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Foreign Investments and Developing Countries: Dialog With Former Finance Minister of Macedonia Nikola Gruevski, Part IV

Sam Vaknin, Ph.D. - 2/19/2006

Nikola: And while one is having a problem with insufficient capital, others have a problem investing the surplus of capital, a problem of high liquidity.

For example, the Nomura company, as one of the most powerful investment banks in the world, with shareholders' capital of over 15 billion dollars, with 63 international offices in 26 countries, approximately 3 million client accounts and over 400 billion dollars in managed client funds, last year, "as a joke", bought 4000 pubs in England. It holds the first place in Central Europe (excepting Russia) as a leading provider of financing. Since 1995, in their capacity as lead managers, they invested 2,7 billion dollars in this region (source: Euromoney Bondware). JP Morgan are right behind them, judging by the same criteria, with 2,2 billion dollars, Daiwa Securities with $1,9 billion, Credit Swiss First Boston $1,6 billion, Merrill Lynch with 1,4 $billion. Nomura was the lead manager of the first public offering of bonds of the National Bank of Slovakia in 1994, to the tune of 25 billion yens. At the same year Nomura bought the municipal bonds of the city of Prague for 250 million US dollars, invested 24 million dollars in corporate bonds in Slovakia, invested 4 billion in Latvia, 15 billion in bonds of the National Bank of Hungary, 60 million $ in international bonds issued by Lithuania. In 1996, besides the issue of municipal bonds of the city of Tallinn, in Latvia (60 million DM), Nomura invested 50 billion yens in Romania, 70 million $ in corporate bonds in the Czech Republic, and in 1997 they invested 500 million $ in bonds of the City of Moscow, 70 million $ in Slovakia, 450 million dollars in international bonds in Ukraine. In 1998 hitherto, they concluded new investments in The Czech Republic (the takeover of IPB Bank), and negotiations in Ukraine and Slovakia are in their final stages. The same company invested 91,2 million $ in Pliva-Croatia, 31,1 million $ in VTS-Slovenia, 24,7 million USD in SKB Bank in Slovenia, and in July 1997 453,3 million $ were invested by it in KGHM Polland Miedrz SA.

Creditanstalt appeared 7 times as a lead manager and 3 times as a co-manager in stock offerings in this region, Credit Suisse First Boston did so 6 times, and 3 times as co-manager, Schroders 4 times and twice, respectively, Dresdner Kleinwort Benson 5 times in both categories, Merrill Lynch 4 times, HSBC 4 times, and Salomon Brothers and UBS 3 times. These data are for 95, 96 and up to July 1997 (source Euromoney Bondware analyzed by number of issues). Last year Romania was a real investment hit and after the stabilization of the economy in Bulgaria, there is a great interest again in new investments there. There are many other similar data from which can be concluded that the big multinationals have much enhanced liquidity, and are looking to emerging markets to invest it in. They have so much money, that they are prepared to invest in risky countries, much more risky than Macedonia, naturally against much higher yields than in low risk countries, or countries with no risk at all.

Sam: Only in the USA in the last two years 2 trillion USD of new wealth were created by investing in stocks. The same pictures repeats itself all over the world. Stock exchanges the world over have set new records and generated fabulous amounts of new wealth. Contributions to pension funds, money pouring in to mutual funds, the globalization of the capital markets and the resulting capital mobility – all created a deluge of money frantically in search of yields. The more mature markets in the West offer less luring returns because of the lower risks that you have mentioned and because of correspondingly lower projected growth rates. New legislation permitted- even encouraged – the international diversification of these funds. Once legally allowed, the dam was opened and a gush of almost 400 billion USD in investments swept over the emerging economies. Some of these investments soured and there are periods of remorse. Sometimes, investors even completely withdraw from a specific market (as they have done in the Czech Republic in 1997). But these are temporary fluctuations. The phenomenon is here to stay: investors and money managers hedge their investments by spreading them across political boundaries. High growth rates attract them. The availability of political risk insurance calms their nerves. It is a golden era for those countries who know how to tempt the right suitors. Macedonia, unfortunately, is not one of them.

Nikola: When we discussing portfolio investments (indirect investments), we must mention that all the serious multinational companies have special departments or separate firms, specializing in investing in the so called Emerging Markets. In these departments, 50, 100 or more account managers and investment officers have an annual amount of money they should invest in some of the countries in East and Central Europe, South and Middle America, Southeast Asia, Russia and the CIS (NIS – New Independent States) and eventually Africa, depending on the strategy of the company. The amount can be between one half and two or more billion German marks. The companies have established in-house research and development (analysis) sections within the departments (or their special firms) which tackle the emerging markets. The professionals, that are working in these departments, are usually divided by regions. For example: Romania, Bulgaria and Croatia, or the Czech Republic, Poland and Hungary or Russia and the NIS. Alternatively, they are grouped according to the type of the securities that they deal with: East and Central European bonds, or shares issued in the same region, or other more complex financial instruments. These departments are obliged to observe everything that happens on their markets, the ones actually invested in or in which there are plans to invest. On the basis on this information, they should provide instructions to the fund and portfolio managers of the company. The latter, after reaching a final decision, issue directives to the dealers of the company to sell or to buy the exact number and type of securities. The dealers of the company are associated with local brokers and the operation is thus completed.

In every meeting that I had with these firms, I concluded that they are (literally) bombarded daily with information, data, brochures, analyses, telephone messages, faxes and e-mail. All of this is sent to them by governments, state agencies and authorities, brokerage houses, by banks and by other private or governmental institutions and individuals, from all the countries, but one: guess which.

It seems that there is a double barrier to information: data from Macedonia never reaches potential financiers from the West , and information from the West doesn't reach the citizens and legal entities in Macedonia. Without exaggeration, I can say that Macedonia is in an information vacuum, when it comes to financial events and opportunities that the world offers.

Sam: I think that the second type of vacuum is less threatening. Today, anyone who is really interested and is willing to devote the time and resources, can hook up to the world at a minimal cost. Professional magazines, the Internet, foreign radio and television stations. The problem is that I see so little interest. People are much more interested in politics, in football or in Cassandra than they are in economics. It may be because matters economic are perceived to be the "government's headache". The government did little to expose the citizens to the realities of the market economy. Most people here replaced "socialism" with "IMF-ism" or with "governmentalism". They await a miracle cure, a solution from above. The psychological barrier to learning that I mentioned before, the twisted superiority-inferiority complex ("no one can teach us anything that we already do not know") – are a major hindrance. I reviewed your economic textbooks and spoke at length to may students of economics. You lack a lot of knowledge. You teach out-dated doctrines to uninterested students. This will not work. You must open up and accept the fact that you need help: urgently and a lot of it.

The first kind of information barrier is much more serious. That Macedonia is absent from the information cum investments race is suicide.

Nikola: That is why many things that are normal and regular, in the financial world, (stock exchange, shares, capital markets, investment banking), seem very distant to most people in Macedonia. Actually, Macedonia is very far from all this. It is not like the public imagines when it sees on the local television an old replay of a chaotic and messy stock market. On the contrary, everything is in perfect order, and that is not something that only a few people can understand.

All of this can be compared to basketball. 7 or 8 years ago nobody in Macedonia knew what was happening in the NBA league, but today, after regular TV broadcasts and commentary, the bulk of the populace feels the league to be its own. Many know the names, success stories, the good and the bad side of every team in the most lofty basketball league. If anyone were to inform the public about the events in the world's capital markets, as well they do regarding the events in basketball, the picture would have been different. Many of the citizens would have put this knowledge to good use, especially in view of the emergence of the capital markets in Macedonia. Unfortunately, not only has the domestic public been until now in a so called informational vacuum, but the passiveness of Macedonia with regards to this question, obstructed the ideas or opportunities of the investment multinationals to invest their capital in Macedonia. This caused great damage to the country, and it is a missed opportunity.

Sam: From the very beginning it was clear that no one knew what is a stock exchange and what to do with it, once it was established. It was perceived more as a nuisance than as a tool for the formation and allocation of domestic and foreign wealth. The privatization was conducted completely outside it, new shareowners were not allowed to trade their shares there, the government did not finance its needs through it. It was relegated to the margins, devoid of liquidity and basically useless as a corporate financing arena. This was a major strategic mistake, which would require many years to reverse. The stock exchange could have become a source of cheap credits and equity capital to the struggling, illiquid, domestic economy. It could have competed with the local, inefficient, banks. It could have attracted portfolio investments and even domestic "undeclared" capital. All this could have been achieved had the right number of companies been listed, had the supply been varied and of good quality. But a stock exchange does not go well with cronyism.

Nikola: However, nothing will help Macedonia in its plan for self-promotion, if it does not help itself. Macedonia must lead an aggressive policy in this respect. Bearing in mind that the private institutions, which are participants in the capital market, are still not fully developed and formed to carry this project alone, the state should take over. The state must be a generator in the process of promoting itself, and later, when the conditions will change for the better, the state can gradually leave the "scene" to a certain minimal level, relegating its role to the private institutions.

Foreign capital is important for faster development as well as for a prompt exit from the economic crises and isolation. Foreign capital is also important in preparing the country to EU entry. Until and unless it finds interest in Macedonia, the probability of entering EU are very small. At the moment, this is better, because if Macedonia were to enter the EU now or in the near future, it would have become an even bigger base for the supply of raw materials to that community than it is now. Macedonia must deeply enmesh itself in the process of globalization, and to ask for the acquirements from it. In that game every side has its own "mathematics". The rich can get richer, and the poor can get less poor. This option is possible, but if one is not careful, the poorer can get even more so.

The second lesson is, that multinationals are looking at emerging markets, and have extra funds to invest. What share of it can Macedonia attract depends on:

1. How aggressive will Ma cedonia be in its propaganda;
2. How much "substance" it has to offer, and
3. The conditions offered by it.


Since these companies invested in Malaysia, Vietnam, Bulgaria, Albania, Romania, Kazakhstan or Afghanistan - there is no reason that they should not invest in Macedonia, which was bypassed until now, and with a reason.

(continued)