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CRITICAL ANALYSIS

OF

STOCK MARKET STABILITY

SLOVAKIA, SLOVENIA

AND

IN

PORTUGAL, ROMANIA,

SPAIN

(Assignment towards partial assessment in the subject of Financial Markets and Regulatory
Systems )

SUBMITTED BY:
SHRIYA NAYYAR (944), SONAM JAMBHULKAR (874), PRANJAL MEHTA (871), ADITYA PRATAP
SINGH (894) & TANIYA KANWAT (946)
BUSINESS LAW HONOURS
VIII SEMESTER
SUBMITTED TO:
MR. RITUPARNA DAS, ASSOCIATE PROFESSOR, FACULTY OF MANAGEMENT
TOTAL WORDS: 14, 746

NATIONAL LAW UNIVERSITY, JODHPUR


WINTER SESSION
(JANUARY-MAY 2015)

INTRODUCTION & OVERVIEW OF SUBJECT MATTER


Financial markets play a fundamental role in the economic development of a country. They
are the intermediary link in facilitating the flow of funds from savers to investors. By
providing an institutional mechanism for mobilizing domestic savings and efficiently
channeling them into productive investments, they lower the cost of capital to investors and
accelerate economic growth of the country. Financial intermediation between borrowers and
savers is done by commercial banks. This credit market enables debt financing for
investments. An alternative method of intermediation is through equity financing. This is only
possible through the development of capital markets. Capital markets, which deal with
securities such as stocks and bonds, are associated with financial resource mobilization on a
long term basis. By raising capital directly from the public, they lower the cost of capital.
Capital markets also allow for wider ownership among the public, thereby distributing risks
and wealth amongst smaller investors. For investors, they provide an effective vehicle for
making investment choices which suit their own preferences of risk and returns based on
available information. As such, capital markets help the economy to generate more savings
and productive investments. A basic feature of an efficient capital market is constant liquidity,
an easy mechanism for entry and exit by investors. This requires sufficient volume and size
of transactions in the market (Tuladhar, 1996). The stock market forms a significant
component of the financial sector of any economy.
The proponents of stock markets emphasize the importance of having a developed stock
market in enhancing the efficiency of investment. A well-functioning stock market is
expected to lead to a lower cost of equity capital for firms and allow individuals to more
effectively price and hedge risk. Stock markets can attract foreign portfolio capital and
increase domestic resource mobilization, expanding the resources available for investment in
developing countries. Recognizing the importance of stock market on economic growth,
prudential authorities such as World Bank, IMF and ADB undertook stock market
development programs for emerging markets in developing countries during 80s and 90s and
they found that, emerging stock markets have experienced considerable development since
the early 1990s. The market capitalization of emerging market countries has more than
doubled over the past decade growing from less than $2 trillion in 1995 to about $5 trillion in
2005 (Yartey, 2008). As a percentage of world market capitalization, emerging markets are
now more than 12 percent and steadily growing (Standard and Poor, 2005). The stock market
is one of the most important sources for companies to raise funds. This allows businesses to

be publicly traded, or raise additional capital for expansion by selling shares of ownership of
the company in a public market. The liquidity that an exchange provides affords investors the
ability to quickly and easily sell securities. This is an attractive feature of investing in stocks,
compared to other less liquid investments such as real estate. History has shown that the price
of shares and other assets is an important part of the dynamics of economic activity, and can
influence or be an indicator of social mood. An economy where the stock market is on the
rise is considered to be an up-and-coming economy. In fact, the stock market is often
considered the primary indicator of a country's economic strength and development. Rising
share prices, for instance, tend to be associated with increased business investment and vice
versa. Share prices also affect the wealth of households and their consumption. Therefore,
central banks tend to keep an eye on the control and behavior of the stock market and, in
general, on the smooth operation of the financial system functions. Financial stability is the
raison raison d'tre of central banks. Exchanges also act as the clearinghouse for each
transaction, meaning that they collect and deliver the shares, and guarantee payment to the
seller of a security. This eliminates the risk to an individual buyer or seller that the
counterparty could default on the transaction (en.wikipedia.org/wiki/Stockmarket 2010).1
General Determinants of Stock Market
Income Levels
According to the demand driven hypotheses, the increase in income will create new
demand for financial services. In support of this theory, Garcia and Liu (1999) found that
income level have positive effect on stock market development in a sample of Latin America
and Asian countries. In the same vein, Yartey (2008) using the modified Calderon Rossell
model on a panel of data of 42 emerging market countries for the period 1990-2004 found
that income level determine stock market development in emerging markets. Other scholars
argue that the effect of income levels is not direct rather higher volume of intermediation
through stock markets cause higher real income growth. Higher income growth in turn
promotes development in stock market. As income increases, its cyclical component impacts
the size of the stock market and its price index. In addition, because of higher income
usually goes hand in hand with better defined property rights, better education and
1
https://profiles.uonbi.ac.ke/jaduda/files/the_determinants_of_stock_market_developmentthe_
case_for_the_nairobi_stock_exchange.pdf

better general environment for business, we expect it to have positive effect on stock
market development (La Porta et al.,1996). On the other hand Nacuer et al., (2007) using
data from Middle East and North African countries found that high income does not promote
development in the stock market.
Macroeconomic Stability
Consistent with previous studies inflation has been used as a measure of macroeconomic
stability (Nacuer et al., 2007; Garcia and Liu, 1999). Macroeconomic stability has been
found to exert effects on stock market development; however, there is no consensus on
the nature of effects. For example, Nacuer et al., (2007) found that macroeconomic instability
has a negative and significant relationship with stock market capitalization. Boyd et al.,
(2001)

found

non

linear

relationship

between

inflation

and

equity

market

development such that as inflation rises, the marginal impact on stock market
development diminishes rapidly. Garcia and Liu (1999) using a pooled data of 15
industrial and developing economies and

using

three

measures of

macro economic

stability: change in inflation; current and last year change in inflation; and standard deviation
of current and last years 12 months inflation rate found no significant effect on stock market
development. In a similar study by Yartey (2008) no significant relationship between inflation
and stock market development was found.
Although there is no agreement on the relationship between macroeconomic stability
and stock market development, we argue that higher levels of macroeconomic stability
encourage investors to participate in the stock market largely because the investment
environment is predictable. Furthermore, macroeconomic stability influence firms
profitability, and so the prices of securities in the stock market is likely to increase. Investors
whose investments are experiencing a capital gain are more likely to channel their savings to
the stock market by increasing their investments, and so this will enhance stock market
development. 2
Stock Market Liquidity
Liquidity has been defined as the ease and speed at which economic agents buy and sell
securities in the stock market (Levine and Zervos, 1998). Indeed, research has been
2 The Macroeconomic Determinants of Stock Market Development in Jordan; International
Journal of Economics and Finance; Vol. 5, No. 6; 2013.

conducted

to

determine

whether

stock

market liquidity enhances stock market

development. Some scholars support the view that liquidity in the stock market is good for
the development of stock market (Levine and Servos, 1998; Yartey, 2008), while others argue
to the contrary (see for example Shleifer and Vishny, 1986; Garcia and Liu, 1999). In support
of positive relationship between stock market liquidity and stock market development, Yartey
(2008) argues that liquid markets affords investors access to their savings, and thus boost
their confidence in stock market investment. More importantly, the more liquid the stock
market, the larger the amount of savings that are channeled through the stock market, thus
enhancing the development of the market. In other words, with a liquid stock market,
investors may not lose access to their savings during the course of the investment
because investors can liquidate their investments easily, quickly and at lower costs (Ngugi,
2003b; Bencivenga and Smith, 1991). In a similar vein, Bencivenga et al.,(1996) argue that
liquidity affect the choice of investments because liquid markets allow the ownership of
capital to be transferred economically, thus reducing transaction cost which in turn favors the
use of long term investments. In effect, liquid markets help improve the resource allocation
and induce more investors to invest in the stock market thus increasing the capitalization of
the market. Other researchers do not support a positive relationship. For instance, Garcia and
Liu (1999) argue that due to their liquidity, stock markets may hurt growth since saving
rates may reduce due to externalities in capital accumulation. In addition, very liquid
stock market encourage investor myopia because they can sell their shares easily which
weakens their commitment and incentive to monitor managerial actions (Shleifer and
Vishny, 1986). Indeed, weaker corporate governance resulting from reduced monitoring
of managers by shareholders impedes the development of stock markets. It is important to
point out; however, that theory is ambiguous about the exact impact of greater stock liquidity
on economic growth. By reducing the need for precautionary savings, increased stock
liquidity may have an adverse effect on the rate of economic growth (Yartey and Adjasi,
2007). In this study, we expect liquid markets to relate positively with stock market
development. 3
Banking Sector Development

3 The determinants of stock market development in the Middle-Eastern and North African
region; www.emeraldinsight.com/0307-4358.htm.

There is no consensus among researchers on the relationship between financial sector


development and economic growth. Some argue that banking sector development has a
positive effect on the economic growth (Berthelemy and Varoudakis, 1996; Christopoulos
andTsionas, 2004); while others suggest that banking sector may not be beneficial for
growth (Singh, 1997). This notwithstanding, it is also not clear on the relationship
between banking sector development and stock market development. Indeed, banking sector
is important in the economic development and more so in the development of stock
market because it affords investors with liquidity by advancing credit, and facilitating
savings. Nacuer et al.,(2007) and Garcia and Liu (1999) found support to a positive
relationship between banking sector development and stock market development. Yartey
(2008) also found support to a positive relationship; however, it was found that a very high
level of bank sector development may have negative effects because stock markets and
banks tend to substitute one another as financing sources. Indeed, stock markets and
banks are considered as competitors in providing finance and so with a well developed
money market, the capital market may be overshadowed leading to a slower rate of
development. 4
In this work, an analysis of the stock markets and determinants of stock market stability has
been made for 5 emerging European economies, i.e. Portugal, Romania, Slovakia, Slovenia
and Spain. Since each of these economies is emerging in the Global Market, the authors of
this work have paid emphasis on determinants of stock markets in emerging economies.

4 Macroeconomic Determinants of Stock Market Development in Emerging Markets:


Evidence from Kenya, Research Journal of Finance and Accounting, Vol 3. No. 5, 2012.

SLOVAKIA
STOCK MARKET AND FACTORS CONTRIBUTING TO ITS STABILITY IN
SLOVAKIA
Slovakia is a sovereign state in Central Europe. 5 The official language is Slovak, a member of
the Slavic language family. The financial market is the market with financial means that is the
one, in which some people are offering them and some are buying. 6 The market is a place
where the sale and purchase of different products are realized. The product is any object
which is able to satisfy the needs or wishes of customers and can be offered in the market 7.
The greater the products ability to meet wishes of buyers, the higher is their success. There
exist the real estate market, automobile market, grain market, labour market, stock market,
insurance market and many others.
Economy: The Slovak economy is considered an advanced economy. Slovakia transformed
from a centrally planned economy to a market-driven economy. Major privatizations are
nearly complete, the banking sector is almost completely in private hands, and foreign
investment has risen. Slovakia adopted the Euro currency on 1 January 2009 as the 16th
member of the Eurozone.
GROWTH

OF

EQUITY CAPITAL

IN THE

COMMERCIAL BANKS

AND

BRANCH OFFICES

OF

FOREIGN BANKS IN SR 2014

Type of bank

Equity capital (in EUR millions)


3.31.2014

6.30.2014

9.30.2014

12.31.2014

5 Austrian Foreign Ministry", 3 June 2013, "UNHCR regional classification". UNHCR.


6 Chovancov, B. & et al. (2006). Financial Market-instruments, transactions and institutions, Bratislava:IURA
Edition.

7 Jlek, J. (2008). Financial Markets and Investment. Praha: Grada

Subscri
bed

paidup

subscri
bed

paidup

subscri
bed

paidup

subscri
bed

paidup

Commercial Banks
and Branch Offices
of Foreign Banks
Total

3,288.9

3,288
.9

3,297.8

3,297
.8

3,394.0

3,394
.0

3,445.4

3,445
.4

Commercial
Banks - Total

1,756.7

1,756
.7

1,756.7

1,756
.7

1,839.0

1,839
.0

1,849.0

1,849
.0

Banks
without
foreign
capital
participation

153.9

153.9

153.9

153.9

153.9

153.9

153.9

153.9

Banks
with
foreign
capital
participation

1,602.8

1,602
.8

1,602.8

1,602
.8

1,685.1

1,685
.1

1,695.1

1,695
.1

1,532.2

1,532
.2

1,541.1

1,541
.1

1,555.0

1,555
.0

1,596.4

1,596
.4

of which:

Branch Offices of
Foreign Banks */

FACTORS AFFECTING STOCK MARKET OF SLOVAKIA:


In agreement with maintaining the order in the financial market, its subjects functioning on
a worldwide scale are liable, to a large or small extent, to a certain form of the regulation. It is
obvious that by setting the rules the indicated process does not end but goes on by a
supervision, i.e. by a permanent control of the adherence to these rules. If they are broken, the
supervision authorities have at their disposal adequate sanctions which must or can be
imposed to supervised subjects.8
1. Regulatory framework: Slovak private law is based on civil law. The corporate
governance framework has recently undergone a major revision as part of EU
harmonization efforts and a drive to incorporate the OECD Principles into Slovak
legislation.9 The Securities Center (SCP) performs all shareholder recordkeeping for
public companies in Slovakia. The SCP is a central registry, and interacts directly with
8 Monika Zatrochov, Rudolf Stejskal, Economic and legal aspects influencing the financial
market in Slovakia, Problems Of Management In The 21stcentury Volume 3, 2012 126.

registered shareholders. Nominee ownership is not a recognized concept in Slovakia.


The only shareholders with ownership rights are those listed in the share register at
the Securities Center. Shareholders have a general right to attend the General Meeting
and the right to vote. Opportunity should be provided for shareholders to ask
questions of the board and to place items on the agenda at general meetings, subject to
reasonable limitations. Shareholders should be able to vote in person or in absentia,
and equal effect should be given to votes whether cast in person or in absentia.
Shareholders should be furnished with sufficient and timely information concerning
the date, location and agenda of general meetings, as well as full and timely
information regarding the issues to be decided at the meeting.
2. Fiscal and exchange rate policies: It helps in controlling exchange rates, Foreign
exchange rate management is an inherent part of monetary policy. Therefore, central
bank independence is limited when the government determines foreign exchange rate
policy. If the central bank is independent and responsible for foreign exchange
management, its responsibility is clear. Responsibility of the government for foreign
exchange rate policy is a way of involving it in the responsibility for the
developments of the exchange rate, which is a politically sensitive issue in most
countries. There is a moral hazard for the government, particularly with an
independent central bank, which allows the government to pursue10, in the short-term,
an expansionary unbalanced fiscal policy without the short-term costs in terms of the
political penalty of exchange rate depreciation, slowing growth or increasing
inflation. This is particularly important in transition economies, where artificially
large corporations dominate as a heritage of communism and are particularly
politically entrenched. The third issue is the changing equilibrium exchange rate 11.
Due to substantial cumulative inflation differential even in transition countries with
9 Nieh, C.-C., Lee, C.-F. (2001) Dynamic Relationship between Stock Prices and Exchange
Rates for G-7 Countries, Quarterly Review of Economics and Finance, Vol. 41, 477- 490.
10 Beblav, M. (1999b), Rastie skutone dolarizcia slovenskej ekonomiky?, Finann
noviny, www.p67value.sk, June
11 Almeida, A. a Goodhart, Ch. (1998), Does the Adoption of Inflation Targets Affect
Central Bank Behaviour? In: Molina, J., Vinals, J. and Gutierrez, F. (eds.): Monetary Policy
and Inflation in Spain Macmillan, London

low inflation, peg presents issues of eroding external competitiveness unless the
structural adjustment is very quick.12 Fourthly, contagion effects exist in emerging
markets, but importance of domestic forces should not be underestimated. 13. The fifth
group of issues is concerned with management of floating currency. It needs very little
explaining that there is a learning curve for both policy-makers and economic agents,
particularly with regard to signaling, intervention and relationship between interest
rates and the exchange rate.14
3. Trade patterns15: This helps in Market stability. Domestic reforms spurred a
deepening of Slovakias integration into the world economy. The importance of
international transactions has increased even further over time. 16 The average of
exports and imports in 2013 reached almost 90 percent of GDP. The different trend in
these two indicators suggests that Slovakia has remained specialized in more
downstream stages of production than regional peers have, and research shows that
the vulnerability of individual countries is heavily influenced by their position in
GVCs. Nonetheless, given its high degree of competitiveness, Slovakia has continued
12 Canzoneri, M. and Diba, B. (1996), Fiscal Constraints on Central Bank Independence
and Price Stability, CEPR Discussion Paper No. 1463, Center for Economic Policy
Research, London
13 Svejnar J. (1993), CSFR: a solid foundation, in Porter R. (ed.), Economic
Transformation in Central Europe: A Progress Report, CEPR, London
14 Beblav, M. (2000), Monetary policy, in: A. Marcinin and M. Beblav (eds.):
Economic Policy in Slovakia 1990-1999, CSMA and SFPA, Bratislava Bernanke, B. and
Mishkin, F. (1997), Inflation targeting: A new framework for monetary policy, Journal of
economic perspectives, no. 2, pp. 97 - 1 16.
15 Mateus, T. (2004) The Risk and Predictability of Equity Returns of the EU Accession
Countries, Emerging Markets Review, Vol. 5, 241-266.
16 Chen, Qianying, Andrew Filardo, Dong He, Feng Zhu (2014) Global impact of US
monetary policy at the zero lower bound, The HKMA-FRBNY Joint Conference on
Domestic and International Dimensions of Unconventional Monetary Policy, March 20-21,
conference draft.

to gain export market shares, which has translated into growing trade surpluses and
recently pushed the current account balance into positive territory as well. Trade flows
have become more affected by external variables than domestic ones. 17 Domestic
industrial production played a role in driving the cycle of real exports before 2005.
However, this relationship is not statistically significant in the recent period and
exports started to be driven more by FDI. Import cycles began to follow shocks to
euro area growth since 2005. This change probably reflects the fact that the exportoriented sectors engaged in global supply chains are FDI-intensive and mainly serve
foreign consumers.18
4. Insufficient information19: Insufficient information affects the rational decisions on
assessing products in the financial market, obtain relevant information on the
corporation on a timely and regular basis.

Slovakia has Stock Exchange Act,

Strategic management involves awareness of how successful and strong the


organization and its strategies are, how the effectiveness of these strategies might be
improved, and of how circumstances are changing. 20 The important issues are: the
ability of the organization to add value in meaningful ways, which, exploit
organizational resources to achieve synergy and at the same time, satisfy the needs of
the organizations major stakeholders, particularly customers and owners.21 The
studies of small manufacturing firms competing in a wide variety of industries suggest
17 International Monetary Fund (2013) German-Central European Supply ChainCluster
Report, IMF multi-Country report No.13/263.
18 Luetkepohl, Helmut (2007) New Introduction to Multiple Time Series Analysis, Springer.
19 Kim, K. (2003) Dollar Exchange Rate and Stock Price: Evidence from Multivariate
Cointegration and Error Correction Model, Review of Financial Economics, Vol. 12, 301313
20 Porter, Michael E.: Competitive Advantage. Creating and Sustaining Superior
Performance. The Free Press. New York 1985
21 Beal, Reginald M.: Competing Effectively: Environmental Scanning, Competitive
Strategy, and Organizational Performance in Small Manufacturing Firms. In: Journal of Small
Business Management, Jan 2000

that obtaining information on several aspects of specific environmental sectors


facilitates alignment between some competitive strategies and environments whereas
the frequency of scanning has no effect on such alignments.22
5. Regulatory service: Regulatory services help in decrease of the risk arising from the
incorrect investment, these are provided by regulatory authorities. Infinity Capital is
subject to supervision by the Securities Market Supervision of the National Bank of
Slovakia. Infinity Capital is defined as investment firm established as a joint-stock
company which has its registered office in the territory of the Slovak Republic and
whose scope of business comprises the provision of one or more investment services
to clients, or the performance of one or more investment activities on the basis of an
investment services license issued by the National Bank of Slovakia. The National
Bank of Slovakia issued an investment services license to Infinity Capital. It also
provides for investment restrictions, In general, mutual funds may only invest in the
following financial instruments, transferable securities being traded on regulated stock
market or a stock exchange from list of countries formed by EU member statesor
transferable securities being traded on other regulated stock market or a stock
exchange where it is being actively traded new securities offerings which will be
quoted on a regulated stock market or a stock exchange within one year participation
certificates of other mutual funds, money deposited on current accounts and term
accounts of banks up to 12 months money market instruments. 23 Funds may not
invest in precious metals, not even in a certificate form. The quantitative
representation of individual groups of securities in the funds portfolio is subject to
special rules. Open-ended mutual funds generally face more investment restrictions
than closed-ended and special mutual funds.24
6. Legal form: There are various forms in stock markets that ascertain effective
supervision over the financial market.
22 Thompson, John L.: Strategic Management. Awareness and Change. International
Thomson Business Press. London 1997
23

Slovakia

Regulation,

<http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/funds-and-fundmanagement-survey/pages/slovakia-regulation.aspx#1.4>
24 Regulatory Reporting, <http://infinitycapital.sk/EN/regulatory-reporting>

Effect of Factors on Stock Market


7
6
5
4
3
2
1
0

SECURITIES MARKET SUPERVISION


The National Bank of Slovakia as part of its supervision of the financial market, performs
supervision of stock exchange, central depository of securities, issuers of securities,
Investment Guarantee Fund, collective investment, investment firms, takeover bids and
squeeze-out and public offer.26 The stock exchange is a joint-stock company with its
registered office in the territory of the Slovak Republic which operates a regulated market
and ensures related activities and which is authorized to perform these activities under a
licence issued by the National Bank of Slovakia. The central depository of securities of the
Slovak Republic (hereinafter the central depository") is a joint stock company having its
registered office in the territory of the Slovak Republic which carry out the activities under
the Act on Securities and Investment Services.

25

Special

Data

Dissemination

Standard,

<http://dsbb.imf.org/pages/sdds/DQAFBaseCollapsed.aspx?ctycode=SVK&catcode=SPI00>
26 National Bank of Slovakia (2011). Evaluation of the Situation in Local Financial Markets during the yearof
2008. Bratislava: Publishing House National Bank of Slovakia.

FORECAST

OF

STOCK

MARKET OF

SLOVAKIA

ON THE BASIS OF THE FACTORS AFFECTING

STOCK MARKET: SLOVAKIA STOCK MARKET (SAX)


The Slovakia Stock Market (SAX) decreased to 237.40 Index points in March from 257.98
Index points in February of 2015. Stock Market in Slovakia averaged 225.69 Index points
from 1995 until 2015, reaching an all time high of 507.98 Index points in March of 2005 and
a record low of 70.19 Index points in March of 2000.

CONCLUSION

Slovak consumer lending market, in addition to banks, an important role is also currently
played by other providers, which are usually denominated as non-banking companies. On 24 th
March, 2015 a new notification came according to which the non-banking companies can
also give loan without obtaining a license from the National Bank of Slovakia or from other
state authorities, they only have to register in a so-called creditors registry administered by
the NBS. This main obligation of a non-banking company, when compared with the licensing
procedures of other entities in the financial sector represented a significantly simpler entry to
the Slovak market, without the need for fulfilling more demanding procedures.27
The financial institutions are state-regulated companies which operate in the financial market
and have legal subjectivity. They are including also commercial banks and the central bank in
27

Slovakia:

licensing

of

entities

providing

consumer

loans,

http://www.thelawyer.com/briefings/slovakia-licensing-of-entities-providing-consumerloans/3033093.article> Last visited on 29th March, 2015

<

the territory of the Slovak Republic. The commercial banks are considered to be one of the
most important subjects in the financial system and receive an extraordinary attention.
Together with the central bank they constitute a bank system. The Central Emission Bank is a
managerial centre of the bank system. It manages other banks mainly by means of indirect
economic instruments. The total indebtedness of households in Slovakia measured by the
proportion of debts in their gross disposable incomes still belongs to the lowest one in the
European Union. The higher the burden of incomes caused by installments the less resistant
are households to negative trends including the increase of unemployment or the growth of
credit installments caused by the rising interest rates.

SLOVENIA
STOCK MARKETS

AND

FACTORS AFFECTING THEIR STABILITY

IN

SLOVENIA

(Analysis of Slovenian Stock Markets between 1991-2015 i.e. Post Slovenian Independence)
I.

THE REPUBLIC

OF

SLOVENIA- A BACKGROUND

Slovenia is a nation state on the Adriatic Sea, bordering Italy to the west, Austria to the north,
Croatia to the south and southeast, and Hungary to the northeast. 28 It covers 20,273 square
kilometers (7,827 sq mi) and has a population of 2.05 million. 29 It is a parliamentary republic
and a member of the European Union and NATO. 30 Its capital and largest city is Ljubljana. 31
The human settlement of Slovenia is dispersed and uneven.32
Historically, the current territory of Slovenia was part of many different state formations,
including the Roman Empire and the Holy Roman Empire, followed by the Austro-Hungarian
Empire. In October 1918, the Slovenes exercised self-determination for the first time by cofounding the internationally unrecognized State of Slovenes, Croats and Serbs, which merged
that December with the Kingdom of Serbia into the Kingdom of Serbs, Croats and Slovenes
28 "About Slovenia: Republic of Slovenia", Government of Slovenia, Republic of Slovenia
(Retrieved 24-03-2015).
29 Europe beyond 2000: The enlargement of the European Union towards the East, p. 121,
(Whurr Publishers. 1998).
30 "About Slovenia: Republic of Slovenia", Government of Slovenia, Republic of Slovenia
(Retrieved 24-03-2015).
31 Id.
32 Id.

(renamed Kingdom of Yugoslavia in 1929). During World War II, Slovenia was occupied and
annexed by Germany, Italy, Croatia, and Hungary.33 Afterward, it was a founding member of
the Federal People's Republic of Yugoslavia, later renamed the Socialist Federal Republic of
Yugoslavia. In June 1991, after the introduction of multi-party representative democracy,
Slovenia split from Yugoslavia and became an independent country.34 In 2004, it entered
NATO and the European Union; in 2007 became the first former Communist country to join
the Eurozone, and in 2010 joined the OECD, a global association of high-income developed
countries.35
II.

THE SLOVENIAN ECONOMY

A. An Overview
Slovenia has a developed economy and is per capita the richest of the Slavic

countries.
With excellent infrastructure, a well-educated work force, and a strategic location
between the Balkans and Western Europe, Slovenia has one of the highest per capita

GDPs in Central Europe.


In March 2004, Slovenia became the first transition country to graduate from

borrower status to donor partner at the World Bank.36


Slovenia became the first 2004 European Union entrant to adopt the euro (on 1
January 2007) and has experienced one of the most stable political transitions in

Central and South-eastern Europe.


Slovenia was in the beginning of 2007 the first new member to introduce the euro as

its currency, replacing the Tolar.


In 2007, Slovenia was invited to begin the process for joining the OECD. It became a
member in 2012.37

33 Oto Luthar, From Prehistory to the End of the Ancient World: The Land Between: A
History of Slovenia, p. 15, (Peter Lang, ed., 2008).
34 Ibid.
35 Manoranjan Dutta, Historical Progression of the EU, The United States of Europe:
European Union and the Euro Revolution, (2011).
36

OECD

Economic

Surveys

Slovenia,

http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf

April

2013,

available

at

Slovenia today is a developed country that enjoys prosperity and stability. Slovenia is
considered to have an established, competitive, and flexible economy, with a good
international position in almost all rankings. Despite obvious challenges it remains in
the fast lane, with GDP growth figures just over 6%. What really clinched Slovenias
place among modern, advanced, and competitive European economies was joining the

Euro area in 2007.


Central Europe has traditionally played a crucial role in Slovenian economic
interactions, so joining the European Union and Euro area represent major stimuli for

economic activities and determine the outlines of economic policies.


Because Slovenia is located at a regional crossroads, its main GDP growth is related
to export activities. In addition, GDP is also driven by robust investment and other
components of domestic demand. Nevertheless, import growth tends to exceed export
growth and, during times of slowdown in the broader European economy, exports also
slow down. When open and competitive economy merged with upbeat EU economies

and favorable international trends, Slovenias exports of goods and services bloomed.
The 2008 Economic Recession- Prospects for the Slovenian economy deteriorated in
the second half of 2008, on account mostly of shifts in the external environment, with
major trading partners entering recession in mid-2008 and external loans becoming
less readily available. The flow of net foreign lending to domestic banks turned
negative in mid-2008 as a result of the spreading financial crisis and related tightening
in international inter-bank markets. As a result, the expansion of domestic bank loans
to domestic nonbank sectors has recorded a significant slowdown.38
The financial sector in Slovenia has not been spared the effects of the global financial
crisis. The market capitalisation of shares on the Ljubljana Stock Exchange declined
57 percent in 2008, and Slovenian banks, while not extensively involved in structured
instruments, are facing refinancing difficulties after years of rapid loan growth and the
strong expansion of business in Southeast Europe. Slovenias largest (and majority

37 OECD (2011b), OECD Economic Surveys: Slovenia 2011, OECD Publishing,


http://dx.doi.org/10.1787/eco_surveys-svn-2011-en.
38

OECD

Economic

Surveys

Slovenia,

http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf

April

2013,

available

at

state-owned) banking groups are still reporting profits, but at drastically lower

levels.39
Slovenias Banking Crisis: The economy is in a deep recession. Slovenia has been hit
hard by a boom-bust cycle, compounded by reform backlogs and the euro area
sovereign debt crisis. Slovenia is facing a severe banking crisis, driven by excessive
risk taking, weak corporate governance of state-owned banks and insufficiently
effective supervision tools. Major state-owned banks have been recapitalised several
times. Additional capital needs are expected but their amount remains uncertain as the
main results of earlier stress tests and due-diligence analysis have not been disclosed
and their assumptions are most likely outdated. The creation of the Bank Asset
Management Company to ring-fence impaired assets is welcome, but lack of
transparency and potential political interference pose risks. The corporate sector has a
severe debt overhang and some firms face insolvency, while existing insolvency
procedures are long and result in low recovery rates. Limited equity markets and the
backlog in the privatisation programme are hindering foreign direct investment,
whose increase would help smooth corporate deleveraging. An agreement on a list of
public assets to be privatised or managed by a new sovereign holding company is still
lacking.40

III.

STOCK MARKET

IN

SLOVENIA

In Slovenia there is currently one organised securities market, The Ljubljana Stock Exchange
(LJSE). The LJSE is a subsidiary (after the takeover in 2008) of the Vienna Stock Exchange
(VSE). Due to legal uncertainty in connection with a new takeover law coming into effect
during the takeover process, a court ruling has for the moment capped the VSEs voting rights
at 50 percent (although the VSE held over 80 percent of the shares as of mid February
2009).41 At issue is whether the VSE will have to offer the same price to those shareholders
that did not accept the initial offer. It is expected that this legal issue will be resolved during
the course of 2009. A new management board member was appointed in February 2009.42
Regarding equities, the exchange operates three market segments: A prime market (7 stocks),
a standard market (18 stocks), and an entry market (61 stocks). KrKA accounts for over 41
39 Damijan, J. (2012), What Went Wrong in Slovenia?, OpEd in Die Presse, 8 September.
40

Slovenia

Faces

'Severe

http://www.cnbc.com/id/100626252.

Banking

Crisis':

OECD,

April

2013,

percent of turnover, and the five largest stocks account for 75 percent of stock exchange
turnover.43 The entry market contains very low liquidity stocks. In addition to stocks, the
exchange also has listings for bonds, collective investment schemes, and structured products,
with only T-bills actually being traded. Trading volume has been very low recently, with only
about EUR 1 million of equities turnover per day. Besides the recent crisis, factors that have
been cited as reasons for low turnover are the low share of foreign portfolio investors of only
7 percent of stock market capitalisation, lack of sophisticated products and services, and high
direct and indirect state ownership in Slovenian companies. Big trades are almost always
done OTC.44
The main stock exchange index in Slovenia is the SBI20. The composition of the index is
described below. The SBI20 declined by almost 68 percent in 2008, and overall equity market
capitalisation fell below EUR 8.5 billion at the end of 2008.45
Data Table
Slovenia - Ljubljana Stock Exchange - Market capitalisation of listed companies
(domestic equities and exclusive foreign listings) - Equity excluding investment fund

41 Slovenia - Ljubljana Stock Exchange - Market capitalisation of listed companies


(domestic equities and exclusive foreign listings) - Equity excluding investment fund shares
Euro,

European

Central

Bank,

available

at

http://sdw.ecb.europa.eu/quickview.do?

SERIES_KEY=181.SEE.A.SI.JSE0.MKP.W.E
42 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of
Slovenia

(IMF

Working

Paper

WP/07/229),

Washington,

September

2007

http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf
43 Bems, Rudolf, and Piritta Sorsa, Efficiency of the Slovenian Banking Sector, IMF and
OECD, October 2008
44 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of
Slovenia

(IMF

Working

Paper

WP/07/229),

Washington,

http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf
45 Id.

September

2007

shares - Euro
(Securities exchange - Trading Statistics)
Period

value

obs. status

2013

5173

2012

4911

2011

2010

2009

8462

2008

8468

2007

11554

2006

2758994

Stock Market Regulation


In terms of regulation, the LJSE Rules are the key LJSE Act, which regulates the areas of
securities, securities issuers, member firms (23) and securities trading. 46 The LJSE Rules
stipulate in particular the stock exchange market structure; conditions for listing, temporary
suspensions of trading and de-listings from the stock exchange market; obligations of
securities issuers; conditions for the admission of member firms and for termination of
membership; rights and obligations of member firms; monitoring of issuers and member
firms; and the exchange's measures related to issuers and member firms and rules on stock
exchange trading. The instructions and guidelines, adopted on the basis of the LJSE rules,
define principles and procedures laid down by the LJSE rules in more detail. These are:
Instructions for Regulated Market Issuers, Trading Instructions, Instructions for Admission
and Monitoring of Member Firms and BTS Traders, Instructions for Indices, Liquidity
Criteria, Price List and other Statistical Data.47
Clearing of Stock Trades
46 International Monetary Fund, Republic of Slovenia: Financial System Stability Assessment
(IMF

Country

Report

No.

01/161),

Washington,

http://www.imf.org/external/pubs/ft/scr/2001/cr01161.pdf

September

2001

Slovenia has a single, centralised clearing/settlement company and securities register, the
Central Securities Clearing Corporation (KDD). KDD was established in 1995 and is a
privately owned institution, with its shareholders being the major market participants, namely
banks, stock-broking firms, fund management companies, and issuers. Whereas under the
Slovenian legislation any qualified institutions can clear LJSE trades, in practice all LJSE
trades are still cleared by the Slovenian clearing company KDD. This may change, however,
in connection with the takeover of the LJSE by the Vienna Stock Exchange, and the
increasing international integration of the Slovenian financial market. The shares for all
Slovenian companies have been dematerialised since 1999 and are held in KDDs central
register. KDD records the legal owner of the shares and this is largely relied upon as the basis
on which company law enforcement and compliance is assessed.48
Equity Ownership and Corporate Governance
Equity ownership in Slovenia is widespread, primarily as a result of mass privatisation after
independence. Whereas favourable stock market developments over the past few years had
encouraged further equity investment, primarily through mutual funds, this trend was
reversed in 2008 as the stock market slumped. Also, as a result of the privatisation process,
share ownership in Slovenia is public, as all shares need to be registered in a public share
register maintained by the KDD Securities Depository. Corporate governance is a major
concern in Slovenia, due to the web of crossholdings among companies, including in the
financial sector, and the strong involvement of the state in the ownership of the financial and
the corporate sectors.49
Venture Capital

47 Republic of Slovenia: Financial System Stability Assessment - Update (IMF Country


Report

No.

04/137),

Washington,

May

2004

http://www.imf.org/external/pubs/ft/scr/2004/cr04137.pdf
48 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of
Slovenia

(IMF

Working

Paper

WP/07/229),

Washington,

http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf
49 Id.

September

2007

The venture capital market in Slovenia is considered to be underdeveloped. In the past five
years, there were only 23 venture capital investments i.e. on average 4-5 investments per
year. In order to develop its venture capital market, the Slovene Enterprise Fund (SEF) is in
the process of establishing a public Venture Capital Company (First Venture Capital
Company, LTD). The Venture Capital Company will be managed by First Capital, LTD, a
Fund subsidiary company established in 2007. 50 The latter will be responsible for the
functioning and use of the European Structural resources for SME equity financing through
this public Venture Capital Company.51 First Venture Capital Company will operate within
principles of public-private partnership, co-operate with external experts in the assessment
procedures, and obtain supervision over the use of financial means for SMEs equity
financing.52
Exchange-Traded Derivatives
Currently, there are no organised derivatives and structured products markets in Slovenia.
One of the reasons appears to be the unfavourable tax treatment of derivatives, which
according to market participants attract 40 percent capital gains tax during the first year. A
number of derivatives, mostly warrants and certificates on five of the largest Slovenian
stocks, are, however, traded on the Stuttgart Stock Exchange in Germany. The BoS reports
selling pressure on the LJSE when the issuers of these products liquidate their hedging
positions, as for example in connection with knock-out levels on structured instruments being
breached.53
Recent reform measures
50 Id at p. 64.
51 OECD (2012a), OECD Reviews of Innovation Policy: Slovenia 2012, OECD Publishing,
http://dx.doi.org/10.1787/9789264167407- en.
52 Tang, G. and C. Upper (2010), Debt Reduction after Crises, BIS Quarterly Review,
Bank for International Settlements, September
53 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of
Slovenia

(IMF

Working

Paper

WP/07/229),

Washington,

http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf

September

2007

The major recent changes in regulatory policy were the consequence of the implementation
of EU directives. An important novelty at the LJSE is the possibility of remote access to the
Exchange trading system for member firms. Remote membership is intended for brokerage
firms who would like to trade on the LJSE electronic order book BTS through remote access,
enabled by the LJSE through the Internet. They can thus provide their clients outside of
Slovenia the opportunity to trade on the LJSE and enable them to directly enter the Slovene
capital market.54 To this end, the LJSE amended its Rules in 2007, which now allow for
remote access to the Exchange trading system. Remote trading has not yet taken off, though.
Besides current market conditions, the KDD clearing arrangements do not yet appear ideally
suited to online trading, as (1) currently the KDD retains the power to suspend remote
members clearing bank activities (in the case of a remote member default on delivering cash
or securities toward KDD), (2) the system of fiduciary accounts is not developed in Slovenia,
and (3) the KDD cannot act as a central counterparty. Enterprise issues in Slovenia, including
in the financial sector, are covered more comprehensively in the report of the OECD Steering
Group on Corporate Governance.55
Performance of Stock Market
Notwithstanding Slovenias efforts to bring its securities market legal infrastructure in line
with EU directives, capital markets in Slovenia are not well developed by OECD standards.
Slovenias capital markets are extremely limited in both depth and liquidity, and perhaps as
a consequence, have a narrow, largely domestically focussed investor base. 56 For example,
total market capitalisation of the LJSE remains small in absolute terms, standing at 8.5
billion (as at 31 December 2014), which represented 25.2 per cent of GDP and a sharp drop
from the 57.1 percent share recorded the previous year, when market capitalisation was just
under 20 billion. There were over 200 issuers listed on the Ljubljana Stock Exchange at the
time of the mass privatisations, but this number has steadily diminished over time. Owing in
part to some buyouts but also to the delisting of many smaller companies, there are now only
54 Id.
55 Id.
56

OECD

Economic

Surveys

Slovenia,

http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf

April

2013,

available

at

about 90 or so issuers in the listed equity markets (7 companies comprise the prime segment,
18 are in the standard segment, and 61 are in the entry segment).57

Slovenian companies mostly prefer bank loans as a source of funds, because it is relatively
cheap, so the bond market is largely undeveloped. While a handful of companies draw upon
fixed-income instruments, many of the largest companies are funded directly by loans from
foreign banks, via domestic subsidiaries, foreign branches, or directly from abroad.58
Factors Affecting Stock Market Stability
1. Public ownership is large: The 10 largest listed companies are state owned.
Competition in the product market is not vibrant enough notably as state ownership
is large and the Competition Authority has been lacking resources to facilitate
economic adjustment.59
2. Banking Crisis: Slovenia is facing a severe banking crisis, driven by excessive risk
taking, weak corporate governance of state-owned banks and insufficiently effective
57 Id.
58 International Monetary Fund, Republic of Slovenia: Financial System Stability Assessment
(IMF

Country

Report

No.

01/161),

Washington,

September

2001

http://www.imf.org/external/pubs/ft/scr/2001/cr01161.pdf
59

OECD

Economic

Surveys

Slovenia,

http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf

April

2013,

available

at

supervision tools. Major stateowned banks have been recapitalised several times.
Additional capital needs are expected but their amount remains uncertain as the main
results of earlier stress tests and due-diligence analysis have not been disclosed and
their assumptions are most likely outdated. The creation of the Bank Asset
Management Company to ring-fence impaired assets is welcome, but lack of
transparency and potential political interference pose risks.60
3. Foreign Direct Investment is low per cent of GDP: The corporate sector has a
severe debt overhang and some firms face insolvency, while existing insolvency
procedures are long and result in low recovery rates. Limited equity markets and the
backlog in the privatisation programme are hindering foreign direct investment,
whose increase would help smooth corporate deleveraging. An agreement on a list of
public assets to be privatised or managed by a new sovereign holding company is still
lacking.61
4. Limited Protection of Minority Shareholders: The scope of the stock market to
finance the economy is limited by the high degree of state ownership in the ten largest
listed companies and weak protection of minority shareholders. Privatisation
supported by the definition of a clear asset management strategy, better disclosure of
related-party transactions to enhance investor protection and further strengthening of
operational and financial independence of the Securities Market Agency would all
bolster financial deepening and improve overall market discipline.62
5. Ineffective Supervision by the Securities Market Agency (SMA): A large share of
NPLs is attributed to LBOs. However, there are large-scale circumventions of rules in
this regard and many disclosures are not made.63
60 OECD (2012a), OECD Reviews of Innovation Policy: Slovenia 2012, OECD Publishing,
http://dx.doi.org/10.1787/9789264167407- en.
61 Republic of Slovenia: Financial System Stability Assessment - Update (IMF Country
Report

No.

04/137),

Washington,

May

2004

http://www.imf.org/external/pubs/ft/scr/2004/cr04137.pdf
62

OECD

Economic

Surveys

Slovenia,

http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf
63 Id

April

2013,

available

at

6. Poor Corporate Governance Norms: Another risk is related to weak corporate


governance in the context of extensive public ownership, notably in the banking
sector (about 40% of banking loans are issued by stateowned banks and more banks
are state-controlled). A weak framework for the governance of state-owned banks
(SOBs) in Slovenia is likely to have contributed to poor credit standards, excessive
risk taking by banks and misallocation of credit. Excessively favourable credit
conditions have underpinned unsustainable mergers and acquisitions, management
buy-outs or buy-outs of public shares at high market values. Moreover, preliminary
findings of the Slovenian Corruption Prevention Commission have recently pointed to
widespread credit misallocation, likely related to corrupt behaviour. The dominance of
state ownership appears to have undermined the quality of banking supervision by the
Bank of Slovenia, which did not take sufficient steps to prevent large and connected
exposures.64 Anecdotal evidence also indicates mismanagement of the SOBs. As an
example of credit misallocation, the two largest SOBs Nova Ljubljanska Banka
(NLB) and Nova Kreditna Banka Maribor (NKBM) extended loans amounting to,
respectively, 20% and 15% of their capital to Zvon Ena, a financial holding company,
which is currently under bankruptcy procedures. These two banks have also been
heavily exposed to major construction companies. They appear to be among the least
efficient in Slovenia, particularly on a profit basis. There have been frequent changes
in the composition of management and supervisory boards of these banks and several
chief executive officers have cited political interference as one of the reasons for their
decision to resign.65

ROMANIA
STOCK MARKETS

AND

FACTORS AFFECTING THEIR STABILITY

IN

ROMANIA

64 Republic of Slovenia: Financial System Stability Assessment - Update (IMF Country


Report

No.

04/137),

Washington,

May

2004

http://www.imf.org/external/pubs/ft/scr/2004/cr04137.pdf
65

OECD

Economic

Surveys

Slovenia,

http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf

April

2013,

available

at

In 2013, Romania had a GDP (PPP) of around $386 billion and a GDP per capita (PPP) of
$19,397. According to CIA's The World Factbook, Romania is an upper-middle income
country economy. According to Eurostat, Romania's GDP per capita (PPS) was at 55% of the
EU average in 2013, an increase from 42% in 2007 (the year of Romania's accession to the
EU).66
After 1989 the country experienced a decade of economic instability and decline, led in part
by an obsolete industrial base and a lack of structural reform. From 2000 onwards, however,
the Romanian economy was transformed into one of relative macroeconomic stability,
characterised by high growth, low unemployment and declining inflation. In 2006, according
to the Romanian Statistics Office, GDP growth in real terms was recorded at 7.7%, one of the
highest rates in Europe. However, a recession following the global financial crisis of 2008
2009 forced the government was forced to borrow externally, including an IMF 20bn bailout
program. GDP has been growing by over 2% each year since. According to IMF, the GDP per
capita purchasing power parity grew from $14,875 in 2007 to an estimated $19,397 in 2014.
Romania has one of the lowest net average monthly wage in the EU in 2013 of 387, and an
inflation of 3.7%. Unemployment in Romania was at 7% in 2012, which is very low
compared to other EU countries.
Industrial output growth reached 6.5% year-on-year in February 2013, the highest in the EU27.

The

largest

local

Dacia, Petrom, Rompetrol, Ford

companies

include

carmaker Automobile

Romania, Electrica, Romgaz, RCS

&

RDS andBanca

Transilvania. Exports have increased substantially in the past few years, with a 13% annual
rise in exports in 2010. Romania's main exports are cars, software, clothing and textiles,
industrial machinery, electrical and electronic equipment, metallurgic products, raw materials,
military equipment, pharmaceuticals, fine chemicals, and agricultural products (fruits,
vegetables, and flowers). Trade is mostly centred on the member states of the European
Union, with Germany and Italy being the country's single largest trading partners. The
account balance in 2012 was estimated to be 4.52% of the GDP.
After a series of privatizations and reforms in the late 1990s and 2000s, government
intervention in the Romanian economy is somewhat lower than in other European
economiesIn 2005, the government replaced Romania'sprogressive tax system with a flat
66

OECD

Economic

Surveys

Romania,

http://www.oecd.org/eco/surveys/Overview_Romania.pdf

April

2014,

available

at

tax of 16% for b. oth personal income and corporate profit, among the lowest rates in the
European Union. The economy is predominantly based on services, which account for 51%
of GDP, even though industry and agriculture also have significant contributions, making up
36% and 13% of GDP, respectively. Additionally, 30% of the Romanian population was
employed in 2006 in agriculture and primary production, one of the highest rates in Europe.
Since 2000, Romania has attracted increasing amounts of foreign investment, becoming the
single largest investment destination in Southeastern and Central Europe. Foreign direct
investment was valued at 8.3 billion in 2006. According to a 2011 World Bank report,
Romania currently ranks 72nd out of 175 economies in the ease of doing business, scoring
lower than other countries in the region such as the Czech Republic. Additionally, a study in
2006 judged it to be the world's second-fastest economic reformer (after Georgia).
Since 1867 the official currency has been leu (Romanian leu), and following a denomination
in 2005, it has been valued at 0.20.3. After joining the EU in 2007, Romania is expected to
adopt the euro sometime around 2020.
Stock Market in Romania and determinants affecting its stability
The Bucharest Stock Exchange (BVB) the stock exchange located in Bucharest, Romania.
The total market capitalisation equals almost 30 billion ($33.5 billion) as of January 2015.
By January 2015, there were 83 companies listed on BVB's regulated market. In 2013, the
main indexBET went up by 26.1%, placing BVB as the 14th best performing stock exchange
globally. Since August 2013, Ludwik Sobolewski is the CEO of BVB.67

67

OECD

Economic

Surveys

Romania,

http://www.oecd.org/eco/surveys/Overview_Romania.pdf

April

2014,

available

at

Beginnings of the history of the Bucharest Stock Exchange can be traced back to 1839, when
the commodities-trade exchanges were established in Bucharest. It was nevertheless only
until December 1st, 1882 that the BVB was officially inaugurated. One week later, the first
exchange rates begun being published in the Official Gazette. Throughout its existence, the
activities of the Bucharest Stock Exchange were affected by the socio-political events of the
time, such as the Romanian Uprising of 1907 or the Balkan Wars that took place between
1912 and 1913. The stock exchange was moreover closed during the First World War. When
BVB re-opened following the end of the war, it went through a period of 7 years of
significant growth, followed by a period of 7 years of accelerated loss. The activity of the
Market for Effects, Actions and Exchange was stopped in 1948, with the establishment of
the Communist regime in Romania and the beginning of the nationalisation process. At that
time, shares issued by 93 companies and 77 fixed-income instruments (bond type) were listed
on the Bucharest Stock Exchange. The Bucharest Stock Exchange reopened again in 1995,
after almost 50 years since it was shut down by the Communist regime. The first trading
session was carried out on November 20, 1995. On that date, 905 shares issued by 6 listed
companies were traded. In 2005, BVB absorbed RASDAQ the over-the-counter electronic
stock market. On February 14th, 2008,Erste Bank listed on BVB and became the first
international company listed on the regulated market. Subsequently, Bucharest Stock
Exchange has experienced a continuous development and is now established as the main
stock exchange in Romania. In 2010, Bucharest Stock Exchange listed on its own spot

regulated market under the symbol BVB. In 2010, the Alternative trading system was
launched by BVB for SMEs and start-up companies wanting to raise capital from the market.
At the end of 2014, it was announced that the equities segment of the ATS market will be relaunched under a new name 'AeRO' which stands for Alternative Exchange in Romania.
AeRO is scheduled to relaunch on February 25th, 2015 during an official opening of the
trading session. AeRO will target early stage companies, to finance their projects, growth
stories, increase their visibility and contribute to the development of the business
environment. On December 15th, 2014 BVB has launched a new website, synchronized with
all the channels used by BVB, including social media pages. On March 27, 2015, BVB
announced that it was joining the United Nations Sustainable Stock Exchanges
initiative making it the 19th stock exchange to join. 68
The Bucharest Stock Exchange is a market and system operator authorized by the Financial
Supervisory Authority (FSA) that manages a Regulated market (RM) and an Alternative
Trading System (ATS) compatible with European standards. BVB also operates a market
section called RASDAQ. The following types of financial instruments are traded on BVB:
shares, rights, bonds, fund units, structured products and futures contracts. BVB operating
revenues are generated mainly from trading activity, from membership and listing fees, as
well as from data vending to various users.
Regulated Market
The main market of BVB is a spot regulated market where financial instruments such as
shares and rights (issued by international and Romanian entities), debt instruments
(corporate, municipality and government bonds) issued by Romanian entities and
international corporate bonds, UCITs (shares and fund units), structured products and ETFs
are traded.
In order to be listed on the regulated market, a company has to fulfill a number of
requirements prior to its listing on BVB:

68

Be a joint stock company (SA)

Have the value of market capitalization / shareholders equity of at least 1 million


euro
OECD

Economic

Surveys

Romania,

http://www.oecd.org/eco/surveys/Overview_Romania.pdf

April

2014,

available

at

Have a free-float of at least 25% (shares not owned by the company, nor by strategic
investors)

Be active on the market for the last 3 years and have available financial reports from
that period.

RASDAQ Market
RASDAQ market was launched in 1996 and it accommodates shares and rights issued by
Romanian entities coming from the mass privatization programme. In 1999, there were more
than 5,500 Romanian companies listed on RASDAQ. On September 30, 2014 the Romanian
Parliament decided that the RASDAQ market should be dissolved. The market still remains
operational however it is no longer possible to list on it. Companies listed on RASDAQ can
decide to promote to the regulated or ATS given that they fulfill the necessary admission
criteria.
Legal Framework
The legal framework for exchange operations in Romania is provided by the following legal
acts:

The Capital Market Law no. 297/2004

CNVM Regulation no. 1/2006 on Issuers and Operations with Securities

CNVM Regulation no. 2/2006 on Regulated Markets and Alternative Trading System

Additionally, the BVB is governed by Constitutive Act of the Commercial Company Bursa de
Valori Bucuresti S.A. and the Regulation on the Organization and Functioning of the Bursa de
Valori Bucuresti whereas the respective markets are governed by the Bucharest Stock
Exchange Rulebook for Market Operators and ATS Rulebook for System Operators.
Determinants of Stock Market69
Graff (1999) stated that there are four possibilities concerning the causal relationship between
financial development and economic growth: (1) financial development and economic growth
are not causally related. An example of this type of relation could be found in the
69 Romania- Market capitalisation of listed companies (domestic equities and exclusive foreign listings) Equity excluding investment fund shares Euro, European Central Bank, available at
http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=181.SEE.A.SI.JSE0.MKP.W.E Andritzky, Jochen R.,
Capital Market Development in a Small Country: The Case of Romania (IMF Working Paper WP/07/229),
Washington, September 2007 http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf

development of modern economy, in Europe, in the 17th Century. In this case, the economic
growth was the result of real factors, while the financial development was the result of
financial institutions development. (2) financial development follows economic growth. In
this context, economic growth causes financial institutions to change and to develop, so as
both the financial and credit market grow. (3) financial development is a cause of economic
growth. In this case, there could be identified two possibilities, respectively: (a) financial
development is a precondition for economic growth; (b) financial development actively
encourages economic growth (see, e.g. Thornton, 1995). Provided that there are no real
impediments to economic growth, mature financial systems can cause high and sustained
rates of economic growth (see, Rousseau and Sylla, 2001). (4) financial development is an
impediment to economic growth. Similar to the previous posibility, causality runs from
financial development to real development, but the focus lies on potentially destabilizing
effects of financial overtrading and crises (see, e.g. Stiglitz, 2002) rather than on the efficient
functioning of the financial system. This view considers the financial system as inherently
unstable. The economic growth is a complex process that is influenced by more factors, other
than the capital market development. Moreover, capital market development is the results of
many influence factors.70
There are several interdependencies between these factors, which makes it difficult to
establish and isolate the causal relation between the economic growth and the capital market
development. There are several empirical studies that analyse the correlation between the
economic growth and the financial development. Calderon and Liu (2002), studying the
direction of this causality, conclude that, as a general trend, the financial development
generates economic growth, the causal relation being stronger in the emergent countries and
being explained by two channels: the fast capital accumulation and the growth of
productivity. Rajan and Zingales (1998) emphasize that the financial development is a
prediction element for the economic growth, because the capital market reflects the present
value of the future growth opportunities. The ex-ante development of the financial markets
facilitates the ex-post economic growth of the external financing dependent sectors. Levine
(1997) and Levine and Zevros (1998) consider that the capital markets liquidity is a good
predictor of the GDP per capita growth and of the physical capital and productivity growth,
but other indicators of the capital market development such as volatility, size and
international integration are not significant for explaining economic growth. Carlin and
70 Id

Mayer (2003) analyse the link between financial systems and economic growth for developed
countries and reveal a link between financial system and type of economic Quantitative
Methods Inquires 68 activities which can influence the economic growth. Arestis,
Demetriades and Luintel (2001), use the autoregressive vector for an empirical analysis on
five developed economies; their study concludes that the capital market has effects on the
economic growth, but the impact of the banking sector is stronger. Filer, Hanousek and
Campos (1999) notice that capital markets include the future growth rates in current prices,
especially in the developed countries, which is a result consistent with the efficient markets
hypothesis. Although in cross-country analyses it can be depicted a correlation between the
financial development and the economic growth, we can question if, in the emergent
countries, an active capital market is a stimulating factor for the economic growth. An
affirmative answer would imply an important role of the public policies and international aid
targeted at introducing and maintaining the capital market structures (see Filer, Hanousek and
Campos, 1999). The previous empirical studies assessed and quantified the correlation
between capital market development and economic growth using different techniques4 . The
variables used in these studies can be grouped in the following categories: (A) Capital market
variables: - size variables: market capitalization/GDP ratio (used by Filer, Hanousek and
Campos, 1999), the logarithm of the stock market capitalization ratio5 (used by Arestis,
Demetriades and Luintel, 2001); - liquidity variables: turnover ratio6 and value traded ratio7
(used by Levine and Zevros, 1998) - volatility variables: eight-quarter moving standard
deviation of the end-of-quarter change of stock market prices (used by Arestis, Demetriades
and Luintel, 2001) (B) Economic growth variables: logarithm of real GDP (used by Arestis,
Demetriades and Luintel, 2001), GDP growth rate (used by Baier, Dwyer Jr. and Tamura,
2004), GDP per capita growth rate (used by King and Levine, 1993). 71

71 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of
Romania

(IMF

Working

Paper

WP/07/229),

Washington,

http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf

September

2007

SPAIN
ASSESSING SPAINS STOCK MARKET, ITS DETERMINANTS AND FACTORS
CONTRIBUTING TO ITS STABILITY
Introduction
Overall, the rapid development in the market for credit risk transfer played a major role
altering banks functions. Structurally, securitization allowed banks to turn traditionally
illiquid claims (overwhelmingly in the form of bank loans) into marketable securities. The
development of securitization has therefore allowed banks to off-load part of their credit
exposure to other investors thereby lowering regulatory pressures on capital requirements and
raise new funds. The massive development of the private securitization market experienced in
recent years coincided with a period of low risk aversion and scant defaults. This resulted in a
number of shortcomings in firms risk management tools and models, which often used
default figures from this period and tended to underestimate default and liquidity risk. The
most prominent example is the securitization of mortgage loans which diversify idiosyncratic
risks but renders the underlying portfolio subject to macroeconomic risks including declines
in housing prices.72
A number of studies have analyzed the impact of securitization on financial stability from a
wider perspective. The broad idea is that the availability of credit risk transfer mechanisms
have changed banks role dramatically from traditional relationship lending-based to
72

Special

Data

Dissemination

Standard,

<http://dsbb.imf.org/pages/sdds/DQAFBaseCollapsed.aspx?ctycode=SVK&catcode=SPI00>

originators and distributors of loans. This change has implications on banks incentives to
take on new risks.
However, the overall view prior to the crisis was that in addition to allowing lenders to
conserve costly capital, securitization improved financial stability by smoothing out the risks
among many investors. Indeed, a widely held view prior to the recent global credit crisis,
underlined the positive effect of securitization in diversifying credit risk across the financial
system, strengthening its overall resilience. From the perspective of individual banks
securitization was expected to be used to modify their risk profile by allowing them to
manage more effectively their credit risk portfolio geographically or by sector. Scant early
empirical evidence from the pre-crisis period also goes in this direction. It is argued that
securitization increases bank profitability and leverage while reducing overall insolvency
risk. Other studies also found a positive effect of securitization on bank performance. In
particular, banks more active in the securitization market were found to have lower solvency
risk and higher profitability levels and were better capitalized.
At the same time there were progressively more skeptical views on the impact of
securitization on the financial system stability. Some argue that by making illiquid loans
liquid securitization could increase, other things being equal, the risk appetite of banks. Risk
sharing within the financial sector through securitization can also amplify bank risks, they
also can increase systemic risk level shows that an the liquidity of bank assets attained to
securitization increases banking instability and the externalities associated with banking
failures, as banks have stronger incentives to take on new risk.
Lending and housing prices and securitization

An important feature in many countries is the role of securitization in the lending and housing
prices boom and burst. At the macroeconomic level, the dynamics of the relationship between
lending, housing prices and securitization have been largely unexplored although a rising
interest has emerged recently with the financial crisis. There is an empirical literature
studying the interaction of lending and housing prices both at the international and the
individual country levels.In addition the cyclical component of mortgage credit and its
interaction with property prices has been underscored, suggests that developments in the
financial sector such as securitization may have enhanced more financial-sector-induced
procyclicality than in the past creating higher probability for a meltdown.
Interestingly, most the evidence tends to suggest a strong impact from housing prices to credit
than from credit to housing prices. In this respect recent evidence has also shown that
subprime credit activity did not seem to have had much impact per se on subsequent housing
price returns for the US. On the other hand, securitization seems to have strengthened the
impact of housing prices on mortgage credit. This latter factor seems to be particularly
important in light of the recent crisis. In this respect there is mounting evidence suggesting
that securitization activity has led to laxer screening of borrowers in the years prior to the
crisis. The reasoning tends to be that by creating informational distance between the
loans originator and the ultimate bearer of the loans default risk, securitization can
potentially reduce lenders incentives to carefully screen and monitor borrowers. In other
words, the idea is that as securities are passed through from originating banks balance sheets
to the markets there might be more incentives for financial intermediaries to devote less effort
to screen borrowers. In the short term this would contribute to looser credit standards, less
credit-worthy borrowers than in the past were denied credit would be able to obtain it. In the
long term, this would lead to higher default rates.

The laxer screening of borrowers is typically linked to an expansion in the credit granted.
Indeed, using comprehensive information broken down by US postal zip codes it is shown
that securitization played an important role in the expansion of the supply of credit. In this
direction studying the evolution of credit quality in the US from 2000 to 2006 it is suggested
that lending standards declined more in areas that experienced larger credit booms and
housing price increases. They also find that lending standards declined more in areas with
higher mortgage securitization rates. Results suggest that existing securitization practices did
adversely affect the screening incentives. Analyzing the subprime lending they show that
conditional on being securitized, the portfolio with greater ease of securitization defaults by
around 10%25% more than a similar risk profile group with a lesser ease of securitization.
These results suggest that screening and monitoring incentives may diminish with
securitization.
There is also evidence that securitization has quantitatively increase the amount of credit
granted making it less dependent on specific banking or monetary policy conditions. It is also
seen that the increasing depth of the mortgage secondary market fostered by securitization
has reduced the effect of lender financial conditions on credit supply. In line with this
hypothesis, it is found that, prior to the current financial crisis, banks making more use of
securitization were more sheltered from the effects of monetary policy changes. However,
their macro-relevance exercise highlights that the shock-absorber role of securitization on
bank lending could even reverse in a situation of financial distress.
Securitization, risk-taking and rating changes
A recent strand of the literature concentrates on the role that securitization has on risk- taking
and the determinants of the credit quality of the securities themselves. This is the area where
our paper aims to contribute by analyzing the determinants of rating changes also considering

the relationships between securitization, lending and financial instability addressed in the
previous sections.
Part of the most recent empirical literature questioned whether securitization activity makes
further acquisition of risk more attractive for banks. In a report by Krahnen and Wilde (2006)
an increase in the systemic risk of banks, after securitization.
Enhancement of risk appetite is also related to the regulatory capital arbitrage. Securitization
has often been used by banks to lower their regulatory needs for costly equity capital charges.
However banks may have an incentive to securitize less risky loans thereby lowering their
capital positions. This behavior derives from the existence of high capital standards to exploit
the benefits of securitizing assets to undertake regulatory capital arbitrage. Through
securitization, banks can potentially increase capital adequacy ratios without decreasing their
loan portfolios risk exposure. In other words, banks may securitize less risky loans and keep
the riskier ones. In one of the research, it is empirically showed that securitized loans have
experienced lower ex-post defaults than those retained in balance sheet.
Bank capitalization plays a role in this respect. It is suggested by the researchers that pooling
has an information destruction effect that is costly for the intermediary. This effect is reduced
if the intermediarys private information is positively correlated across the assets. Hence if
the incentives of investors and banks are misaligned, banks -as originators- should also have
adequate capital so that warranties and representations can be taken seriously to avoid a bad
use of securitization. A more scant but very recent literature considers the dynamics of rating
changes in securitized deals. Rating agencies perform a unique role in this respect. Analyzing
downgrades, it is found that ABS downgrades have an impact on the originating bank
parents performance. There are evidences that ratings levels were less conservative around
the MBS market peak of 2005-2007. The involvement of rating agencies should go beyond

providing passive credit-quality certification and theoretically includes a more active


approach over the economic cycle. This is crucial for our analysis as large part of our
empirical analysis revolves around the issue of how rating changes of the underlying deals
are determined.
The Spanish case: a changing role for securitization
Little has been said or explored on a possible role for securitization in triggering lending in
countries that experienced a lending and housing bubble in the years before the crisis, such as
Spain. On the latter, housing prices in the years prior to the crisis have been particularly
noticeable in some European countries, the UK, Ireland and Spain -where housing prices
have increased by more than 180% only between 1997 and 2007- the largest growth among
major industrialized countries. Mortgage financing has also been the focus of the debate in
these countries.
The stock market index is as under:

PORTUGAL
ASSESSING PORTUGALS STOCK MARKET, ITS DETERMINANTS AND
FACTORS CONTRIBUTING TO ITS STABILITY
The assessment of market risk has long posed a challenge to many types
of economic agents and researchers (see, for instance, Granger (2002)
for an overview). Market risk arises from the random unanticipated
changes in the prices of financial assets and measuring it is crucial for
investors. Besides its interest to portfolio managers, the assessment of
market risk is relevant for the overall risk management in banks and
bank supervisors. Although bank failures are traditionally related with an
excess of non-performing loans (the so-called credit risk), the failure of
the Barings Bank in 1995 showed how market risk can lead to
bankruptcy. Furthermore, market risk has received increasing attention
in recent years as banks financial trading activities have grown.
Although the measurement of market risk has a long tradition in finance, there is still no universally agreed upon definition of risk. The
mod- ern theory of portfolio analysis dates back to the pioneering work of
Harry Markowitz in the 1950s. The starting point of portfolio theory rests
on the assumption that investors choose between portfolios on the basis
of their expected return, on the one hand, and the variance of their
return, on the other. The investor should choose a portfolio that
maximizes expected re- turn for any given variance, or alternatively,
minimizes variance for any given expected return. The portfolio choice is
determined by the investors preferred trade-off between expected return
and risk. Hence, in his seminal paper, Markowitz (1952) implicitly
provided a mathematical definition of risk, that is, the variance of
returns. In this way, risk is thought in terms of how spread-out the
distribution of returns is.

Later on, the Capital Asset Pricing Model (CAPM) emerged through the
contributions of Sharpe (1964) and Lintner (1965a, 1965b). Accord- ing
to the CAPM, the relevant risk measure in holding a given asset is the
systematic risk, since all other risks can be diversified away through
port- folio diversification. The systematic risk, measured by the beta
coefficient, is a widely used measure of risk. In statistical terms, it is
assumed that the variability in each stocks return is a linear function of
the return on some larger market with the beta reflecting the
responsiveness of an asset to movements in the market portfolio. For
instance, in the context of interna- tional portfolio diversification, the
country risk is defined as the sensitivity of the country return to a world
stock return. Traditionally, it is assumed that beta is constant through
time. However, empirical research has found evidence that betas are
time varying (see, for example, the pioneer work of Blume (1971, 1975)).
Such a finding led to a surge in contributions to the literature (see, for
example, Fabozzi and Francis (1977, 1978), Sunder (1980), Alexander
and Benson (1982), Collins et al. (1987), Harvey (1989, 1991), Ferson
and Harvey (1991, 1993) and Ghysels (1998) among others). One natural
implication of such a result is that risk measurement must be able to
account for this time-varying feature.
Besides the time-variation, risk management should also take into account the distinction between the short and long-term investor (see, for
ex- ample, Candelon et al. (2008)). In fact, the first kind of investor is
naturally more interested in risk assessment at higher frequencies, that
is, short-term fluctuations, whereas the latter focuses on risk at lower
frequencies, that is, long-term fluctuations. Analysis at the frequency
level provides a valuable source of information, considering that different
financial decisions occur at different frequencies. Hence, one has to
resort to the frequency domain analysis to obtain insights into risk at the
frequency level.
In this paper, we re-examine risk measurement through a novel
approach, wavelet analysis. Wavelet analysis constitutes a very promising

tool as it represents a refinement in terms of analysis in the sense that


both time and frequency domains are taken into account. In particular,
one can resort to wavelet analysis to provide a unified framework to
measure risk in the time- frequency space. As both time and frequency
domains are encompassed, one is able to capture the time-varying
feature of risk while disentangling its behavior at the frequency level. In
this way, one can simultaneously mea- sure the evolving risk exposure
and distinguish the risk faced by short and long-term investors. Although
wavelets have been more popular in fields such as signal and image
processing, meteorology, and physics, among oth- ers, such analysis can
also shed fruitful light on several economic phenomena (see, for example,
the pioneering work of Ramsey and Zhang (1996, 1997) and Ramsey and
Lampart (1998a, 1998b)). Recent work using wavelets in- cludes that of,
for example, Kim and In (2003, 2005), who investigate the relationship
between financial variables and industrial production and be- tween
stock returns and inflation, Gencay et al. (2003, 2005) and Fernandez
(2005, 2006), who study the CAPM at different frequency scales, Connor
and Rossiter (2005) focus on commodity prices, In and Kim (2006)
examine the relationship between the stock and futures markets,
Gallegati and Gal- legati (2007) provide a wavelet variance analysis of
output in G-7 countries, Gallegati et al. (2008) and Yogo (2008) resort to
wavelets for business cycle analysis, Rua (2011) focuses on forecasting
GDP growth in the major euro area countries, and others (see Crowley
(2007) for a survey). However, up to now, most of the work drawing on
wavelets has been based on the dis- crete wavelet transform. In this
paper we focus on the continuous wavelet transform to assess market
risk (see also, for example, Raihan et al. (2005), Crowley and Mayes
(2008), Rua and Nunes (2009), Rua (2010, 2012), Tonn et al. (2010), and
Aguiar-Conraria and Soares (2011a, 2011b, 2011c)).
We provide an illustration by considering the emerging markets case.
The new equity markets that have emerged around the world have
received considerable attention in the last two decades, leading to

extensive recent literature on this topic (see, for example, Harvey (1995),
Bekaert and Harvey (1995, 1997, 2000, 2002, 2003), Garcia and Ghysels
(1998), Estrada (2000), De Jong and De Roon (2005), Chambet and
Gibson (2008), Dimitrakopou- los et al. (2010), among others). The fact
that the volatility of stock prices changes over time has long been known
(see, for example, Fama (1965)), and such features have also been
documented for the emerging markets. The time variation of risk comes
even more naturally in these countries due to the changing economic
environment resulting from capital market liberal- izations or the
increasing integration with world markets and the evolution of political
risks. In fact, several papers have acknowledged time varying volatility
and betas for the emerging markets (see, for example, Bekaert and
Harvey (1997, 2000, 2002, 2003), Santis and Imrohoroglu (1997), and
Estrada (2000)). Moreover, the process of market integration is a gradual one, as emphasized by Bekaert and Harvey (2002). Therefore,
methods that allow for gradual transitions at changing speeds, such as
wavelets, are preferable to segmenting the analysis into various
subperiods. Hence, the emerging markets case makes an interesting
example for measuring risk with the continuous wavelet transform.
The Portuguese economy registered a lower decline in economic activity
during 2013 (-1.4%), in comparison to 2012 (-3.3%). The positive
performance of exports and a smaller contraction in domestic demand
and of investment were determining factors in this recuperation.
In the 3rd quarter of 2014, INE estimated an increase of 1.1% in GDP in
comparison to 2013. This was due to a more positive performance in
domestic

demand,

consumption,

mainly

meanwhile

reflected
net

in

external

the

increase

demand

had

of
a

private
negative

contribution, due to the acceleration of the imports of goods and


services. We note, however, that exports of goods and services in volume
terms showed an annual growth of 2.9% in the 3rd quarter of 2014.

The projections from the Banco de Portugal (BP) point to a real increase
in the Portuguese economy of 0.9% in 2014, supported by the increase of
consumption and private investment, as well as by exports (+2.6%). The
combined current and capital balance should be positive in 2014, 2.6% of
GDP. For 2015-2016 GDP is forecast to grow 1.5% and 1.6%, respectively,
being above the projected for the Euro Zone by the European Central
Bank

(1%

and

1.5%

respectively).

The

BP

considers

that

this

development is because of an acceleration of GFCF as well as a strong


increase in exports (+4.2% in 2015 and +5% in 2016), favouring the
continuing surpluses of the current and capital balance, thus enabling an
improvement in the international investment position.
At the end of last April, in the Medium-Term Budget Strategy
(Documento de Estrategia Orcamental de Medio Prazo - DEO), the
Government set out guidelines for public finances for the 2014-2018
period, wherein it advocates the continuation of the process of
adjustments

in

external

imbalances

and

an

effort

in

budgetary

consolidation.

In May 2014, the Government announced the end of the Economic and
Financial Assistance Programme - PAEF, (agreed with the EU and the
IMF in May 2011), without resorting to additional external financial
assistance thus gaining access to international debt markets. After three

years of the Programme, the Portuguese economy has made significant


progresses in the correction of a number of macroeconomic imbalances,
having implemented measures of a structural character in several areas.
According to the Banco de Portugal, the PAEF objectives were globally
met in certain aspects of the Portuguese economy, such as the net
financing capacity in relation to the exterior that was registered in 2012;
the

structural

primary

budget

surplus

in

2013,

ongoing

budget

consolidation, as well as the transfer of resources from the non-tradable


sector to tradable were several of the favourable elements that
contributed to the process for sustainable growth.
International trade
According to data released by the Banco de Portugal, in the last five
years exports and imports of goods and services registered annual
average growth rates of 9.6% and 2.3%, respectively. In 2013, exports of
goods and services showed an increase of 6.8%, in comparison to the
previous year, and imports showed a slight increase of 1.5%. The trade
balance of goods and services was positive in 2013, inverting the
negative tendency registered in the last decade.
In the period January-September 2014, year on year, the increase of
exports of goods and services were 2.2%, while imports were more
significant, 4.1%, while the rate of coverage was around 104%.
With regards to exports of goods, these increased in 2013, year on year,
4.5%, according to INE data, while imports decreased 0.9%. The trade
balance of goods continues to show a deficit in 2013, although this has
happened for the third consecutive year (-13.6% in relation to 2012 and
-51% between 2009 and 2013).
According to the same source, in the period January-September 2014
exports and imports of goods registered an increase of 1.0% and of 3.5%
respectively, year on year (the rate of coverage was 82% in this period).
The trade balance of goods remained negative in this period of 2014.

In the first nine months of 2014, machinery and tools continue to be the
most exported products (14.5% of the total), followed by vehicles and
other transport material (11.1%), mineral fuels (8.3%), base metals
(8.0%) and plastics and rubber (7.4%). These five main product groups
represent about 49% of the total exported by Portugal during this period
(against 51% in the previous year).
The principal destination for exports of goods is the EU28 (71.5% of the
total in the January-September 2014 period), PALOP (7.6%) and NAFTA
(5.3%), being that the EU28 and NAFTA increased their quotas in
relation to the same period in 2013. Portugals main clients Spain,
Germany, France, Angola and United Kingdom together represent
around 60% of total exports in this period. The main clients remain
almost identical in relation to 2013, with the exception of China (10th
client) that gained importance in relation to Morocco that dropped out of
the TOP 10.
In relation to the imports of goods, mineral fuels, machinery and tools,
agricultural products, vehicles and other transport material and chemical
products lead the ranking of purchases made during the JanuarySeptember 2014 period, representing 64% of the total. The EU28 was the
origin of most of the products imported during this period with 74.2% of
the total (against 70.7% in the same period of 2013), being Spain,
Germany, France, Italy, the Netherlands the main suppliers, that together
represented 62% of imports. A special mention is made to the arrival of
Brazil in the Top 10 of suppliers, to the detriment of Russia, and the
increase in the positions of Italy, United Kingdom and China and the
decrease in the position of Angola.

CONCLUDING AND COMPARATIVE ANALYSIS


On the basis of the foregoing analysis we conclude as under:

Slovakia consumer lending market, in addition to banks, an important role is also


currently played by other providers, which are usually denominated as non-banking
companies. On 24th March, 2015 a new notification came according to which the nonbanking companies can also give loan without obtaining a license from the National
Bank of Slovakia or from other state authorities, they only have to register in a socalled creditors registry administered by the NBS. This main obligation of a nonbanking company, when compared with the licensing procedures of other entities in
the financial sector represented a significantly simpler entry to the Slovak market,
without the need for fulfilling more demanding procedures.
The financial institutions are state-regulated companies which operate in the financial
market and have legal subjectivity. They are including also commercial banks and the
central bank in the territory of the Slovak Republic. The commercial banks are
considered to be one of the most important subjects in the financial system and
receive an extraordinary attention. Together with the central bank they constitute a

bank system. The Central Emission Bank is a managerial centre of the bank system. It
manages other banks mainly by means of indirect economic instruments. The total
indebtedness of households in Slovakia measured by the proportion of debts in their
gross disposable incomes still belongs to the lowest one in the European Union. The
higher the burden of incomes caused by installments the less resistant are households
to negative trends including the increase of unemployment or the growth of credit
installments caused by the rising interest rates.
The Slovakia Stock Market (SAX) decreased to 237.40 Index points in March from
257.98 Index points in February of 2015. Stock Market in Slovakia averaged 225.69
Index points from 1995 until 2015, reaching an all time high of 507.98 Index points in

March of 2005 and a record low of 70.19 Index points in March of 2000.
Slovenia- Notwithstanding Slovenias efforts to bring its securities market legal
infrastructure in line with EU directives, capital markets in Slovenia are not well
developed by OECD standards. Slovenias capital markets are extremely limited in
both depth and liquidity, and perhaps as a consequence, have a narrow, largely
domestically focussed investor base. For example, total market capitalisation of the
LJSE remains small in absolute terms, standing at 8.5 billion (as at 31 December
2014), which represented 25.2 per cent of GDP and a sharp drop from the 57.1
percent share recorded the previous year, when market capitalisation was just under
20 billion. There were over 200 issuers listed on the Ljubljana Stock Exchange at the
time of the mass privatisations, but this number has steadily diminished over time.
Owing in part to some buyouts but also to the delisting of many smaller companies,
there are now only about 90 or so issuers in the listed equity markets (7 companies
comprise the prime segment, 18 are in the standard segment, and 61 are in the entry
segment).73

Portugal- The Portuguese economy registered a lower decline in


economic activity during 2013 (-1.4%), in comparison to 2012 (3.3%). The positive performance
contraction

in

domestic

demand

of exports and a smaller


and

of

investment

were

determining factors in this recuperation. In the 3rd quarter of


2014, INE estimated an increase of 1.1% in GDP in comparison to
2013. This was due to a more positive performance in domestic
73 Id.

demand, mainly reflected in the increase of private consumption,


meanwhile net external demand had a negative contribution, due to
the acceleration of the imports of goods and services. We note,
however, that exports of goods and services in volume terms
showed an annual growth of 2.9% in the 3rd quarter of 2014. The
projections from the Banco de Portugal (BP) point to a real increase
in the Portuguese economy of 0.9% in 2014, supported by the
increase of consumption and private investment, as well as by
exports (+2.6%). The combined current and capital balance should
be positive in 2014, 2.6% of GDP. For 2015-2016 GDP is forecast to
grow 1.5% and 1.6%, respectively, being above the projected for
the Euro Zone by the European Central Bank (1% and 1.5%
respectively). The BP considers that this development is because of
an acceleration of GFCF as well as a strong increase in exports
(+4.2% in 2015 and +5% in 2016), favouring the continuing
surpluses of the current and capital balance, thus enabling an
improvement in the international investment position. At the end of
last April, in the Medium-Term Budget Strategy (Documento de
Estrategia Orcamental de Medio Prazo - DEO), the Government set
out guidelines for public finances for the 2014-2018 period,
wherein it advocates the continuation of the process of adjustments
in external imbalances and an effort in budgetary consolidation.
Spain Overall, the rapid development in the market for credit risk transfer played a
major role altering banks functions. Structurally, securitization allowed banks to turn
traditionally illiquid claims (overwhelmingly in the form of bank loans) into
marketable securities. The development of securitization has therefore allowed banks
to off-load part of their credit exposure to other investors thereby lowering regulatory
pressures on capital requirements and raise new funds. The massive development of
the private securitization market experienced in recent years coincided with a period
of low risk aversion and scant defaults. This resulted in a number of shortcomings in
firms risk management tools and models, which often used default figures from this
period and tended to underestimate default and liquidity risk. The most prominent

example is the securitization of mortgage loans which diversify idiosyncratic risks but
renders the underlying portfolio subject to macroeconomic risks including declines in
housing prices.74
Finally, the market capitalizations of these 5 Euro Zone members compare as under:

74

Special

Data

Dissemination

Standard,

<http://dsbb.imf.org/pages/sdds/DQAFBaseCollapsed.aspx?ctycode=SVK&catcode=SPI00>