, more than half of whom were UK citizens.
Various companies, such as Bulgarian Dreams, actively marketed
Bulgarian properties to buyers overseas.In 2007 Bulgaria was
visited by 5,200,000 tourists, ranking 39th in the world. Tourists
from Greece, Romania and Germany account for 40% of visitors.
Significant numbers of British (+300,000), Russian (+200,000),
Serbian (+150,000), Polish (+130,000) and Danish (+100,000)
tourists also visit Bulgaria. Most of them are attracted by the
varying and beautiful landscapes, well-preserved historical and
cultural heritage, and the tranquility of rural and mountain
areas.Main destinations include the capital Sofia, coastal resorts
Sunny Beach, Albena, Sozopol, Sveti Vlas; winter resorts Bansko,
Pamporovo, Chepelare and Borovetz. Arbanasi and Bozhentsi are rural
tourist destinations with well-preserved ethnographic traditions.
Other popular attractions are the 10th century Rila Monastery and
the 19th century Euxinograd chteau.SECTORAL ANALYSIS: Agriculture,
forestry and fishingIn the communist era, Bulgarias agriculture was
heavily centralized, integrated with agriculture-related
industries, and state-run. In the postcommunist era, the process of
restoring agricultural land to private owners in a form that
ensures productivity has been slow. Bank investment and insecurity
in the land market contributed to slow development in the 1990s. By
2004 some 98 percent of the workforce and output of Bulgarias
agricultural sector was private, including a number of large
private cooperative enterprises. A significant amount of food also
is produced for direct consumption by non-farmers on small plots,
which are an important support for parts of the population. In 2000
and 2003, droughts limited agricultural production, and floods had
the same effect in 2005. Bulgarias main field crops are wheat,
corn, and barley. The main industrial crops are sugar beets,
sunflowers, and tobacco. Tomatoes, cucumbers, and peppers are the
most important vegetable exports. Production of apples and grapes,
Bulgarias largest fruit products, has decreased since the communist
era, but the export of wine has increased significantly. The most
important types of livestock are cattle, sheep, poul