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Authors : Dušan Mramor PhD Vesna Tomažin Marko Pahor PhD Žiga Hieng

SOUTH EASTERN EUROPE AND COMMONWEALTH OF INDEPENDENT STATES: OPPORTUNITIES AND RISKS IN FINANCIAL SECTORS. Authors : Dušan Mramor PhD Vesna Tomažin Marko Pahor PhD Žiga Hieng Miha Novak Tim Umberger Mateja Štimec Matija Bitenc. Studied Countries. Russia. EU 25.

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Authors : Dušan Mramor PhD Vesna Tomažin Marko Pahor PhD Žiga Hieng

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  1. SOUTH EASTERN EUROPE AND COMMONWEALTH OFINDEPENDENT STATES:OPPORTUNITIES AND RISKSIN FINANCIAL SECTORS Authors: Dušan Mramor PhD Vesna Tomažin Marko Pahor PhD Žiga Hieng Miha Novak Tim Umberger Mateja Štimec Matija Bitenc

  2. Studied Countries Russia EU 25 Kazakhstan EU 8 Ukraine (EU 5) EU 15 Moldova Romania Croatia BIH Serbia Bulgaria Montenegro Kosovo Macedonia 8th Portorož Business Conference

  3. Population 2005 8th Portorož Business Conference

  4. Slovenia and Selected Countries TotalEXPORTof selected countriesinSlovenia’s GDP: 11.5% TotalIMPORT of selected countries in Slovenia’s GDP: 5.5% 8th Portorož Business Conference

  5. Economic development Slovenija (2005) 18,900 EUR 8th Portorož Business Conference

  6. Unemployment Rate 2005 - ILO 8th Portorož Business Conference

  7. Government Debt and Budget Deficit 2005 8th Portorož Business Conference

  8. ForeignReservesandtheCurrentAccountoftheBalanceofPayments2005ForeignReservesandtheCurrentAccountoftheBalanceofPayments2005 8th Portorož Business Conference

  9. Openness of the Economy 2005 8th Portorož Business Conference

  10. Macroeconomic stability 2005 8th Portorož Business Conference

  11. Agenda • Introduction: Dušan Mramor, PhD • Banking Sector • Corporate Loans: Miha Novak • Retail Loans: Mateja Štimec • Investment Banking: Vesna Tomažin • Capital Markets • Development and Efficiency: Žiga Hieng • Mutual Funds: Tim Umberger • Insurance Sector: Matija Bitenc • All statements reflect the positions of the authors and not of the institutions in which they are employed 8th Portorož Business Conference

  12. Acknowledgments • Irena Sodin (EBRD) • Ksenija Maver (World Bank) • European Bank for Reconstruction and Development (EBRD) • World Bank • International Monetary Fund (IMF) • Slovene Export Corporation (SID) • Reinsurance Company Sava (Sava RE) • Center forInternationalCooperationandDevelopment (CMRS) • Nova Ljubljanska banka (NLB) • Chamber of Commerce and Industry of Slovenia (GZS) 8th Portorož Business Conference

  13. Which Countries Offer the Most Opportunities in Corporate Loans? Miha Novak Zavarovalnica Triglav, d. d.

  14. Level of Current Development • Transition into the market economy • Restructuring of banking system • Privatization • Central banks • Functions • Legislation • Growth of mortgage market 8th Portorož Business Conference

  15. Key Characteristics of Banking Sectors 8th Portorož Business Conference

  16. Corporate Loans Corporate Loans in GDP % in 2005 Euro Area (2005): 42.6 % 8th Portorož Business Conference

  17. Factors of Growth • Gross domestic product • Inflation • Loan interest rate • Interest spread • External debt in GDP • Amount of M2 in circulation • Government debt in GDP 8th Portorož Business Conference

  18. Expected Rates of Growth? Year 2015 Year 2005 Slovenia Bulgaria Croatia Ukraine Hungary Kazakhstan Moldova BIH Slovakia Macedonia Czech Republic Russia Serbia Kosovo Montenegro Poland Romania 8th Portorož Business Conference

  19. Sources of Opportunities? • Low share of corporate loans in GDP • Size of banking systems • Above-average growth rates • Favorable macroeconomic predictions • Real estates markets • Entry into the EU • Privatization • Concentration • Segment of medium- and small-sized companies 8th Portorož Business Conference

  20. Where are the Risks? • High level of loans in GDP in relation to economic development • Restrictive measures • Macroeconomic risks • Budget deficit • High inflation • Deficit of the current account of the balance of payments • Political risks 8th Portorož Business Conference

  21. Countries with the Highest Potential Russia Kazakhstan Ukraine Moldova Croatia Serbia BIH Macedonia 8th Portorož Business Conference

  22. Will Fast Growth inRetail Loans Continue? Mateja Štimec BOFEX d.o.o. Ljubljana –MERKUR Group

  23. Retail Loans (2005) Southeastern Europe CIS Central Europe 8th Portorož Business Conference

  24. ProjectedRealGrowth in Retail Loansin (%) • Factors of growth in retail loans: • GDP • Inflation 8th Portorož Business Conference

  25. Are Projected Growth Rates Sustainable? • Importance of institutional factors • Restrictive measures • are being implemented inCroatia, Bulgaria, Serbia, Romania • are planned inRussia, Ukraine, Kazakhstan, Montenegro • Growth rates are not sustainable in the long run. 8th Portorož Business Conference

  26. Opportunities and Risks - + 22.7% • largest market in terms of size • no significant macroeconomic risks Russia • political risk • low share of loans in GDP according to projected economic growth • relatively large market • lowanddispersedconcentration • political risk (status of Kosovo) • postponedfurther negotiations with the EU • macroeconomic risk – external debt 21.1% Serbia & Montenegro 8th Portorož Business Conference

  27. Opportunities and Risks II - + 23.4% • institutional development • possibility of expropriation • political instability • macroeconomic (high budget deficitanddebt) • highest rates expected – very limited access to loans Ukraine 15.29% • highest projected economic development • very developed and competitive banking market • Unclear democracy • Investor discrimination • limits on foreign bank ownership Kazakhstan 8th Portorož Business Conference

  28. Opportunities and Risks III - + 20.0% • expected GDPgrowthdoesnot ensure the appropriate growth of loans • politicalRisk • least developed country • highprojectedgrowth (largest lag) Moldova 19.8% • largest relative lag • political status • banking market is small, privatized, non-competitive Kosovo 8th Portorož Business Conference

  29. Opportunities and Risks IV + - • macroeconomic (relatively high deficit of the current account of the balance of payments) • fast-changing legislation 15.3% • substantial lag • entry into the EU Romania 8th Portorož Business Conference

  30. Development Possibilities of Investment Banking Services Vesna Tomažin Faculty of Economics, University of Ljubljana

  31. FACTORS OF GROWTH OF INVESTMENT BANKING SERVICES situation in capital markets banking factors country’s macroeconomic situation 8th Portorož Business Conference

  32. Average Growth of Investment Banking Servicesin EU5 8th Portorož Business Conference

  33. Projected Growth of Investment Banking Services (in %) CIS Southeastern Europe 8th Portorož Business Conference

  34. Opportunities (I) COUNTRIES OF THE FORMER YUGOSLAVIA 3. Development of capital market (primary market) 4. Possibility of long-term borrowing 1. Underdeveloped area of business in the region (“market niche”) 2. Provision of other forms of investment banking services 5. Unfinished privatization 6. Information on markets, established business networks 8th Portorož Business Conference

  35. ROMANIAand BULGARIA Some Slovenian financial companies are already present in both markets EU membership in January 2007 High growth of services in the next ten years CIS Countries Ukraine→ unfinished privatization Kazakhstan → foreign investments because of rich supplies of natural resources Russia → already developedinvestment banking Opportunities (II) 8th Portorož Business Conference

  36. SEE COUNTRIES Former Yugoslavia incomplete banking legislation competition by other banks unfamiliarity with services underdevelopment of certain capital markets Bulgaria bureaucracy constant legislative changes Romania incompatible legislative and regulatory frameworks in the area of FDI foreign banks CIS COUNTRIES Russia presence of bigger players legislative restrictions Ukraine underdeveloped banking sector corruption weak legislation Kazakhstan unfamiliarity with the market state’s interference in certain projects Risksand Limitations to the Growth of Services 8th Portorož Business Conference

  37. Assessments of Banking Markets 8th Portorož Business Conference

  38. Capital MarketsWhere are Opportunities for Investors? Žiga Hieng KD BPD, d.o.o.

  39. Capital Markets MarketCapitalizationandLiquidity: 8th Portorož Business Conference

  40. Past Returns Countries and Indexes: Returns from the beginning of 2006: 8th Portorož Business Conference

  41. Opportunities in Capital Markets • Market Inefficiency • Privatization and acquisitions • Diversification • (Institutional investors) • Opportunities by individual sectors 8th Portorož Business Conference

  42. Inefficiency • Inefficiency: security prices do not fully reflect all available information • Methodology: - autocorrelation test • - runs test • - coefficient of variance test • Conclusion: SEE and CIS markets are not weak efficient! • Exception: Croatia! • Consequences: • stock prices do not reflect the stocks’ intrinsic value • forecasting of stock prices based on past prices 8th Portorož Business Conference

  43. Privatization • combined ownership of companies: state + privateinvestors • deficits in the balance of payments: state is forced to sell companies • sale to strategic owner: control premium + exit option for other investors 8th Portorož Business Conference

  44. Consequences of Inefficiency and Privatization • Potentials for above-average returns! • Above-average return = return that is higher than return appropriate for certain risk • Figure: Average monthly returns in terms of standard deviation of monthly returns for the 1999–2006 period 8th Portorož Business Conference

  45. Diversification Correlations: SEEandCISin relation to USAandWE < 0.2 SEEandCIS < 0.1 DAX in S&P500 = 0.6 RTS and DAX = 0.3 Opportunity for additional portfolio diversification! 8th Portorož Business Conference

  46. Opportunities by Sectors Natural resources, Consumer sector, GDRs Natural resources, Banking, GDRs Steel, Transport Energy, PIFs SIFs Holdings Tourism Banking Tourism Banking 8th Portorož Business Conference

  47. Risks Macroeconomic risks • Weak liquidity: • high trading only with the biggest companies listed on stock exchanges Market volatility and exchange rate risk: standard deviations of returns are relatively high Risks Political risk Corruption Corporate governance: managers and not owners govern companies, state intervention Protection of small investors: weak regulation in the areas of acquisitions and securities markets 8th Portorož Business Conference

  48. MutualFunds: Will the SEE and CIS Countries Follow the Explosive Growth in EU 8? Tim Umberger KD BPD

  49. Development of Mutual Funds in EU8 and EU15 8th Portorož Business Conference

  50. Mutual Funds in SEE and CIS Countries at the End of 2005 8th Portorož Business Conference

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