In a report published last year, the World Bank put it simply and bluntly: capital markets in Serbia are underdeveloped and underutilised.
It’s as simple as that.
Markets in the Balkan country are shallow and not yet fully developed, and while the government bond market has made substantial progress in recent years, the private market lags significantly behind.
Companies seem unwilling to use bonds as a form of financing, and the country has only had one IPO in the last 80 years.
Elsewhere in the Western Balkans, the situation is a little better.
In 2017, the European Bank for Reconstruction and Development (EBRD) called the Bulgarian capital markets promising. The EBRD noted a clear upward trend in the country’s market development. There is also cause to be optimistic about Croatia too.
“Croatia has been leading the development of the capital markets in the region for almost 30 years and represents a bridge between the European Union and the rest of the region,” Ivana Gažić, the president of the management board of the Zagreb Stock Exchange tells Emerging Europe. “Croatia has been part of the European Union for seven years, and the capital markets were harmonised with European regulations and prepared for accession much earlier,”
The Zagreb market is not without its challenges, however.
“As with many relatively young capital markets the Zagreb Stock Exchange also faces a liquidity issue, which became especially problematic during the last financial crisis. Croatia is still pretty much a bank-centered system and one of the missions of the Zagreb Stock Exchange is to improve the still inadequate level of awareness that raising capital through the stock exchange can be a great option,” Ms Gažić adds.
Her concerns about awareness reflect the problems capital markets have in Serbia.
As noted in the World Bank report, companies rarely choose to raise capital via bonds or IPOs. Instead, the private sector looks solely to the banks and prefers taking out loans.
One of the main causes for this, according to the bank’s report, is a surplus of liquidity in the country’s domestic banking system which has led to low levels of activity on the interbank trading market.
“In the absence of active interbank trading, short term rates of the yield curve are considered unreliable by market participants. More reliable short-term rates would facilitate the development of new derivative instruments, providing hedging instruments for investors, and would provide pricing reference for the private sector, allowing for more reliable and accurate pricing of credit instruments,” the report states.
In short: the private sector prefers credit to the capital markets.
The CEO of the Belgrade Stock Exchange (BELEX), Siniša Krneta, echoes this sentiment.
“Long-term borrowing on the capital markets by issuing bonds is overshadowed by borrowing via credits. In an extremely bank-centric market, such as Serbia, and in a time of historically lowest interest rates, the significantly more demanding procedures of issuing bonds are simply not competitive compared to bank loans,” says Mr Krneta.
But there are still reasons to be optimistic.
There are projects underway – both in Serbia and elsewhere in the region – designed to create more favourable conditions for the capital markets, and also to educate stakeholders about the processes and benefits of using them.
In 2014, the Bulgarian, North Macedonian, and Croatian stock exchanges founded SEE Link. The objective is to link the three markets, thus making it much easier for investors to trade securities.
“One of our goals is to strengthen know-how among Croatian market participants – in 2010 we founded the Zagreb Stock Exchange Academy, with the support of the EBRD, which today is the largest provider of financial market education services in Croatia,” Ivana Gažić adds.
The need to educate market participants has been recognised in Serbia too. With help from the EBRD and PwC, BELEX launched its IPO Go! project in 2018.
“It’s a project of great value that served to break taboos and fears successful private companies have about the mystical capital markets. Aside from having had 20 or so owners and C-level managers go through workshops and training sessions, we have two companies now working on their IPOs,” says Siniša Krneta.
“We expect the Serbian capital market to soon see significant regulatory advancement, administrative and tax stimulants for companies and investors, but most important of all – the beginning of a series of initial public offers,” he concludes.