Last week, the Government of the Republic of Slovenia adopted the Strategy for the Development of the Capital Market in Slovenia by 2030 to achieve the status of an emerging market. The proposed strategy allows the creation of a fund of shares of state-owned companies that would be traded on the stock exchange, issuing municipal and other bonds, while also touching on a few other matters.
First of all, it is stated that the Slovenian capital market could still be considered poorly developed, especially compared to Western Europe. Besides its small size, it is marked by modest liquidity and the insufficient number of financial instruments available to investors as well as small capitalization on LJSE. Consequently, the majority of funding sources are thus still provided through the banking system. With this taken into account, the Ministry of Finance has prepared a strategy for the development of the capital market until 2030, where they also plan to achieve easier and more transparent access to financial resources in this market.
The government set itself the goal that the Slovenian capital market would achieve the status of an emerging market. As a result of the aforementioned, daily turnover on the LJSE is expected to increase from the current EUR >1m to EUR 4m by 2027, while the market capitalization is expected to reach a fifth of GDP. Also, at least two new listings per year are expected. Besides the key three pillars of the new strategy, the Government of Slovenia touched on a few matters like reducing costs for companies that want to list on LJSE or are already listed on the stock exchange, increasing legal clarity, etc.
LJSE average daily turnover [EURm]
Source: LJSE, InterCapital Research
Three pillars of the Capital Market Strategy
1. Fund of shares of state-owned companies listed on LJSE
In the strategy proposal, we can read that as one of the options for promoting liquidity and market capitalization, they will consider the creation of a fund of shares of state-owned companies and the shares of which would be listed on the LJSE. This is expected to increase LJSE’s liquidity. As it is already known, the State is an important owner of companies in Slovenia, but the problem is that only a few of the companies are listed on the stock exchange. Regarding this, we note that the 10 biggest Slovenian companies (all 10 being SBITOP constituents) amount to c. 99% of the whole equity traded amount throughout the year.
Regarding fund of shares of the state-owned companies listing on the stock exchange, we emphasize that Romania can be an exceptional example of a professionally guided fund resulting in a major improvement for the capital market, with its Fondul Proprietatea fund [Bloomberg: FP RO Equity] as an example.
Talking about liquidity, further digitization in financial services is expected with an establishment of a single platform for investing in SMEs (small and medium-sized companies), which should enable the acquisition of capital on the primary market and safe and transparent trading on the secondary market.
2. Additional offer of bonds on the market
The second pillar of the strategy envisages the creation of an additional offer of bonds on the market. It should mainly concern corporate green bonds, mortgage and communal bonds, and government bonds of smaller values, which could also be interesting for small investors, along with municipal bonds. Slovenia, still, does not have municipal bonds, but this act, would reduce the dominant position of banks in financing local communities, increase their autonomy and reduce financing costs. We note that Croatia did a similar thing just this month, issuing bonds available to retail demand that could be purchased in small lots. As everyone could witness, it turned out extremely successful.
3. Financial education
The ministry believes that this will give the economy a better understanding of the advantages and disadvantages of different forms of financing, along with better knowledge of financial products and instruments for the general public. We think this should result in increasing the interest of the general public in capital markets, given the recent response of the Croatian retail investors showing strong demand for Government bonds with a maturity in 2025. We think general retail will respond positively when investment opportunities are presented to them due to the high amount of deposits. Currently, Slovenia has one of the highest rates of household savings in banks and one of the lowest rates of investments in financial markets (still better than Croatia 😊). This part of the strategy would give the possibility for retail investors to trade financial instruments on these accounts without incurring tax liabilities. LJSE evaluated this strategy proposal as positive. They have given a view that the goals are set ambitiously, but rightly so.
Overall, this act should result in higher visibility of the Slovenian capital market to foreigners, higher liquidity of the Slovenian stock exchange, improvement in financial literacy of the population in Slovenia, greater activity of small investors and new issuers to be listed on the LJSE. Of course, a concrete action plan for specific segments is not made public. , How the presented goals will be achieved will be known very soon, while the act shows the ambitions of the Slovenian Ministry of Finance.
By the end of January 2023, producer prices of industrial products on the domestic market grew by 19.2% YoY, and 0.9% MoM.
The latest producer prices of industrial products (PPI) overview has recently been published by the Croatian Bureau of Statistics, DZS. In the report, we can see that the producer prices of industrial products increased by 19.2% YoY, and 0.9% MoM in January 2023. Meanwhile, producer prices excl. Energy increased by 0.7% MoM, and 10.9% YoY, showing us that other input costs besides energy, such as prices of material/commodities and other goods required for production have also increased. This would also indicate that even though the initial surge in PPI was driven by higher energy costs, as the prices of energy have somewhat stabilized in the last couple of months, the higher prices have spilled over to other segments of the industry. This would also mean that it would take longer for these prices to stabilize and start declining, as they are not under the influence of only higher energy prices anymore.
Breaking the PPI by categories, on a YoY basis, the producer prices in the Energy category grew by 42.1%, in Non-durable consumer goods by 14.3%, in Durable consumer goods by 12.8%, in Intermediate goods by 8%, while in Capital goods they grew by 5.5%. Meanwhile, on a MoM basis, the largest growth was recorded in Non-durable consumer goods and Energy, both at 1.2%, followed by Intermediate goods at 1%, Durable consumer goods at 0.9%, while they recorded a decrease in Capital goods, at 0.4%.
Producer prices of industrial products (June 2016 – January 2023, %)
Source: DZS, InterCapital Research
Next up, we have the breakdown of the producer prices of industrial products by sector. On a YoY basis, the largest growth was recorded in prices in Electricity, gas, steam and air conditioning supply, which increased by 59.4%, followed by Manufacturing at 11.8%, and Water supply; sewerage, waste management and remediation activities, by 1.7%. On the other hand, Mining and quarrying recorded a decrease in prices of 13.5%.
At the same time, on a MoM basis, producer prices in Mining and quarrying grew by 1.2%, in Manufacturing by 0.9%, and in Electricity, gas, steam and air conditioning supply by 0.7%. If the trend from the year is anything to go by, then the continued growth in the PPI will inevitably spill over to the CPI. As these prices are under continued pressure, and further uncertainty is also present, especially when it comes to energy costs, the PPI in the upcoming period could go either way. The only question then is, will the producers shoulder the higher costs, pass them to consumers, or do a combination of these things? Of course, producers have proven quite resilient when it comes to higher costs, and thus far have managed them effectively, never passing the entire cost to the end consumer, while at the same time, trying to maintain as much of their profitability margins & market shares as possible.