Interest Not Taxable On Bonds Used To Finance Government Operations Why Is The Macedonian Stock Exchange Unsuccessful?

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Why Is The Macedonian Stock Exchange Unsuccessful?

The Macedonian Stock Exchange (MSE) did not operate successfully. True, some of the parameters we use to measure the success of the exchange have recently improved in MSEs. For example, the monthly cash volume increases with the number of transactions. But this is far from a success.

Who is to blame? Is the current management of MSEs incompetent?

I do not think so. Actually, I think MSE has an excellent management team, doing their best to incorporate new trading techniques and register new companies. The problem lies elsewhere.

The 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 a large proportion of corporate needs, well above the financing available from banks. Individuals and companies keep part of their income and invest it. The stock exchange is a meeting place for savers looking to invest their savings – and companies looking to invest.

Another function of the stock exchange is to assist governments in financing their internal borrowing needs. Governments sell obligations (called bonds) to investors through stock exchanges in their countries. Therefore, the stock exchange is an indispensable tool for refinancing the national debt.

But several conditions must apply before the stock exchange can function properly.

The most important condition is the existence of healthy economic growth on the country’s stock market. Investors flock to strong economies and avoid sickly ones.

At first glance, the Macedonian economy falls into the latter category. Unemployment is high, savings are low, growth is retarded, trade deficits and payments are gaping. But this is an optical illusion. The economy is in much better shape most Macedonians will admit. The unemployment rate is skewed. They reflect attempts to avoid paying social taxes – not real unemployment. The economy is growing, even by official forecasts. The black economy is growing faster. The deficit was covered by huge capital injections from donor countries. Macedonia receives more international credit per capita than Russia. It’s always convenient to blame the deteriorating economic climate – but the cold, objective numbers don’t support this.

When the economy grows – the profits of companies (including those registered with the MSE) will grow with it. This makes the shares of these companies an attractive buy.

Since nobody’s buying – we’ll have to look elsewhere for the problem.

A prosperous stock market is related to proper micro and macroeconomic management. Macedonia has more problems in this regard.

The business transformation process with social capital has four fundamental weaknesses:

first, it does not introduce new management, ideas, or capital to beleaguered companies that are “transformed.” The market simply does not believe that they have been changed. The same people run the same events under different hats.

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

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

In addition, changes in innovation and revitalization are all prevented. What change can come from a bunch of tired managers? How could thousands of owners decide to worsen labor conditions – if owners and workers were one and the same? Thus, management is tainted by irrelevant non-economic considerations: power struggles among groups of workers, social and political considerations.

We identified one criminal. The other is high (real) interest rates. When interest rates are high, three effects prevent stock market resuscitation:

First, companies have high financing costs (interest payments) – which reduce their profits. Secondly, there is no point in borrowing money and investing in stocks.

Thirdly, it is more tempting to invest money in bank deposits, which earn high interest rates – than in stocks. High interest rates are stock market poison.

The same goes for low savings rates. If people and companies don’t save – there is no available capital for stock investment.

This, precisely, is the current situation in Macedonia: very high interest rates coupled with very low savings. There is a basic mistrust between clients and their banks. They prefer other ways to save their money.

But all of the above is far from the list of prerequisites for the correct functioning of the stock exchange.

Investors must have timely, accurate and complete information about the companies they invest in. This will allow them to respond to company developments in real time and prevent losses. It will also make it difficult to deceive them – which is where we come to the question of accounting standards. It was only recently that the accounting rules in Macedonia were revised to conform with the Western accounting system. Even now, the resemblance is slim. Macedonian companies maintain a dual accounting system. One set of books is subject to tax. It is meant to show a loss or gain at the whim of management. Elaborate hidden reserve schemes lie at the heart of the typical financial statements of Macedonian companies. Another set of books – if kept at all – reflects reality. This is a huge barrier to foreign investment – and foreign investors are the driving force on every modern stock exchange.

Investors’ trust in the stock exchange is based on laws to protect their property rights over company management against authorities and against other investors who may want to cheat the market or manipulate share prices.

But laws without an effective justice and enforcement system are like a stock market without money. Enforcing property rights in Macedonia took a long time and even then the results were uncertain. Laws, regulations are in an embryonic stage and some of them seem to have an abortion: they were hastily and tactlessly copied word for word from the legal codices of other countries (Germany, England).

Last – but not least – is the existence of a market that is fair, transparent and not corrupt. Stock exchanges, banks, authorities, police and courts must be free from suspicion. For a market to be truly efficient – it must be completely free of any ulterior motives and considerations. Corruption distorts the mechanism and allocative power of the market. This is easy to see in transactions on the stock exchange for all to see. After all, the stock exchange is a showcase of the local economy.

But there was a problem that towered above all others and was nearly epidemic in Macedonia. This helps explain many of the difficulties of the stock market in Skopje. It is a fact that the market is losing its most important player: Government.

Investors – both foreign and domestic – expect the Government to be active in the local stock market. Governments around the world use their stock exchanges to sell shares of state-owned companies to their citizens. The stock exchange is a mechanism for distributing national wealth – as realized by state-owned enterprises – to all citizens. As we said before, governments also use stock exchanges to borrow money from their citizens.

The Macedonian government does neither. It completely ignores MSE. Not a single company has been privatized through the UMK. Not a single Denar was borrowed from Macedonians through it. Government activity on the stock exchange is proof that the government believes in it. Therefore, if it doesn’t operate on the exchange – it proves that it doesn’t trust it. If the government doesn’t believe in the stock market in its own country – why should investors?

There are several additional structural characteristics that are considered hallmarks of a healthy stock market. But it is a by-product of all the conditions mentioned above.

Stock exchanges must be liquid so that investors can convert their shares into cash easily and wisely. It has to cover a wide range of investment options – professionally, it has to be diversified. This will allow investors to choose from a variety of investments and also reduce their risk by dividing their money among several types of investments.

Stock exchange management can help him by introducing efficient trading techniques, computerized trading and settlement systems, and so on. The quicker investors run into their money when they sell their shares – the more inclined they are to operate on a stock exchange that allows them to do so. The easier it is for them to liquidate their assets by meeting buyers – the more they choose to work on the stock exchange.

Investing in stock exchanges in emerging markets has been an unprofitable decision in the last three years. Stock exchanges from Russia to Hungary and from Lithuania to Poland have booed since late 1993.

They resemble a roller coaster in their appearance, going up and down tens of percent every year. There are exceptions to this rule. The Ljubljana Stock Exchange, for example. Trading volume there has increased 10 times since December 1993 – and market capitalization has increased 30 times. But this is due to the general economic performance in Slovenia. In Croatia, the government privatized its holdings in state-owned companies by auctioning shares to the public through the Zagreb Stock Exchange. This really helps him.

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

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

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