Foreign Investments and Developing Countries - Macedonia as a Case Study - X

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Foreign Investments and Developing Countries - Macedonia as a Case Study - Part X A dialog with Nikola Gruevski, former Minister of Trade and Finance of the Republic of Macedonia By Sam Vaknin Author of "Malignant Self Love - Narcissism Revisited"

Nikola: Besides the promotion of Macedonia and legal provisions, the third very important component of attracting foreign capital is the opening of foreign Western mega-national bank branches. At least four reasons can be given. They are:

1.. Decreasing the risk to the foreign investor's money transfer; 2.. Creating competition between the domestic banks, which results in a healthier and more resilient banking system; 3.. Possibility for the injection of direct foreign credits to the economy and to the population; 4.. To return the trust of the clients in the banks. Probably, at the beginning, the clients will deposit their savings, now kept in their homes, though for a much smaller interest rate, in the foreign banks. But, in the longer run, the competition will strengthen the Macedonian Banks. By providing just a bit more acceptable terms (because the risk will still be much bigger in the Macedonian Banks) they will begin to reestablish the trust of the population in Macedonia and its confidence in the banking system. It would be the most effective and fastest way for changing the culture of savings in Macedonia and to eliminate the fear from the banks. It would be recommendable to have two branch offices of this type of banks opened, which would create competition between them, this being particularly important at the beginning. Even the biggest Macedonian banks are to the big investment companies from the West:

1.. Totally unknown (they never heard about them, and they can find their name only if they open the bank register); 2.. High risk with low performance; 3.. Banks with low capitalization, the same or lower than the amount of the transfer that would be done if they choose to invest 50 or 100 millions DEM in Macedonia in opening their own branch. It is a positive sign that foreign Western capital entered one Macedonian Bank, and that the other perhaps will be bought by Western banks and institutions very soon, but it is still far from enough. The big brokerage houses are not interested in that. They ask which known banks (City Bank, Deutsche Bank, ABN - AMRO) have opened branch offices in Macedonia, and they are surprised that Macedonia is not the same as the other countries in transition where there are many branch offices of various west banks (see wider information in our first dialogue). E.g., in Bulgaria there are six branch offices of the west banks. In Macedonia there were objective factors, which prevented banks from opening branches (instability of a region in war, closed borders, small market etc.). Still, there is information that in the first 5-6 years of the existence of Macedonia as an independent state, the Macedonian negotiators have been setting specific conditions to the interested Western banks: they were not allowed to accept savings, so that the Macedonian population was not likely to have transferred its money from the Macedonian banks to the foreign ones. Another prohibition was to ban them from making foreign exchange transactions, transfers, etc. Besides the already existing obligations for limited financial placements, in financing that was more than an unreal request. Subject to such restrictions and in view of the mentioned problems in Macedonia, we could ask what will those banks have done? Our opinion is that equal working terms should be completely supplied and extra state advantages should be given to the branch offices of the foreign banks: free location, unlimited financing, tax benefits for a longer period, time allowances for realizing the juridical processes which the bank will conduct in Macedonia until the law provisions in this field are settled etc.

Some of the domestic banks can not fight the competition and they will join or merge with the other banks or they will stop working.

The sick part of the Macedonian banking system will be amputated, the healthy part will become healthier and stronger. The foreigner's money transfer risk (short term and long term) and the risk of working with our banks (midterm and long term) for foreign investors and domestic investors and clients will decrease. The domestic banks will emulate the working methods of the Western developed banks, and this will influence the domestic economy (midterm and long term) By the way, without a doubt, the law that regulates the payments of the credit requirements of the banks must be urgently copied from the Anglo-Saxon law, because the existing situation in this field would seriously question the positive implications from the above mentioned suggestions.

Attracting at least two branch offices of famous Western banks to Macedonia will be a big plus in the eyes of the potential foreign investors. Also, the more efficient healing of the banking system on the domestic front will be thus achieved. This will have strong positive effects on the national economy, and obtaining credit will not be a privilege, or a result of personal interest, family relations and friendships, but the outcome of the quality of a project.

Besides that , the banks will expand and modernize the volume and quality of the operations, and will achieve the form of real banks - secure and more resistant.

Sam: There is nothing much that I can add to your excellent analysis. I just want to emphasize the importance of the existence of a healthy banking system to the operation of a thriving capital market. In the West these two are either complementary or competitive. On the one hand, the stock exchanges have taken over a lot of the corporate business of the banks. On the other hand, the banks themselves access the stock exchanges in order to raise capital for their operations. Many times a collaboration is forged. Mortgages, for instance, are still provided to individuals by banks. But the money comes from securitizing the mortgages: selling packaged mortgages to investors through the stock exchanges. Thus, the crystallization of a vibrant, innovative, customer-oriented, capital-adequate banking sector is very likely to encourage the formation of an equally exuberant stock exchange.

It is somewhat misleading to talk about "banks" as though they were uniform entities. They are not. There are important differences between a retail bank and an investment bank or a commercial bank. Because of the restrictive Glas-Steagall act, there are major differences between American and Continental (all-purpose) banks. Macedonia should open itself, initially, to retail banks and to investment banks. The appropriate legislation should be adopted. The right infrastructure should be made available. That foreign banks should not be discriminated against, goes without saying. Maybe a good place to start is with the capital requirements. A branch of a foreign bank has to come up with 21 million USD. This is a huge amount, unjustified by the size of the territory and by the potential to do business. Local banks require only 9 million USD. The conclusions?

(a) A branch of Chase Manhattan is less secure than a newly established Macedonian bank (this is why the larger capital requirement). And (b) Macedonia is a more interesting and lucrative market than Israel (it takes less money to open a bank in Israel).

Nikola: When the state will hasten the payment of the requirements of the banks on the basis of given credits with a law, the foreign banks (and in their footsteps, the domestic banks) will lower the interest rate and the housing mortgage market will revive, as a part of the long-term provision of credit based on a mortgage collateral, as invented and developed a long time ago in the Western countries. In these newly formed conditions, the interest rate on the domestic market will stabilize between the present interest rates in Macedonia and the interest rates of the banks in the Western countries. This will eliminate the main problems that high interest rates generate:

1.. Capital Risks; 2.. Capital (Credit) Supply. Changing the consciousness of the individuals that are demanding credits, and raising the quality of the projects for which the credit is sought will follow quickly after realizing the above mentioned. Only in this way can Macedonia emulate the picture in the West, where instead of having individuals and companies compete for credits, the banks compete and advertise for clients, emphasizing their superior conditions. This way, the banks will start thinking about expanding the business, into investment banking etc. In the world today the banks are realizing the largest share of their profits through the trading of securities and derivatives in the global markets. Better conditions for reviving the trade in an effective stock exchange in Skopje will be created with the influx of foreign capital. At the same time the domestic capital will participate by finding direct interest in profit-making and investing in a portfolio of securities. Sam: The present interest rates in Macedonia reflect not only the balance between meager supply of money and a much larger demand for it. They also reflect the fact that the default rate is probably more than 50%. I repeat: half the credits and loans are non- performing, not paid back (not even the interest) on time. It is a wonder that the interest charged is that LOW - not that it is that HIGH. Within the general disregard for contracts and obligations, it is considered acceptable not to pay back loans. People prefer to fantasize instead of face reality and this is reflected in the poor quality of the projects for which finance is sought. Even the concept of collateral is thwarted. A bank cannot rely on the debtor's cash flow precisely because the morale of payments is so low. The debtor might get paid by HIS debtors - and yet he might not. So, a lender has to rely on real estate as the only collateral realizable in case of trouble. I share your optimistic scenario as to what will happen with the introduction of branches of foreign banks in Macedonia - but I think that the process will be much longer and will not happen at all if the government does not reverse its erroneous monetary policies. A full blown restrictive monetary policy is now in force, leading to a contraction of the economy. In the absence of real liquidity, for instance, no mortgage market will take off. Buyers will simply be unable to pay the market prices of apartments. In Israel, the government stepped in and provided potential buyers with subsidized loans. Here the government is too poor to do even this. If you ask me, this - the reduced of money supply - is the heart of the problem. The economic body is starved almost to death. Under these conditions it is ridiculous to talk about investment banking. Equity investments rely mostly on discounted future streams of income and dividends. These will not be available unless the Central Bank changes its policy dramatically.

Nikola: In this context it is very important to prevent the politicization of the banks. Some lessons from the Asian tigers and the Eastern European countries must be learned in Macedonia. The banks must be apolitical, they should lend money only for commercial, and not political reasons. The recent collapse of JRB, a big Slovak bank that was used for supporting sick companies is a classical case. South Korea was an inspiration for many Eastern European companies that were diversifying to many different fields. If you ask the Russian banks like Unexim why they took control over the key industrial segments, they will refer to Korea. But now when the Asian mirror shattered, the Koreans that had politicized banking system are not suitable as an example. Only one country in the region learned this lesson: Hungary whose banks are in foreign hands today and whose companies must justify it if they want money to invest. This is improved further by the restored expansion and the increased productivity.

Romania has this problem of involving politics and finances, and it seems that the reforms in this country were blocked because the ex prime minister did not dare to jeopardize his cozy relations with business and finances.

The Czech failure at restructuring its industry because of the "old boys" network that connects the banks, the funds and the managers of the companies was similar.

But the Asian collapse demonstrated one truth: businessmen and politicians can realize their dreams of poor judgement, but when the income stops, the collapse is inevitable.

Sam: It is better to generalize and say that the government should supply the conditions for the private sector to work. It should ameliorate market failures, attend to social problems, ensure a competitive environment. Market failures are situations when the private sector has no economic incentive to act. The provision of defense, crime prevention, welfare transfers and medical are for the poor are oft cited examples. The government must also ensure a competitive environment by fighting monopolies, opening up the market to foreign and domestic competition, liberalizing the foreign exchange and payments regime (gradually and carefully and after the establishment of a realistic exchange rate). It also means heavily deregulating and cutting red tape. So, there is no need to single out a specific sector. The government should definitely take its hands off the banking sector by selling it to foreigners or by refraining from politically dictating whom to lend to and how much. Politicians are unable to properly manage businesses, they are not skilled to face the harsh realities of the market. In an ideal world, politicians should do politics and businessmen should do business. This not being an ideal world - the two intermix but this should be minimized even by law. Otherwise, businessmen will find themselves engaged in lobbying and in political wheeling and dealing - rather than in profit maximization.

Nikola: It's clear that in the next few years there will be a technological revolution in banking in the world (especially in the biggest banks). The process of globalization will not skip the banks. That technological revolution will be available only to the biggest banks with the highest capitalization, biggest profits, and high quality staff and management. Investments in technology and staff training will be similarly sizable. So, the banking scene will witness the arrival of the so called ''Global Players". The legal limits to Macedonian banks (It is possible to invest only 25% in fixed investments) will constitute a big problem. These limits are very strenuous. They would be possible in banks with big capitalization, but to the Macedonian banks, it will, obviously, be problem. The upper limit has to be 50 percent.

Sam: As you know, banks are merging fervently. Only in March 1998 there have been financial mergers worth more than 200 billion USD (including the Citigroup merger of Citibank and Travelers' Group). There are undeniable economies of size and competitive advantages in being big today. To cope with a global world, with global, around- the-clock, markets - global, around-the-clock banks are formed by merging and acquiring. The same trend is evident in manufacturing and in telecommunications. This is why it is surprising and very worrying that Macedonia is left out of this reshuffling. It looks as though the giants of tomorrow do not consider it to be a viable member of tomorrow's global networks. We must also not forget the Internet. Once a satisfying solution will be found to the problem of secrecy over public computer networks, it will become serious challenger to the established, old fashioned banks and financial houses. Already, shares are offered successfully through it and many off-shore banks have opened "virtual branches". The dream of "home banking" is about to come true. The Macedonian banks must be integrated into international banking alliances - otherwise none of them will survive. Even if all their capital were to be invested in technology it would have hardly been sufficient. Their clients are already complaining that they are not getting the minimal services that they require. So, technology in itself is not enough. Training is called for. The staff must become well acquainted with Western banking. There is a Macedonian Banking Operations Center (MBOC) in Skopje and I heard that it has to beg the banks to accept its (mostly free) services. It provides both training and advice in all banking matters. The banks would do well to use it while still available.

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AUTHOR BIO (must be included with the article)

Sam Vaknin ( samvak.tripod.com ) is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He served as a columnist for Global Politician, Central Europe Review, PopMatters, Bellaonline, and eBookWeb, a United Press International (UPI) Senior Business Correspondent, and the editor of mental health and Central East Europe categories in The Open Directory and Suite101.

Until recently, he served as the Economic Advisor to the Government of Macedonia.

Visit Sam's Web site at samvak.tripod.com