The Market of the Future

In the series of conversations about the Program of the Group 17, the topic this time is the development of the capital market which has not been elaborated in detail in the document. This time we talk to Dusko Susnjar, an expert in the area of business investment banking with the Karic Bank and Petar Ivanovic, the assistant lecturer at the School of Economics in Podgorica, both the members of the Group.

The beginning of the year is characterized by high insolvency of the banking system. What is your view of the current situation on the capital market?

Ivanovic: It hardly could even be considered that we have the capital market. In order that the capital market gets its full meaning, an element that the ruling party has been incapable of achieving for a long time now is needed - stabile economic environment, stability of established rules and stabile quantity of the money. Therefore the participants in the market are concentrated on the short term transactions, in other words on the money market. There’s nowhere in the view about even a slightest intention of the ruling circles to change something.

Susnjar: The capital market does not exist in Serbia, there is only the money market. Although these two categories interlace, influence one another and are often viewed through the identical optical glass, they differ considerably. As the area of my professional interest is the capital market, I wouldn’t analyze and make judgments concerning the money market.

If the program of radical economic reforms starts by the end of the year, what will be the necessary period of time to build a solid capital market?

Susnjar: If the program of radical economic reforms is to be realized under optimal conditions, which means effectuation of the program as a whole, I believe it would not take long. The success of the initial moves and their coordination are the key factors for its rapid development. In case of the positive development of events, I believe that already in 1999 we could reach the level of development of the capital market that could be considered as solid. The main reason for this positive, or as someone might say optimistic attitude, is the transition experience from the Central and East European countries, which is equally helpful to domestic and foreign subjects.

Ivanovic: If it starts by the end of the year, its implementation could begin in 1998. And the years ending with an 8 brought enormous changes in our country. Having in mind the current state of our economy, my estimation is that we shall need three to five years. Of course, one of the crucial conditions for the implementation of the Program are political changes.

The development of the capital market requires the construction of appropriate infrastructure...

Susnjar: The law on securities and the law on stock exchanges and stock market brokers are extremely "technical" laws and therefore could be generally qualified as adequate for the current level of Yugoslav practice. That which could favor domestic economy is a good link with the future law on investment companies and the law on privatization, and their harmonization with the law about enterprises. The conceptual remark to the law about securities and stock exchanges could be exagerated and obsolete persistence on the dinar’s sovereignty. This persistence is obsolete because it is contrary to the European and world trends to dissolve the national frontiers for the international capital flows. One of the most important elements lacking in the infrastructure is the "Law on the investment companies". The importance of the investment companies, or investment funds as they are sometimes referred to, is so enormous that it can hardly be evaluated. In the developed markets they represent the most important participants, while in the transitional markets as a rule they have the key stabilizing role in the privatization process. However, the most important lacking element of the existing infrastructure is the mechanism which could break up the existing monopolies and fight the future ones. The economy, or from the broader aspect, a society void of monopolies, is the only possible surroundings for the development of the modern and efficient capital market.

Ivanovic: The infrastructure has not been completed. For example, there are no investment funds, private funds (for instance, private pension funds), clearing houses, etc. Yet, let’s not forget that the most important percussion means is personal productive capability of each individual - that which the economists refer to as the human capital. And the human capital (as well as the physical) requires care and renewal. The capital market is and will be what we make it to be. The problem is not to mold the institutions of the market capital. The problem is the lack of will, motivated by interest, to do so. The order in general, an in the market in particular, is not introduced by establishing strict principles, strict legislature, but through the care about the consecutive application of the established rules which must be equally valid for all subjects; those who do not follow them must be sanctioned, and the once established and accepted rules of the game must not change while the game is on. And the signal for such behavior in our economy is coming from the top. Just recall the "frozen" currency savings, the loan for the economic recovery of Serbia, Dafiment and Jugoskandik Banks. After one law is broken, disregard of the law spreads to all laws.

How could the "frozen" currency savings be channeled to the benefit of capital market development?

Susnjar: Here I would start from the two indisputable facts. The first, that the state is unconditionally under obligation to compensate the funds to the citizens, with the belonging interest which has been blocked for many years. The second, that the state has no possibility to fulfill this obligation properly and without discrimination. If these two statements are really true, the only possible solution may be found in the capital market. By issuing the state bonds for settling the "frozen" currency savings, relatively quality and solvent instrument would emerge on the capital market. About the validity of such model could be learned from the neighboring Croatia, where the problem of the "frozen" savings is solved successfully. Special importance of this kind of bonds for the development of the capital market is exactly in its foreign currency component around which the whole gamma of instruments will rapidly develop and would in turn strengthen the real convertibility of the dinar. Reaching one so critical level of real convertibility will produce additional strong stimulus for the development of our capital market.

Have we sufficiently capable experts for these tasks?

Ivanovic: Contrary to several years ago, today we can already speak about the existence of the experts in the institutions of the capital market. Currently in Yugoslavia some 20 broker and dealer houses have the license for that job. Only among the postgraduates at the School of Economics in Podgorica - "the entrepreneur economics" - some thirty MA and Ph.D. thesis are being elaborated which cover various aspects of financial market.

Susnjar: There is no need to mystify the operations of the capital market institutions. It resides on clear rules and mechanisms. That is why it is not unusual that in English language the same term is used for the common farmers market and all other types of markets. Since the simplicity and clarity is the precondition for the efficiency of the market, there is no problem that could be considered as serious in respect of the available experts trained to work in the institutions of the capital market. That which really represents the problem is to form and elevate some institutions to the modern European level. This is the area susceptible to many errors so that the importance of the experts capable to form the institutions of the capital market will be of the utmost importance.