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

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Foreign Investments and Developing Countries - Macedonia as a Case Study - Part XII 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"

The government of Macedonia should revive the issuing of bonds in Macedonia, and above all, Government and Municipal bonds. The government will appear as the guarantor, and at the beginning, the government can serve as the guarantor of corporate bonds issues of the best Macedonian companies (with a prior mortgaged property of the company and the state as a collateral). When it comes to capital projects, in the absence of a big and modern bank (or a consortium of banks) which would serve as a guarantor to the corporate bonds the government should jump start the "game". This would be a positive example for the banks to support quality projects in quality domestic companies by issuing bond guarantees. There is a great interest of foreign companies to invest in Macedonian bonds, providing that they are guaranteed by the state or by a consortium of the prime banks. Sam: I don't think that I can support this idea. To me it would seem like nationalization through the back door. What if the enterprise will not pay his debts? The government will have to take over, own and manage it. I am afraid that the government will end up, this way, with more assets than it succeeded to "privatize" hitherto.

Nikola: Actually, the state issued a small package of bonds against a part of the obligations for the so called "frozen deposits" in the amount of $120 million. These bonds mature in 2001, and are not traded on the Macedonian Stock Exchange, what seems, at first sight, to be a great pity. But if some unofficial sources are correct, the state intends "with a law" to prolong the maturity of these bonds. In that case the damage will be much bigger if they are traded on the Stock Exchange, and thus possessed of a greater transparency.

The government must understand that in the eyes of the foreign investors (although in this situation they are not directly involved, nevertheless with the present moves of the government they would anticipate its next), postponing the payment of issued state bonds - "with a law" is not very far from making a decision "with a law" to deprive them of their property in the future. That would be a classical example of loosing the low international rating.

In the future the state must think twice before assuming any financial obligations.

Sam: I hope that your sources are wrong. There is no such thing as "prolonging the maturity" or "postponing the payment" without the consent of the holders of the bonds. If this will be done unilaterally by the government, it will amount to a default on its obligations. A state which does not respect its obligations towards its own citizens - is not very likely to respect its outside obligations, either. Such an act will mean an abrogation of property rights in the worst sense of the word.

Nikola: The government and the local authorities should review the question of issuing domestic bonds. Besides that, it must be explained to the future owners of bonds what happens in situations when the association that issued the bonds is not in the condition to fulfill its obligations for payment of the principal and the interest. Also, some changes must be made in the Macedonian law, which would determine the status of trusts.

The state should issue a small amount of Eurobonds in spite of the availability to obtain credits without interest, in order to improve its own rating. According to many rating agencies (e.g. Euromoney) the access to capital markets plays a significant role when it comes to ranking the country. The country must demand to obtain a rating from a renowned country rating agency. At this moment any kind of rating is better than none.

For example, in 1996 Kazakhstan in its first emission of bonds on the European market reached $200 million. Even the bankers from this country were concerned about the success. The assumption was that the investors would not be convinced about the expected economic perspectives of Kazakhstan, and that they will not be ready to invest their money in the bonds. The experts advising this emission, taking stock of the circumstances in Kazakhstan, thought that this country did not have an urgent need to raise money by issuing bonds. The emission was with a view to establishing its ranking for future lending from the European bond market and for attracting foreign investments in the country. That would be an incentive and opportunity for some of the best domestic companies to demand and obtain foreign capital in the form of the sale of bonds in the future.

Sam: Good idea. I think - as you do - that just to establish a presence and generate a benchmark rating are sufficient reasons to have a Macedonian Eurobond issued. The only caveat I suggest is that the proceeds of this issue should not go into the regular budget, but rather should be earmarked for amore "noble" (that is, profitable) cause. For instance, the money can be used to encouraged small businesses through business incubators. Inventions by Macedonian citizens are now plundered by rich companies in the West because the money is not available to develop them inside the country.

Nikola: The strategy of developing and attracting foreign capital, called "development by demand" is based on developing cooperation with companies from the developed countries, above all, with the transnational companies. In other words, it is based on attracting investment capital from abroad. This was successful in many examples like Hungary, Czech, Poland, China, Singapore, South Korea, Taiwan and others. This strategy is applied by countries which don't have an internal market, and the main channels and outlets for their sales should be abroad. The countries that wish to be successful in realizing this strategy must provide some legal guarantees and privileges to the capital from the developed countries.

Some of the above mentioned countries managed to secure a quick economic development with this strategy, and they even became exporters of capital.

Sam: Playing with lions can be dangerous to one's health. Big western firms bring with them an abundance of capital, know-how, technology and access to export markets. However, they are never found in a missionary capacity. They are not looking to educate the "natives". They teach the locals the minimum needed to comply with their demands. They mostly import their management and skilled labour. They prefer to buy parts and capital assets outside the host country. They rarely transfer technology, let alone share it or the ownership of it. They are quick to dismantle their tent and move on, to greener pastures, they have no local patriotism. Their contribution to the economy - with the exception of opening up export markets and discounting the tax and investment benefits and grants that they normally demand and get - is now in great doubt. It was China, though, who found the redeeming formula. It forced all the foreign companies which wanted access to its enormous market, to establish plants on its soil. Additionally, it compelled them to transfer technology and share it, to buy local goods and services and to participate in the development of the local economy and of the capital markets. But very few ations can offer the investor a choice of 1.2 billion people. To the rest of the nations, this subordination of the foreign investment beast must await better, more prosperous, times.

Nikola: The global approach to the privatization in Macedonia was commercial, as opposed to the mass character of the processes of privatization in many other central and eastern countries. As a result several inconveniences appeared:

First, the business associations are owned and controlled by their managers and by their employees, which, in the process of privatization should buy off 51% of the shareholders capital within 5 years. In many cases that made the associations pay large dividends, for the management and the employees to be able to finance the privatization. As a result the reserves of the associations, that are needed for financing the further development drastically decreased. Also, because of the obligation to buy 51% of the capital, the incentive to collect additional (foreign or domestic) capital through the stock market is very small, because this would lead to diluting the percentage of the shareholders capital owned by the management and by the employees.

Second, in the countries where the method of mass privatization was applied, the public discovered very soon how to use the stock market as a venue for issuing and trading securities and for raising capital. In some cases, the basis that is used for evaluating the enterprises in Macedonia proved damaging for the development of the Macedonian stock exchange (for example the City Shopping Center).

Sam: To be fair, no one knows what is the "right" model of privatization, or whether there is one at all. In Britain, Margaret Thatcher was accused of cronyism long before Eastern Europe dreamt of privatization. In Israel companies were sold for a fraction of their real worth to a select elite of businessmen long before the Czech Republic repeated the procedure and Russia perfected it. Vouchers spread the national wealth equally - but prevent the formation of ownership and management nuclei. Management Funds are hotbeds of corruption and mismanagement. Incestuous relationships characterize them more than any Western methods of modern organization. Management and Employee buyouts are wasteful in the long run. How should something that nominally belongs to everyone - be sold to the few that must control it, risk their capital in it and reap the rewards, if any? No one succeeded to come up with a model which will be, at once, equitable, workable and implementable.

Nikola: The nonexistence of international accounting standards does not only negatively affect the establishment of foreign investment institutions in Macedonia, but also influences global investments in Macedonia negatively. Without uniform accounting standards it is very difficult for brokerage firms and for investors to evaluate the shares of the traded companies.

Sam: It is not only a problem of the adoption of international standards. Anyhow, there is no agreement as to which standards reflect reality best. The SEC refuses to accept the IAS (International Accounting Standards) and demands the strict implementation of the GAAP (Generally Accepted Accounting Principles) as a precondition for being listed in any American Stock Exchange. The problem is that the financial reports ae tax driven. Put less gently: accountants and managers collaborate to cheat the tax authorities by falsifying financial reports. This can be done with IAS and with GAAP, as well. It is the intention that counts. Tax evasion in Macedonia is a civil war - the citizens against the tax authorities. It indicates an abyss of trust between the populace and the various establishments. Unless and until this more fundamental problem is solved, no accounting standards will suffice.

Nikola: The nonexistence of foreign capital as commercial direct and especially indirect investment is very expensive for Macedonia:

a.. Lack of serious growth of production; b.. High unemployment; c.. Stagnation in the technical and organizational development of the companies in Macedonia; d.. Lack of new ideas and philosophies of thinking and working; e.. Low standard of living, with a chance for further deterioration; f.. Missing the opportunity to increase the exports and to conquer new markets; g.. Losing the race for new markets, and especially losing the old markets; h.. A poorer state budget; i.. And as a result of all above mentioned, sooner or later, a stronger pressure on the domestic currency and inflation, meaning new debts and impoverishment. Until the above mentioned "open questions" are resolved, the probability of generating a greater interest in institutional investment in Macedonia is very small. This still doesn't mean that steps should not be taken to facilitate this kind of investing. The broker associations and the stock exchange can achieve very much in promoting the Macedonian market through the major investment firms and investment funds in Great Britain and in the USA. Even convincing these institutions to start seeing Macedonia as an investment opportunity could take a long time. To reach this stage, this it is necessary to establish contacts, and to activate the government of Macedonia on all the fronts mentioned in this dialogue. Detailed studies of the market and its promotion must be embarked upon. The foreign institutions will want to conduct their own analyses, but the existence of institutions in the country to which they can refer for the collection of local data and inside information is always helpful. Until Macedonia does not open up its economy, except through declarations, it will remain without the necessary foreign commercial investments, and will wait a long time to enter the EU and other economic alliances.

FINIS

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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