What have been the latest developments within the financial sector and what would you consider to be your contribution towards this development?
I think that the financial sector is one of the most developed sectors in Bulgaria and of course it has its explanation. The financial sector is the backbone of the economy; it has been in the focus of the Government as well as in the attention of the multilateral institutions like the World Bank and IMF that are closely monitoring the country's developments. At present we have a well functioning banking system. On one hand, the national currency is stable because of the Currency Board. People feel confident in depositing their money in the banks. The experts do not see any risk for the banking system. On the other hand, the banking system is not developing quickly enough to meet the business requirements, because we have a lack in products and services. Due to the previous crisis and lack of confidence, the legislation jumped in the over-regulated side. Now the system is over-regulated and too conservative and does not provide all of the necessary products and services that business may require.
Most of the efforts of the last two governments, the IMF as well as the World Bank were directed towards the stabilization of the country, which itself means stabilization of the financial sector. Following this, a lot of the work has been done, almost all of the legislation of the financial sector has been changed, both in banking and capital markets. The main achievement seems to be the economic and financial stability of the country, which is the first step towards a stable economic growth. The economic stability was set as first priority and I think it has been achieved in the last 4 years. Currently, we have a 4 to 5 % growth, higher than last year's, but it is not enough if we want to join the EU. To meet the necessary criteria, we need to speed up the process in order to catch up with other countries that are much ahead of us. Bulgaria needs 7 to 10% growth per year, which at this stage is unrealistic but in the long run it could be achieved if we mobilize the financial resources in the country.
As the biggest brokerage institution within the financial market sector, what is your opinion on the underdevelopment of the sector?
I believe this is true for all aspects of the financial sector. In general, we now have a well-developed and stable banking system, a fact that is most important for an emerging market. We have a currency board, determined either by DM or the Euro. Deposits in the banks are growing. The main weakness of the banking system is that it does not provide a sufficient set of services and products. The main complaint by businesses is that banks do not provide long-term financing. Of course the banks have their reasons - their assets and liabilities are short-term due to the short-term deposits. How to meet the needs of the business with the possibilities of the available financial resources in the country is a big challenge. And that is where the place of our company is - to provide more instruments for investing this money. Currently, Bulgaria has about $2,5 billion in short-term deposits abroad. The estimates are that there is still $1billion held in bank deposit boxes. Furthermore, we have long-term money in Bulgaria already. We have 8 pension funds since last year, which are very small but have started to accumulate money. At the moment, they accumulated about $100 million but the estimate for the year of 2004 is $1 billion and for the year 2006 - $2 billion. So, this is long-term money and the challenge for the market is how to get this money into the Bulgarian economy.
The capital market, which is the other side of the financial market, is well structured in our country, even better than in many other Central European countries. We have a very well structured stock exchange and clearing system. But I must say, although well structured, the capital market is not well functioning. We have the backbone, the market place, but we do not have the stocks to trade. The reason for the weakness of the Bulgarian capital market may be the so-called Corporate Governance problem. Bulgarian public companies have become public by law, not by raising capital through the market. Thus, they do not understand the incentive of being public or how to get any benefits; they only get the charges and obligations. So there is still a long way to go in order to achieve good volumes on the market. The good news is that the fixed income market has already started in the Bulgaria. Now we have about 10 bond issues, one will be closed in 2 days from now, and we already have mortgage bonds issues as well. That is why I believe we already have a bonds' market in the country and it is growing and improving. Starting from next year, this will be an interesting market to look at because of the low country risk and the good credit rating combined with zero currency risk due to the currency board. The yields are much higher than the European ones - the yields of Bulgarian bonds are 7 to 10% per year and we expect the volumes to keep growing. Thus the market will attract the investors' attention and will open new investment opportunities.
Where does Elana stand in the sector?
A lot of companies are on the market but there are only 3 or 5 big investment companies, and I believe that we are one of them. We have been on the market for 10 years now, which may not be a considerable time period compared to the European market, but it surely is in Bulgaria. We focus on three types of activities in our company. First of them is brokerage. Currently, we have a trading desk with 8 people working round o'clock on all the financial markets in the world. Trading volumes are about $300 million per year, which again is a considerable volume compared to Bulgarian standards. We are operating on the domestic market with all kinds of domestic instruments. On the international basis we deal a lot on equity, fixed-income, and money markets covering all the major markets.
Our second sphere of activities is corporate finance and investment banking. We co-managed the biggest corporate bond issue in the country and the first IPO in Bulgaria. Our company played a major role in the placement of the first mortgage bond issue. We are involved in a series of M&A's as well. |
The third part of our range is the asset management. At the moment we manage only private portfolios and no investment funds. We expect this to change in the next few months. Elana Inc. is planning to raise mutual fund in the effort to attract some of the "sleeping" money. Our belief is that by providing a wide variety of high quality services and products we will meet our clients' requirements even more efficiently. Our goal is to continue offering access to the global markets as much as possible.
What is your approach towards local investors?
More or less it is a direct marketing because Bulgaria is a small country. It is clear who the individuals and the companies that need our services are, it is clear where and which are the big accounts in the country. Therefore, the most important element is not just finding the investors but gaining and sustaining their confidence and trust. Elana Inc. is a registered broker for five of the existing eight pension funds in the country. We also started a lot of activities in order to utilize part of the sleeping money in the population through mutual funds.
In terms of competition who would you consider to be your biggest competitors and what would you say is your competitive advantage in regards to them?
We offer a wide variety of products that distinguishes us from our competitors and allows us to meet our clients' demands. We have different specialized units to provide special services on the small Bulgarian market. Many of our clients are still not specialized, underdeveloped and unskilled in the financial markets. It is an ongoing learning process, based not only on relations but also on the development of the company itself that will allow it to benefit by using our services.
The mid-sized companies do not know too much about financial and risk management. Recently, we started to promote risk management products on the market and it is a long process of explaining what this product is about and how companies can benefit from it without the risk of losing money. That is why it is also an educational process, not only marketing or advertising.
What future do you foresee for the Bulgarian financial sector?
I shouldn't speak too much about the banking sector because it is much more mature than the capital market. Although the Bulgarian banks are in a relatively high stage of development, the banking sector should continue to extend its range of products. Even then the banks will still remain to be the most conservative part of the financial sector. But I do not want to go into details, as I am not an expert in this sphere.
There are 2 scenarios for the capital market development:
1- Constant and slow evolutionary development without additional Government support.
2- Strong support from the Government. And we all expect such a support to be provided in the nearest future.
To my opinion we need this support if we want to achieve faster development. By support I do not mean only listing the blue chips on the market because this certainly is not enough. This can only create volume once and the shares will go to foreign portfolio investors. Although the companies are blue chips, they will create temporary volumes on the market but will not create sustainable volumes. The real market starts with IPO's. Volumes should be created through fixed-income market, mutual funds, private equity funds or other structured instruments. All of these should be established in the next few years in order to complete the variety of instruments on the market. What the Government could do is list equity of the blue chips on the market, but it could not establish a private equity fund. But the Government could sponsor the establishment of private equity or mutual funds because spending a small amount of taxpayers' money will prevent a big bulk of money from running out of the country. Many local institutional investors may take part in such future projects and the process will be of primary importance to foreign investors. That is why I would rather favour the second scenario.
What is your vision of the investment climate in Bulgaria, and what would you say are the most positive and negative aspects of this environment?
Although Bulgaria is still underdeveloped as an investment location, the investment climate will continue to improve. As a part of Eastern Europe the country has a good prospective as an emerging market now that the conflict in Yugoslavia has already been settled and it will join the emerging market community very fast. So, basically South East Europe is a region of about 50 million population and GDP around $100 million. This represents a large market and this market will be in the focus of foreign investors, no doubt.
What would be your final message to our readers?
I believe that Bulgaria should be considered as an attractive investment location. It has already passed through the stabilization stage successfully and the economy is constantly growing. Joining EU and NATO will increase the confidence in the country and will improve the investment climate. The perspectives for the country are very good due to the regional development as well. A lot of infrastructure, telecommunication, and energy projects will start in the nearest future. Estimates for the investments only in the energy sector are between $3 and $5 billion for the next few years. This will definitely make difference for the investors.
Note: World Investment News Ltd cannot be held responsible for the content of unedited transcriptions. |
