PLATFORM FOR DISCUSSION
Speaking note
NATIONAL BANK OF THE REPUBLIC
SPEAKER: Anita Angelovska Bezhoska, Governor
OF MACEDONIA
info@nbrm.mk
DATE: 5-7 September 2018
www.nbrm.mk
LOCATION: Vienna, Austria
INVESTMENT AND FINANCE, CHALLENGES FOR THE CESEE REGION

This Speaking note was prepared for the EUROFI Financial Forum, 2018, organised in
association with the Austrian EU Council Presidency
Contributors to the note: Ana Mitreska, Biljana Jovanovikj, Tanja Jakimova and Neda Popovska -
Kamnar
Department: Monetary Policy and Research
Investment and Finance, Challenges for the CESEE Region
1. Investment in CESEE - historical perspective and recent developments
The investment in spurring growth and supporting productivity and efficiency of an economy
is a well-known principle. The larger the investments, the higher the potential to grow. Yet, the
investment function is dependent on many factors such as expectations of investors, the already existing
capital stock, the general business environment, the level of demand, technological progress, the
possibility to invent and innovate, the leverage level, and the access to finance.
Before the outburst of the global crisis, investment was an important growth driver in the
CESEE region, though the growth was not sufficient to provide for stronger capital
accumulation. Notwithstanding the heterogeneity among countries, prior to the crisis, investment was
an important contributor to the overall growth, supported by large capital inflows, which propelled the
productivity of the economies, as well. The solid growth in general, including the inflows of foreign capital
and rising investments, was a combined effect of the reform processes in these countries, and the
extremely conducive global environment. Low interest rates, liquidity glut, expansion of global trade and
global value chains were global features that supported investment growth in the region. Hence, the
share of investment in GDP was rising prior to crisis (close to 10 p.p. in 2008 compared to 2000),
reaching around 30% of GDP in 2008, well above the rule of thumb benchmark of 25%. Yet, according to
the IMF (2016), given the easy pre-crisis funding conditions and low initial capital-labor ratio, "CESEE
would have been expected to have much higher rates of capital accumulation than what they actually
had". One reason for this might be that the financial flows fueled consumption as well, thus precluding
stronger growth of saving and investment.
Chart 1: Share of investments in GDP, in % in Chart 2. Capital flows, net in % of GDP
constant terms)
Financial account flows, in % of GDP
15
20.0
10
MK CEE SEE Baltics
15.0
5
10.0
0 EU28
EE
5.0
-5 0 PL 5 10 15 20 25
SEE
HU CESEE
-5
CZ LT
0.0
CEE
Baltics HR
RO
RS
AL
-10
LV
-5.0
SI
BG
-15
-10.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-20
Source: Eurostat, IMF and NBRM calculations.
With the occurrence of the crisis, investment ratios plunged across the board, and despite
the more recent recovery, the level of investment in most of the countries is still below the
pre - crisis maximum. The crisis was accompanied by rising uncertainty, increased risk premium, and
most importantly, sharp reversal in the external financing. The region has been shielded partially from
the sudden stop, given the FDI dominance as a stable financing, and the contained bank deleveraging,
amid regional initiatives (Vienna Initiative in particular). Yet, some of the countries were also caught by
the crisis in the middle of rising vulnerabilities, excessive leverage in particular, which precluded faster
recovery of the investment rates. The level of investment, ten years after the emergence of the crisis, is
below the pre-crisis maximum in the EU as a whole, and in the CESEE region as well. Exception is
countries such as Macedonia, Poland, and Estonia recently, where investment pattern was different, and
the current level is above the pre-crisis one.
Chart 3: GDP and demand components, 2008=100
160.0
180.0
SEE
CEE
160.0
140.0
140.0
120.0
120.0
100.0
100.0
80.0
80.0
60.0
60.0
40.0
40.0
20.0
20.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
180.0
180.0
Baltics Region
160.0 160.0
140.0 140.0
120.0
120.0
100.0 100.0
80.0
80.0
60.0
60.0
40.0
40.0
20.0
20.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Eurostat and NBRM calculations.
At the current juncture, an important question is whether such slow post-crisis investment
recovery should be perceived as a natural cyclical adjustment, or are there some structural
forces that also play role? Investment spending, in theory and in practice, is highly
procyclical and more volatile than GDP. In general, this holds for the CESEE region, as well.
Therefore, there is no doubt that significant part of the observed slowdown in investment demand in the
CESEE region after the crisis is cyclical in nature. In addition, simple analysis of relative volatility of
investment points out to a decline in volatility of investment in the period after the crisis, which could be
an indication of an unsustainable investment boom in CESEE region before the crisis.
Table 1: Pro-cyclicality and relative volatility of investment
Correlation between y-o-y Volatility of investment Volatility of investment in
change in investment and GDP relative to GDP* CESEEE relative to EU28**
2001-2008 2009-2017 2001-2008 2009-2017 2001-2008 2009-2017
CESEE 0.93 0.93 5.20 3.99 2.02 1.29
EU28 0.89 0.98 3.38 3.31
*std.deviation of the y-o-y change in investment relative to std.deviation of the y-o-y change in GDP
*std.deviation of the y-o-y change in investment in CESEE relative to std.deviation of the y-o-y change in investment in EU28
Source: Eurostat and NBRM calculations.
Nevertheless, the observed slowdown in investment activity is persistent which might have
negative impact on growth potential of CESEE region. Investment flows define capital dynamics by
renewing and augmenting capital stock, which in turn is one of the determinants of potential growth.
Lower investment also implies faster depreciation and lower maintenance of capital stock. For the CESEE
region, data shows significantly smaller capital growth in the post-crisis period (the only exception is
Macedonia1). Though the decline/significantly depressed growth in TFP is the key factor for the observed
slowdown in potential growth across the region, slower capital accumulation also played a role.
Chart 4: Capital, TFP and potential GDP before and after the crisis (average growth rates across
countries, in %)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
avg. 2000-08 avg. 2009-16 avg. 2000-08 avg. 2009-16 avg. 2000-08 avg. 2009-15
-1.0
Growth of total capital Growth of TFP Growth of potential GDP
CEE SEE Baltics CESEE
Source: World Bank, The Conference Board Total Economy Database and NBRM calculations.
Apparently, the region is in need to boost investment growth, catch-up with the pre-crisis
level, and narrow some of the existing gaps. As, not only has investment been lower compared to
the pre-crisis period, but also some of the international institutions assess their level to be below
estimated benchmarks, which are consistent with the features and the development level of the region.
For instance, EBRD in its Transition Report (2015-2016)2 provides estimates for the investment shortfalls
in some of the countries in the region. The estimates are perceived as conservative, as they do not reveal
the needed investment level. They rather reflect the investment level consistent with the one pertinent to
comparable countries. The estimates reveal shortfall, meaning that after the crisis, the investment in the
1
The only exception is Macedonia, given the strong investment cycle after the crisis, driven by public investments and structural
reforms in the export segment.
2
Transition report 2015-2016 "Rebalancing Finance", European Bank for reconstruction and development.
region is lower than in the peer countries, in the range of around 3 to 6 percentage points of GDP.
Similar inference is drawn by the IMF (2016)3, pinpointing post-crisis gaps in the capital stock in the
CESEE region compared to estimated benchmarks, being reflection of lower savings rates in the region,
narrower borrowing space after the crisis and lower return on investment. This notion is confirmed with
the data on the real capital stock in the region, as well, which is around 40% of the EU-28 average, with
the SEE region lagging behind significantly. Though this ratio is rising, yet it clearly indicates large scope
for improvement.
Chart 5: Real capital stock, per capita in CESEE region vis-à-vis EU28
0.70
0.60
0.50
0.40
0.30
0.20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
CESEE CEE SEE Baltics
Source: Penn World Table, version 9.0 and NBRM calculations
2. Investment financing
Many policy measures for unleashing investment growth are suggested in this context.
Boosting saving rates of the corporate sector in the region by enhancing incentives for reinvesting
earnings, rather than distributing dividends, supporting household savings by putting stronger emphasis
on Pilar II and III pension schemes. Enhancing productivity and hence return on investment has
been heavily debated issue for the region for many years, as well. Many structural and institutional
bottlenecks in the region have been frequently pinpointed as hurdles for higher productivity and
investment. Those are institutions, governance, human capital, innovation, with the access to
financing being mentioned as an important constraint, as well.
3
Central, Eastern, and Southeastern Europe - How to Get Back on the Fast Track?, Regional Economic Issues May 2016,
International Monetary Fund.
Chart 6: National and domestic saving rates, averages
for 2000-2017 period (% of GDP)
30.0
25.0
20.0
15.0
10.0
5.0
0.0
2000-08 2009-17 2000-17 2000-08 2009-17 2000-17
Gross domestic saving rates Gross national saving rates
SEE CEE Baltics CESEE
Source: Eurostat and NBRM calculations
When it comes to financing, a matter that we focus on more closely further in the note,
important issues come to fore. First, what are the main segments where large investment needs are
in place, thus requiring priority in allocating finance and alleviating access to it? To tackle this question
we will discuss more thoroughly the investment structure. The second matter of interest is how to
reconcile the current large investment needs of the region, with the already high leverage level, both in
the private and public sector, as well. This will be also discussed further in the note.
Structural decomposition of investment in CESEE countries vis-à-vis EU points to CESEE
countries having larger share of investment in non-residential construction, and, to a lesser extent, in
machinery, transport equipment and ICT equipment. This structural characteristic is connected with two
historical episodes - first, the transition process, when large investment was needed to replace and
renew the outdated infrastructure and second, large capital inflows in the form of FDI before the crisis
triggered increase in the imports of machinery and equipment goods. On the other hand, CESEE region
faces potential weaknesses in the part of investment activity connected with intellectual
property, innovation and R&D. Namely, in all CESEE countries, there is a gap in investment in
intellectual property, which, in turn creates critical support for more dynamic increase in productivity and
value added, boost economic growth and real convergence. For the whole region, the gap vis-à-vis EU is
around 9 p.p., for the period 2000-2008, and 10 p.p, for the period 2009-2017, but for some countries it
is even larger (e.g. for Albania the difference is around 17 p.p. in the share of intellectual property
vis-àvis the EU share).
Chart 7: Investment categories, difference vis-à-vis the EU in the share of the respective category in total
investment (p.p.)
18.0
13.0
8.0
3.0
-2.0
avg.2000-08 avg.2009-17 avg.2000-08 avg.2009-17 avg.2000-08 avg.2009-17 avg.2000-08 avg.2009-17 avg.2000-08 avg.2009-17 avg.2000-08 avg.2009-17
-7.0
Dwellings Other construction Transport equipment ICT equipment Other machinery and Intellectual property
equipment products
-12.0
CEE SEE Baltics CESEE
-17.0
Source: Eurostat and NBRM calculations.
Another important aspect in the investment-growth nexus is the infrastructure quality and
spending on infrastructure. Do CESEE countries spend enough on infrastructure? World
economic forum indicators show infrastructure quality gap between CESEE region and EU-28 in the
period 2017-2018 - the quality of infrastructure in the CESEE region, is around 4.3 on average, whereas
the same index for the EU-28 is 5.14. The picture is very similar if one looks at the data on stock of public
capital, which reflects to a large extent the availability of infrastructure - stock of public infrastructure in
CESEE countries in 2015 is around 60% compared to EU-28 stock. According to both indicators, SEE
region has largest infrastructure gaps in the group. EBRD5 concludes that current spending on
infrastructure in CESEE region "are low by historical standard" and that "infrastructure spending needs to
rise by at least half a percentage point of GDP, unless significant improvements can be made in terms of
the cost-efficiency of infrastructure spending".
4
NBRM calculations based on World Economic Forum estimates (2017-2018 edition).
5
Transition report 2015-2016 "Rebalancing Finance", European Bank for reconstruction and development.
Chart 8: Quality of infrastructure in CESEE region vis-à-vis EU 28
Quality of infrastructure index (difference in p.p.) Real public capital stock, per capita, % of EU-28
0.0
0.80
-0.5 0.70
0.60
-1.0
0.50
-1.5
0.40
-2.0
0.30
-2.5
CEE SEE Baltics CESEE 0.20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2007-2008 2010-2011 2017-2018
CESEE CEE SEE Baltics
Source: World Economic Forum, IMF Investment and Capital Stock Dataset (2017) and NBRM calculations.
Complementary and equally important question is whether CESEE countries invest in
costeffective, viable and long-term growth supportive projects. Largest part of infrastructure projects
in CESEE region is publicly financed (60-70% in transition countries, compared with 15 to 60% in the
EU15 economies6). This is problematic because of two reasons - first, public resources may become
insufficient for infrastructure financing, given the tight fiscal constraints and rising public debts and
second, in practice, very often, public investment decisions are not guided by economic rationale which
might lead to inefficient and unproductive projects. Improvements in fiscal institutions, fiscal rules,
public-private partnership, foreign financing partly in the form of grants, improvements in
public investment management frameworks are some of the possible "remedies" that might generate
improvements in the infrastructure in the CESEE region.
3. SMEs' investment activity and access to finance
Apart from the needs for investment in infrastructure, as mentioned above, apparently what
the region is also in need of are the investments in more technologically advanced and
innovative segments, investments that are very often led by SMEs, or start-up companies. In
order to grow and to be economically productive, this sector needs stable sources of financing. Without
access to finance SMEs are unable to invest, which impairs their capacity to improve productivity, raise
competitiveness, promote innovation, generate employment, and contribute to economic growth and
development. And the importance of the SMEs sector is continually increasing. According to some studies,
majority of enterprises globally are SMEs, accounting for approximately more than a half of private sector
employment. In fact, the latest data on SMEs in the EU, as well as some of the countries in the region,
confirm the importance of this sector in terms of the number of companies, its share in the total value
added, as well as in the total employment.
6
Transition report 2015-2016 "Rebalancing Finance", European Bank for reconstruction and development.
Chart 9: The importance of SMEs
Share of number of enterprises in total in 2015, Share of number of employees in total in 2015,
enterprises employing less than 250 persons (in %)
enterprises employing less than 250 persons (in %)
99.9 90
79.4
78.2
99.8
99.8
99.8 80
75.9
74.8
99.8 73.7 74.4
99.8
69.8 69.5
68.3 66.3
99.8 99.8
70 67.6
65.5
99.8
99.7 60
99.7
99.7 50
99.7
99.7
40
99.6
30
99.6
20
10
0
99.5
Latvia Union
Latvia Union Poland
Estonia Croatia
Poland
Estonia Croatia Bulgaria
Republic Hungary Romania Slovenia
Republic Hungary Slovenia Bulgaria Lithuania
Romania
Lithuania
Macedonia
Macedonia
Czech
Czech
European
European
Baltics CEE EU28 SEE
Baltics CEE EU28 SEE
Source: Eurostat. Source: Eurostat and SSO of RM.
Share of value added at factor cost in total in 2015,
enterprises employing less than 250 persons (in %)
80
75.6
70.0
68.3
70
64.4 64.5 64.5
58.5
60 55.9
55.1
53.0
52.2
51.1
50
40
30
20
10
0
Latvia Union
Poland
Estonia Croatia
Republic Hungary Slovenia Bulgaria
Lithuania Romania
Macedonia
Czech
European
Baltics CEE EU28 SEE
Source: Eurostat.
To depict more closely the state of the SMEs and the own perception of their business
environment, in the next section we will focus on the results of the Survey on the Access to
Finance of Enterprises (SAFE survey of the EC and the ECB). The Survey itself pinpoints the
concentration of SMEs in trade and services (around 70% on average, both for the EU and the region),
with many of the companies not having export of goods and services in their total turnover (around half
of surveyed companies). The survey data also indicate that SMEs from the EU and the region face rather
similar challenges in terms of the main perceived obstacles in doing their business. Finding customers and
availability of skilled labor seem to be the main issues of the SMEs from the European Union and from the
region. Thus, 7-8% of the companies perceives access to financing as the most important current
problem, but there are countries, Macedonia in particular, where this percentage is higher (13%), and
with a similar weight compared to most of the other obstacles7.
7
Survey on the access to finance of enterprises (SAFE), September to October 2017
Chart 10: The most important problems that the SMEs are currently facing with
(Average 2015-2017, % of the total number of surveyed companies)
30%
30%
CESEE region
EU-28
2017 2016 2015
24%
2017 2016 2015
24% 25%
25%
23%
20%
20%
17%
14%
15%
15%
13% 13%
12% 12% 12%
11%
10% 8%
8%
10%
7%
5%
5%
0%
0%
finding competition access to costs of availability regulation other
finding competition access to costs of availability regulation other
customers finance production of skilled
customers finance production of skilled
or labour staff or
or labour staff or
experienced
experienced
managers
managers
Source: on the access to finance of enterprises (SAFE), EC and ECB.
Survey
Despite the fact that according to the Survey, access to finance itself is not the major
impediment for the SMEs, it is still an important caveat. And going under the surface and
dissecting the sources of financing, one can note important structural features. First,
bankrelated products remained the most relevant source of financing for SMEs compared with market-based
instruments. The SMEs from the European Union and from the region do not differ much in terms of the
main sources of financing. Around half of the European SMEs and from the region agree that the most
relevant source for financing are the bank related products (credit line, bank overdraft, bank loans) and
leasing or hire purchase. Also, companies from the region and the European Union use grants or
subsidized bank loans and retained earnings (one third of the companies) as source for financing. On the
other hand, market-based instruments, such as equity and debt securities, and factoring are less
considered potential source of financing.
Chart 11: Relevance of different sources of financing
Relevance of the sources of financing for SMEs
Relevance of the sources of financing for SMEs
(average of 2015-2017)
(average of 2015 -2017)
60%
54%
51%
49%
47% 18% 17%
50%
46%
42%
16%
40%
35%
32% 14%
13%
31%
30%
30% 27%
25%
12%
11%
10%
10%
20%
8%
10%
6%
0%
3%
4%
Retained Grants or Credit line, bank Bank loan Trade credit Leasing or hire- 2%
earnings or sale subsidised bank overdraft or (excluding purchase
2%
of assets loan credit cards subsidised bank
(Internal funds) overdraft loans, overdrafts 0%
and credit lines)
Debt securities Equity capital Factoring
EU-28 Region
EU-28 Region
Source: on the access to finance of enterprises (SAFE), EC and ECB.
Survey
Second, for those companies that external finance seems to be important caveat, the main causes are
related to the inadequate collateral, high costs and complex procedures. Both notions bring to the fore
the need to discuss the state of play and the potential for financing with alternative instruments through
capital markets.
Chart 12: The most important limiting factors for external financing
(Average 2015-2017, % of the total number of surveyed companies)
Region
insufficient collateral or guarantee
Baltics
interest rates or price too high
reduced control over the enterprise
CEE
financing not available at all
SEE
too much paperwork is involved
there are no obstacles
EU28
0.0% 20.0% 40.0% 60.0% 80.0% 100.0%
Source: on the access to finance of enterprises (SAFE), EC and ECB.
Survey
4. Capital markets in CESEE - potential source for finance
Although greatly used, the traditional sources of finance, such as government financing for infrastructure,
or financing through domestic banks of SMEs might be either limited in size, or constrained by some
structural impediments. Hence, these sources might not be sufficient to close financing gaps. In this
context, capital markets can have significant role for bridging the existing gaps. Benefits of
developed capital markets are well known. They could complement banks as a source of financing
and could: 1) unlock more investment for all companies, especially SMEs and for infrastructure projects,
2) attract more investment to the region through external financing, and 3) make the financial system
more stable and resilient by opening up a wide range of funding sources8. Thus, capital markets have
potential to foster growth.
Despite the continuous progress, capital markets in the CESEE region still lag behind the
more advanced EU countries. In most of the countries in the region, the financial system is
bankbased. Capital markets in CESEE countries have expanded significantly, since they were originally
created9. Despite the growth from the low base, and given the impact of the global crisis on the market
growth momentum, the capital market depth (listed shares and bonds) in the region is hovering around
50% of GDP, far below the EU average for 2008-2016 of around 200% of GDP. Similar is the assessment
of the region on the financial market development in the Global Competitiveness Report. The region is
positioned in the middle of the scored countries, and the SEE region has the poorest ranking. While some
of the reasons for the low capital market development might be linked to demand factors (dominance of
8
EU Green paper on capital markets, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52015DC0063&from=EN.
9
Stock exchanges were established at different points in the transition process: Bulgaria, Hungary, Poland, Russia and Slovenia
opened their stock markets in 1990-91; the Czech Republic, Lithuania and the Slovak Republic followed in 1993; Latvia and
Romania were next in 1995, followed by Estonia in 1996. Turkey's stock exchange was established much earlier than those of the
transition countries, in early-1986.
SMEs that are more prone to bank credits), some of the causes are related to supply-side factors. And
when discussing the latter group of reasons, commonly four important aspects are highlighted: 1) the
role of equity; 2) the role of institutional investors; 3) household preference for bank deposits and 4)
regulatory environment.
When it comes to equity, a large distance compared to the EU-28 average is visible in the
area of financing through local equity market and venture capital availability, with a rank of 90
and 74 (EU-28 average rank is 61 and 55). Yet, concerning the availability of venture capital, some
CESEE countries (the Baltics, Czech Republic, Slovakia, Bulgaria, Macedonia) score rather well, reflecting
the public support and a favorable regulatory environment. "This is encouraging given the importance of
this financing channel for start-ups and innovative companies".
Chart 13: Financial market development, ranking based on the Global Competiveness Report
Financial market development
(ranking based on 138 countries, 2016)
120.0
100.0
83.0
80.0 69.4 68.9
55.8
60.0
44.7
40.0
20.0
0.0
SEE CEE Baltics Region EU-28
Venture capital availability
Financing through local equity market
(ranking based on 138 countries, 2016)
(ranking based on 138 countries, 2016)
120.0
120.0
101.2
100.0
90.4 90.5 86.2
100.0
75.2
74.0
73.0 80.0
80.0
61.1
55.0
51.7
60.0
60.0
40.0
40.0
20.0
20.0
0.0
0.0
SEE CEE Baltics Region EU-28
SEE CEE Baltics Region EU-28
Source: World Economic Forum.
Equity markets in the region are quite shallow, with a stock market capitalization averaging
around 15% of GDP, compared to the EU-28 average of close to 70% in 2016. Positive outliers
in this context are countries such as Croatia (43% of GDP) or Poland (close to 30% of GDP). Similar is
the inference when it comes to private equity, which is considered an attractive source of financing for
young firms, or companies not listed on the stock exchange. It is a model that enables risk-sharing, and
fosters management and operational efficiency. The main role of private equity is to fill the gap between
internally generated financing and conventional market sources, such as bank loans and public equity.
Unlike most stock market investments, equity investment enables shareholders to adopt a long-term and
hands-on approach in their investee companies, fostering sound corporate governance and transparency,
making appropriate contributions to business strategy and optimizing management. Crucially, however, it
also contributes to the transfer of skills and has positive demonstration effects in terms of the
development of local capital markets and competitive market-oriented behavior10. These modalities such
10
EBRD Transition report 2015-2016.
as, venture capital, crowdfunding, business angels, are relatively modest in the CESEE, although the
same holds for the EU as well, where private equity has a share of around 0.3% in GDP. Debt market in
the region is larger compared to the equity, averaging around 50% of GDP, which is still much lower
compared to the EU-28 average of close to 160%. Yet, dominant part of this market segment is related
to government securities, while the corporate issuance remains modest. In fact, in most CESEE countries,
corporate bond markets remain small, or even nonexistent.
Chart 14: Stock and debt market capitalization
Source: ECB and central bank websites.
To recap, the region needs to mobilize finance, which amidst burdened government financing and
structurally difficult access to bank finance for new and innovative companies, requires further
development of the capital markets and more diversified portfolio of financial instruments. One of the
key questions going forward is where the potential for financing might come from. The
potential of capital markets is usually determined by the domestic institutional investor
base. Traditional institutional investors (pension funds, investment funds and insurance companies) are
present in all CESEE countries, but mostly in the government bond-market segment. However, their role
in the CESEE region is smaller, compared to the EU as a whole, and there is a lot of variation across
countries. For instance, assets of insurance undertakings and pensions, as a share of GDP, stood roughly
at 33% in Croatia, compared to 6% in Romania.
Chart 15: Banking sector assets and assets of institutional investors (pension funds, insurance
corporations and investment funds) in CESEE countries, as % of GDP
Banking sector assets, as % of GDP
Assets of institutional investors, as % of GDP
80
400
2012
60
300
2013
40
20
2014
200
0
2015
CEE SEE CEE SEE CEE SEE
100
Baltics Baltics Baltics
2016
Eurozone Eurozone Eurozone
0
Pension funds Insuruance Investments funds
Baltics CEE SEE Eurozone
corporations
Source: ECB, OECD statistics.
Another aspect linked to the potential of institutional investors and relevant in the context
of capital markets development are household saving preferences. Large part of financial wealth
of households in CESEE countries is invested in bank deposits. This is especially the case of Macedonia
and Croatia (with 55% and 62% of total financial assets, respectively) with most CESEE countries staying
above the EU average (30%). Subsequently, equity, insurance and pension investments are below the EU
average. There are some notable exceptions (Estonia, Bulgaria, Hungary and Lithuania) with share of
equity and investment fund shares in total financial assets of 52%, 42%%, 40% and 40% respectively.
Broadening the financial knowledge of households and raising their awareness of the possible investment
alternatives, might provide support to institutional investors.
Chart 16: Households' financial assets
Source: Eurostat
Even if the potential of institutional investors is large or underutilized, allocating their funds
to cover the financing gaps requires tailored-made financial instruments. "These groups of
investors are more likely to be interested in investments in fixed income instruments, given their potential
to deliver long stable cash flows with attractive yields, but potentially with less volatility than equity
options". Instruments that can be used for this purpose are: 1) corporate bonds issuance (by SMEs and
SME lenders), 2) securitization structures (project bonds on infrastructure side and loan securitization on
the SME side), 3) covered bonds (mainly for SMEs financing), and 4) debt funds (for infrastructure and
SME related assets). Given the low level of development of capital market structures in CESEE countries,
connecting SMEs financing needs with the funds of bank and non-bank investors via securitization of
SMEs loan seems to be viable solution, thus assisting banks in their ability to fund and distribute a risk.
Although in some of the countries banks do not face funding problems, SME securitization allows for
transformation of SMEs loans that have low liquidity into tradable securities. This creates secondary
market, for SMEs loans, but also contributes to the general market development.
The need for deeper and more developed capital markets, to complement traditional sources
of financing and support investment and innovation is common feature for the region. Yet
many country specifics are in place, and this makes proposing "one-fit all" solutions very difficult.
Following the findings of the Vienna initiative group on capital market development11, and the way the
obstacles and solutions are schematized, several conclusions can be drawn.
11
Report by the Working Group on Capital Markets Union, March 2018.
First, CESEE countries must develop comprehensive policies and strategies aimed at
addressing the financing gap in infrastructure and SMEs financing. Strategies should include a
clear assessment of the role that capital markets in general and institutional investors in particular can
have, along with the measures necessary to use the potential. In practice, challenges of mobilization
institutional investors to infrastructure and SMEs financing are complex, and addressing them requires
participation of many public entities in coordination with the public sector.
Second, conducive regulatory environment is an important prerequisite for the development
of capital markets. The perception of the level of investors' protection and the degree to which the
markets are fair and transparent are the key factors that investors take into consideration when investing
in jurisdiction. That is why a stronger regulatory and supervisory environment, including better protection
of prop