Why is the Macedonian Stock Exchange not successful?

The Macedonian Stock Exchange (MSE) is not working properly. True, some of the parameters we use to measure the success of a stock market have improved lately on the BMV. For example, the monthly money volume has increased along with the number of transactions. But this is very far from success.

Who to blame? Is the current management of the MPE incompetent?

I don’t believe it. In fact, I think the MSE has an excellent management team, doing everything they can to incorporate new business techniques and list new companies. The problems are elsewhere.

A stock exchange is a very important financial market. It is a very efficient and visible financing instrument. In the West, it is used to finance most of the needs of corporations, well in excess of the financing available from banks. Individuals and companies save part of their income and invest it. The stock market is a meeting place for savers who want to invest their savings and companies looking for investments.

Another function of stock exchanges is to help governments finance their domestic borrowing needs. Governments sell obligations (called bonds) to investors through their countries’ stock markets. A stock market is therefore an indispensable tool for refinancing public debt.

But some conditions must prevail before a stock exchange can function properly.

The most important condition is the existence of a healthy and growing economy in the country of the stock market. Investors flock to robust economies and steer clear of sick ones.

At first glance, the Macedonian economy belongs to the latter category. High unemployment, low savings, retarded growth, a huge trade and payments deficit. But this is an optical illusion. The economy is in much better shape than most Macedonians would like to admit. The unemployment figures are skewed. They reflect efforts to evade paying social taxes, not actual unemployment. The economy is growing, even according to official estimates. The underground economy is growing even faster. Deficits are covered with huge injections of capital from donor countries. Macedonia is receiving more international credits per capita than Russia. It is always convenient to blame the worsening economic climate, but the cold and objective figures do not confirm it.

When an economy is growing, the profits of companies (including those listed on the MSE) will grow with it. This makes the shares of these companies an interesting buy.

Since no one is buying, we have to look elsewhere for the problem.

A prosperous stock market is linked to the existence of correct micro and macroeconomic management. Macedonia has more than its share of problems in this regard.

The transformation process of companies with social capital had four basic flaws:

First, it did not introduce new management, ideas, or capital to the embattled companies that were “transformed.” The market simply does not believe that they have been transformed. The same people run the same shows under a different hat.

Second, such a transformation violates the concept of Hierarchy, a chain of command.

It blurs the distinction between labor (workers) and capital (owners). What’s wrong with that is that a ship must have a captain, and only one. Someone must have the authority and responsibility. Collective management is not management at all.

In addition, innovation change and revitalization are prevented. What change could come from the same set of worn-out managers? How can thousands of owners decide to worsen labor conditions, if owners and workers are the same? So management is contaminated by irrelevant, non-economic considerations: power struggles between groups of workers, social and political considerations.

We identify a villain. The other is high (real) interest rates. When interest rates are high, three effects prevent the reactivation of the stock market:

First, companies have high financing costs (interest payments), which reduces their profits. Second, it is not worth borrowing money and investing in stocks.

Third, it is more tempting to invest money in bank deposits, which earn high interest rates, than in stocks. High interest rates are the poison of the stock markets.

The same is true for low savings rates. If people and companies do not save, there is no capital available to invest in stocks.

This is exactly the situation in Macedonia today: impossibly high interest rates coupled with extremely low savings. There is a basic mistrust between customers and their banks. They prefer other ways to keep their money.

But all of the above is far from exhausting the list of prerequisites for the proper functioning of a stock exchange.

Investors must have timely, accurate and complete information about the companies in which they invest. This will allow them to respond in real time to the evolution of the company and prevent losses. This will also make it difficult to fool them, and we come to the question of accounting standards. Only recently have accounting rules in Macedonia been revised to conform to Western accounting systems. Even now, the similarity is very slight. Macedonian companies maintain a double bookkeeping system. A set of books is taxable. It is meant to show profit or loss at the whim of management. An elaborate scheme of hidden reserves is at the heart of the typical financial statements of the Macedonian company. Another set of books, if they are preserved, reflects reality. This is a huge barrier to foreign investment, and foreign investors are the driving force in all modern stock markets.

Investors’ confidence in the stock market is based on legislation to protect their property rights against company management, authorities, and other investors who wish to rig the market or manipulate stock prices.

But legislation without an effective judicial and law enforcement system is like a stock market without money. Enforcing property rights in Macedonia takes a long time and even then the outcome is not certain. Laws, regulations are in their embryonic stage and some of them seem to have had an abortion: they were hastily and recklessly copied word for word from legal codices of other countries (Germany, Great Britain).

Last, but definitely not least, is the existence of a fair, transparent and non-corrupt market. The stock market, the banks, the regulatory authorities, the police and the courts have to be above suspicion. For the market to be fully efficient, it must be completely free of ulterior motives and considerations. Corruption distorts market allocation mechanisms and powers. It is easily discernible in the transactions on the stock exchange for all to see. A stock market is, after all, the showcase for the local economy.

But there is one problem that rises above all other problems and is almost endemic to Macedonia. It helps explain much of the stock market situation in Skopje. It is the fact that the market is missing its most important actor: the Government.

Investors, both foreign and domestic, expect the government to participate in the local stock market. Governments around the world use their stock exchanges to sell shares of state-owned companies to their population. The stock market becomes a mechanism for the distribution of national wealth – embodied in state companies – to all citizens. As we said before, governments also use the stock market to borrow money from their citizens.

The Macedonian government does not either. Totally ignores the MSE. No company was privatized through the MSE. Not a denarius was borrowed from a Macedonian citizen through him. A government’s activity on the stock market is proof that the government believes in it. Therefore, if he does not trade in the stock market, it proves that he does not believe in it. If the government doesn’t believe in their own country’s stock market, why should investors believe in it?

There are some additional structural features that are considered the hallmark of a healthy stock market. But those are the byproducts of all the aforementioned conditions.

A stock market must be liquid so that investors can easily and conveniently convert their shares into cash. It must include many investment options; in professional terms, you need to diversify. This will allow investors to choose from a variety of investments and also reduce their risks by spreading their money among a few types of investments.

Stock exchange management can help you by introducing efficient trading techniques, computerized trading and settlement systems, etc. The faster investors raise their money when they sell their shares, the more inclined they will be to trade in the stock market that allows them to do so. The easier it is for them to liquidate their assets by meeting with buyers, the more they will prefer to work on that stock exchange.

Investing in the stock markets of emerging economies has been an unfortunate decision in the last three years. The stock markets from Russia to Hungary and from Lithuania to Poland have been wildly taunted since late 1993.

They seemed like a roller coaster in their performance, going up and down tens of percent annually. There are exceptions to this rule. The Ljubljana Stock Exchange, for example. The trading volume there has increased 10 times since December 1993, and the market capitalization has increased 30 times. But this is due to the performance of the general economy in Slovenia. In Croatia, the government is privatizing its holdings in state-owned companies by auctioning shares to the public through the Zagreb Stock Exchange. This has helped him a lot.

The newly established stock markets are highly volatile and very dangerous. Volatility goes hand in hand with risk. They are long-term investments. Since 1988, they have outperformed the world’s most established stock exchanges, such as Wall Street.

But these stock markets are growing fast, are cheap by any measure, and are the best investment a country can make in its own future.