COMPARITIVE ANALYSIS OF THE STOCK MARKETS OF ALBANIA, BELGIUM, BULGARIA, CANADA & CROATIA

Kameshwar Teja Bhagwaty, Ishita Kumar, Supragya SInha, Ankita Agarwal, Chaitanya MuraliBusiness Law Honours, VIII Semester, NLU Jodhpur

Table of ContentsComparative Evaluation of stability of the stock markets and the factors contributing to stability or instability in Croatia1Overview of the Stock Market in Croatian Economy1Factors responsible for the stability or instability of Stock market in Croatia1Existence of Company Stocks that trade with a very low free float:1Relatively Undeveloped Financial Market:2Rapid Growth of Stock Market and valuation concerns and the risk of a correction3Co-movements and spill over effects between American and Croatian stock markets:3Foreign Owners of Croatian Stock Market Stability and the Single Pact Market4Comparative Analysis with Stock market in other jurisdictions4COMPARATIVE STABILITY ANALYSIS OF THE ALBANIAN STOCK MARKET6INTRODUCTION6THE PRIVATIZATION REGIME7REFORMS IN THE FINANCIAL SYSTEMS8CONCLUSION10THE HEALTH OF THE CANADIAN STOCK MARKET11INTRODUCTION11FACTORS AFFECTING STABILITY IN CANADIAN STOCK MARKET:15Business Activity in the Canadian Economy15Movement of International Investment16Speculative Trading & the Canadian Dollar17GOVERNMENTAL FACTORS:17What is Monetary Policy?17Bank of Canada & Monetary Policy18Regulating the Money Supply18Manipulating Interest Rates19Controlling Inflation Rates20Ensuring Political Stability21CONSEQUENCES OF THE INSTABILITY/STABILITY FACTORS:21International Trade & the Economy21International Trade & the Cost of Living22International Tourism & Travel23Exchange Rates & Foreign Debt24THE STABILITY OF THE STOCK MARKET IN BELGIUM24General developments24Funding review26Conclusion26Cautious growth estimate29INTRODUCTION TO THE ECONOMY OF BULGARIA:29REFORMS OF 1990s AND EARLY 2000s:30REFORM FROM THE CRISIS OF 1997:31ECONOMIC DOWNTURN OF 2009:31NEW GOVERNMENT AND FISCAL DISCIPLINE:32CURRRENCY OF BULGARIA:32BULGARIAN STOCK EXCHANGE:33SECTORAL ANALYSIS: INDUSTRY AND CONSTRUCTION:34SECTORAL ANALYSIS: ENERGY36SECTORAL ANALYSIS: SERVICES AND TOURISM37SECTORAL ANALYSIS: Agriculture, forestry and fishing38SECTORAL ANALYSIS: Mining and minerals40SECTORAL ANALYSIS: INFRASTRUCTURE41SECTORAL ANALYSIS: SCIENCE AND TECHNOLOGY41TAXATION, STATE BUDGET AND DEBT:42FOREIGN ECONOMIC RELATIONS:43CURRENT SCENARIO IN BULGARIA:45EU CRITICISM:46STATUS QUO: STILL VULNERABLE47

Comparative Evaluation of stability of the stock markets and the factors contributing to stability or instability in CroatiaOverview of the Stock Market in Croatian EconomyCroatias capital markets have experienced very rapid growth, but the market continues to lack depth and liquidity. Equities have been the key driver of the rapid capital market growth. The favorable tax regime applied to equities likely also contributes to the popularity of the market. Investor education of the risks in the system, which the authorities have started addressing after the Financial System Stability Assessment Report update, is indeed to temper over-enthusiasm and herd behavior.Factors responsible for the stability or instability of Stock market in CroatiaExistence of Company Stocks that trade with a very low free float: In Croatia, while market capitalization has more than tripled since 2001 to 133 percent of GDP, the overall turnover ratio averaged 8.1 percent of capitalization, one of the lowest in the region. The existence of a number of company stocks that trade with a very low free float (the estimated amount of shares not readily and freely available for resale) contributes to low market liquidity and to the possibility that large orders generate significant price volatility.[footnoteRef:1] [1: Republic of Croatia: Financial System Stability Assessment Update, IMF Country Report No. 08/160, (2008) p.19, 16-17 available at http://www.imf.org/external/pubs/ft/scr/2008/cr08160.pdf (last visited on March 29, 2015).]

It must be explained here what is meant by the low free float stocks in a market. The "float" of a stock is the number of shares available to the public for trading. It doesn't count shares owned by company officers and insiders. In this case, it boils down to a question of supply and demand. Because of their limited supply, stocks with small floats can make major moves-either to the upside or downside.[footnoteRef:2] [2: David Zeiler, Risk in low float stocks, available at http://econintersect.com/b2evolution/blog3.php/2012/05/14/risk-in-low-float-stocks (last visited on March 29, 2015). ]

While lowfree-float stockscan be a good investment bet because their prices can move up quickly. If such a stock attracts the attention of even a few investors, the demand supply mismatch can push up its price.However, the low free-float stocks tend to have lesser liquidity, which can result in a possible mispricing of the stock. Investors with a low ticket size can capitalise on this mispricing. Besides, low-float companies are prime candidates for de-listing.Experts also flag further issues related to low free-float stocks. There are very few that are good for investment. Typically, shares with a higher float are associated with better governance since the promoter has lesser influence and other shareholders have more power to exercise their rights. The stocks with a low public float are open to the promoters' whim. The promoters who hold their stocks closely for the purpose of exercising control over the company find it easy to manipulate the stock price for their gain. Therefore, Companies that keep their stock float low, however, never shed the risk of a rapid loss in value. And it's investors who pay the price.[footnoteRef:3] [3: Ibid.]

Relatively Undeveloped Financial Market: In Croatia, it has been noted by the IMF Financial System Stability Assessment Report, that the interbank money market is shallow and segmented, with the market unable to recycle liquidity efficiently across banks. Only 20 percent of all transactions take place in the market with the remaining bilaterally. The FX market is more active and less volatile. Daily turnover has increased more than fourfold since 2003 to an average of 500 million in 2007. Although spot transactions have traditionally represented the bulk of FX transactions, the volume of FX swaps has increased recently, with the share rising to 60 percent of total transactions in 2007. The weaknesses and absence of longer tenor quotations in the money market along with exchange rate stability, hinder the development of longer term hedging markets for managing interest and exchange rate risks. Capital markets have recently boomed, with market capitalization one of the highest in the region (133 percent of GDP). However, the market continues to lack depth and liquidity and is dominated by equities; the overall size of the bond market remains small (15 percent of GDP).[footnoteRef:4] [4: Supra note 1 at p.38, 55. ]

Rapid Growth of Stock Market and valuation concerns and the risk of a correctionThe very rapid growth of the stock market has raised valuation concerns and the risk of a correction. The limited supply of securities coupled with increasing demand has exerted substantial pressure on the process, though significant price correctionn has indeed taken place since early 2008. Co-movements and spill over effects between American and Croatian stock markets: Despite the fact that intra-sectoral connections between Croatian and American business sectors are rather weak, it is clear that the investors on the Croatian stock market dominantly rely on American indices movements. This was especially apparent during the beginning of the World Financial Crisis in October 2008 when the prices of Croatian companies had almost nothing to do with their business results. The behaviour of Croatian investors was largely based on the psychological effects of the crisis, and this is why behavioural finance is introduced to explain what pure financial reasoning could not. High correlation and co-movements between Croatian and American indices could be explained by three concepts; global factors, contagion and irrational escalation.[footnoteRef:5] [5: Domagoj Sajter Tomislav ori, (I)rationality of Investors on Croatian Stock Market Explaining the Impact of American Indices on Croatian Stock Market, Working Paper Series, Paper No. 09-01 (2009) available at http://web.efzg.hr/repec/pdf/Clanak%2009-01.pdf (last visited on March 29, 2015); See also Beltratti, A. & Morana C. (2008) "Comovements in international stock markets" in Journal of International Financial Markets, Institutions and Money, 18 (2008) 3145.]

Foreign Owners of Croatian Stock Market Stability and the Single Pact MarketForeign owners are taking hold of an increasing portion of Croatian economy with the help of Croatias political, banking, and trade clusters. Small shareholders are losing shares because their companies are being handed over to the stock exachange manipulations, to the Darwinist entrepreneurship and management. They have no knowledge of the anonymous forces which depreciate their ownership. At all times and in all cases, they lose. Those who buy their shares win, due to non-transparent nature of capital relations and due to anonymous capital which buys the shares.[footnoteRef:6] [6: Davorka Vidovic, Davor Paukovic, Globalization and Neo-liberalism: Reflections on Croatian Society, (Zagreb: 2007), p. 132. ]

Thus, the non-conceptual privatization and the stock market transactions are truly a part of the forced redistribution of ownership in Croatian economy.[footnoteRef:7] [7: Id at 133.]

Comparative Analysis with Stock market in other jurisdictionsCroatia joinedEuropean Unionon 1 July 2013, and in spite of the rather slow post-recession recovery, in terms of income per capita it is still ahead of some European Union member states such asBulgaria,Romania, and Latvia.[footnoteRef:8] At the same time, Croatias capital markets have experienced very rapid growth, but the market continues to lack depth and liquidity, as noted above. [8: Eurostat Statistics Explained, available at http://ec.europa.eu/eurostat/statistics-explained/index.php/Main_Page (last visited on March 29, 2015). ]

One of the important factors explained above contributing to the risks and liquidity issues in Croatian stock market is that regarding the existence of a low free float stocks in the market. It is pertinent to note that while the low free float maybe a distinguishing feature of the Croatioan capital market in the Eurozone, however, as far as India is concerned, traditionally, promoters of Indian companies have been wary of sharing their prized asset with public. In fact, the free-float capitalisation of Indian firms is among the lowest in both the developed and emerging markets. Many companies are managed by families, which prefer to exert control by way of a higher level of ownership in the firm. While this leaves very little in the hands of the small investor, careful stock selection can help them benefit from companies with a low free float, or limited number of actively traded shares.[footnoteRef:9] [9: Should you invest in a low free float stock?, available at http://articles.economictimes.indiatimes.com/2014-12-08/news/56839487_1_public-float-free-float-stocks (last visited on March 29, 2015).]

As far as the relationship and comparison between Croatia and other Eastern European markets is concerned, it is pertinent to note that the EBRD is working to strengthen local capital markets and encourage the use of local currencies in the countries where it works, to counteract major weaknesses in their transition to open-market economies. The SEE Link is a prominent initiative aimed at increasing liquidity in southern and eastern Europe. The EBRD, through its Local Currency and Capital Markets Development Initiative, is proposed to support these regional integration efforts that will contribute to improving the options for raising funding through capital markets. SEE Link is proposed to standardise and develop financial services in the region, making it more attractive to international investors, including the EBRD.[footnoteRef:10] [10: ViktorijaMelohina, EBRD supports development of regional capital markets in Bulgaria, Croatia and FYR Macedonia, (July, 2014) available at http://www.ebrd.com/news/2014/ebrd-supports-development-of-regional-capital-markets-in-bulgaria,-croatia-and-fyr-macedonia.html (last visited on March 29, 2015).]

In the light of the factors discussed above that are responsible for the stability or instability of Stock market in Croatia; it has been noted that further deepening of the capital market in Croatia should be supported by:[footnoteRef:11] [11: Republic of Croatia: Financial System Stability Assessment Update, IMF Country Report No. 08/160, (2008) p.19, 18 available at http://www.imf.org/external/pubs/ft/scr/2008/cr08160.pdf (last visited on March 29, 2015).]

(i) Stronger enforcement of disclosure requirements;(ii) Strengthening shareholder rights by revising provisions in the Companies Act regulating conflict of interest;(iii) Enhanced market surveillance and analysis;(iv) An adequate legal framework and de-mutualisation of the stock exchange to enhance market integrity;(v) Addressing the legal framework for the finality of settlement; (vi) Furthermore, it has also been noted that increased sale and privatization of public enterprise could add to market liquidity.

COMPARATIVE STABILITY ANALYSIS OF THE ALBANIAN STOCK MARKETINTRODUCTION It is submitted that the Tirana Stock Exchange (referred to henceforth in the assignment as TSE) is the first exchange ever established in Albania. The Bank of Albania (referred to henceforth in the assignment as BoA) was instrumental in its set up with the goal of setting up a metamorphosis of the financial market system of Albania. The Tirana Stock Exchange dealt as an intermediary for trading of treasury bills which were issued by the Albanian government. However, it also acted as the primary market for auctioning of the same until 1998 where this role was taken over completely by the Bank of Albania. It is submitted that the Stock Exchange separated from the Bank of Albania in 2002 to function as a joint-stock company operated by the State.[footnoteRef:12] It further developed by obtaining a final license to operate as a securities market in 2003[footnoteRef:13] and hired a panel of experts to draft the development of the Tirana Stock Exchange.[footnoteRef:14] [12: Page 13, Annual Report of the Tirana Stock Exchange, 2002.] [13: Page 17, Annual Report of the Tirana Stock Exchange, 2003.] [14: Page 33, Report of the Albanian Securities Commission., 2005.]

It is submitted that by far the most important economic reforms undertaken in Albania is the privatization process. It started since 1991 and by the end of 1994, the first phase of it was already completed where light industry sector small and medium enterprises (SMEs) and state farms were privatized. In 1995, the second phase of privatization started. An investment voucher scheme was used to privatize companies larger than SMEs. Despite its philosophy to distribute the common property to the people, this process resulted to be a failure. Indeed, most of the people sold their vouchers in the informal market from 10 to 20 percent of face value. Hence, these huge amounts of vouchers were concentrated in the hand of certain individuals which became the major shareholders in the privatized companies.

THE PRIVATIZATION REGIMEHowever, it is submitted that it is important to stress out that, different from Czech Republic, one of the main reasons why the privatization process through vouchers failed, was the lack of a stock exchange and other capital market institutions in Albania. After year 1997, only strategic state-owned companies and few non-strategic ones were left to privatize. During this period of time, Albanian government, under the consulting of donors and foreign experts privatized many of these companies to strategic investors by selling the major stake of shares. Among these companies can be mentioned National Commercial Bank, Albanian Mobile Communication, Savings Bank etc. The method used by the government on the privatization of these companies, indirectly counted out the Albanian population. Differently from the experiences on CEE or SEE countries, in Albania never were made any initial public offer (IPO) for state-owned companies to be privatized. For this reason Albanians never had the chance to be owners) in strategic companies. In 1997, the fall of the informal saving schemes brought Albania to an anarchical situation and a drastic cut of 7% in countrys GDP and inflation increasing to over 40%. The inadequacy of the financial system, especially its regulatory and supervisory framework, led to the proliferation of informal financial arrangements including pyramid schemes, the collapse of which triggered the civil crisis of early 1997, and the subsequent fall of the government[footnoteRef:15]. However, after agreement signed between Albanian government and IMF, very tough programs were implemented and the economy started to recover in very short period of time. Thus, GDP growth started since 1998 and till 2004 Albanian economy grew up in at a yearly average of 7.5% [15: Irving Jarvis, 2000.]

From central planning economy, Albania inherited a banking system which was underdeveloped. After 90s, for the new democratic government, one of the most important means to accomplish the objectives on macroeconomic development and stabilization was the reform on banking and financial sector. Thus, strong efforts were made to develop especially banking sector by making an independent central bank as well as establishing few commercial banks.

REFORMS IN THE FINANCIAL SYSTEMS Also, reforms were undertaken to establish nonbank financial sector. Hence, Insurance Institute (INSIG) was established to pave the way for a modern insurance sector and in 1995-96 important steps were made to establish a capital market as well as its necessary institutions. Only after 1998, insurance sector started developing when private capital companies entered the market, while capital market remains still undeveloped with a formal stock exchange which never was backed by the state and has no listed companies so far. Efforts were made in compilation of legal infrastructure to make possible the financial system work efficiently. Donors helped the government establish a comprehensive legal framework for the financial sector and strengthen the independence of the Bank of Albania (BoA), which manages monetary policy. Also, work continues on introduction of an International Accounting Standards (IAS) based accounting system for both the banking and enterprise sectors, including a uniform chart of accounts for enterprises, leading to enhanced transparency and increased intermediation. Regulatory framework has been improved and continues to be subject of changes even for banking or non-banking system. However, as a matter of fact, donors funds have been concentrated more in the banking sector than on the other side of the system.[footnoteRef:16] The main factor threatening the soundness of the Albanian financial system is the high level of informality in the countrys economy. [16: Implementation Completion Report, The World Bank, 2005.]

In Albania, about half of total economic activity is considered informal. The predominance of such informality contributes to low levels of credit from the formal banking sector and wipes out any possibility to use capital markets as an financing alternative, as enterprises seek to avoid drawing attention to themselves from tax and other regulatory authorities. Also, governance and management remain weak in the real sector. Private companies are often subject to poor standards of governance and management, and therefore represent serious credit risks. Business accounting practices are particularly weak, reducing bank capacity to assess creditworthiness and, consequently, their willingness to lend. The lack of professional capacity in the accounting and audit fields means full movement to accounting standards is still several years away. Strengthening internal audit functions at enterprises, ensuring the independence of auditors, enforcing a code of conduct that is consistent with international standards, and observing more open standards of transparency and disclosure would contribute to more and better information for market purposes. In spite of the up-mentioned problems, Albania has a relatively sound financial system. Prudent monetary and fiscal policies have contributed to a stable macroeconomic environment. The system does not appear to be highly vulnerable to any immediate macroeconomic or financial sector shocks. The financial system is at an early stage of development Likewise, even other donors such as EU, USAID, IFC and EBRD concentrated their financial system technical assistance programs in the development of banking sector and while the core legal and regulatory framework is in place, several recommendations are made that aim to broaden and deepen markets to encourage financial intermediation.[footnoteRef:17] [17: Albania: Financial System Stability Assessment - FSSA, IMF Country Report, August 2005]

Even there is an undeveloped capital market, in Albania there are active operators in the market which create the demand and supply on securities. The main securities supplier is Albanian Government issuing public debt securities. No local government debt securities (Municipality Bonds) issued so far. Companies are another important supplier issuing only ownership securities. Thus, shares of state companies are privatized to strategic investors, while private companies sell their shares in informal market. The demand for securities is committed generally by financial institutions such as commercial banks, brokerage houses (generally invest on government papers), insurance companies, pension funds as well as international financial institutions (i.e. IFC, EBRD, American Enterprise Fund etc. which invest in private company shares). Another important securities demander is public, generally individuals who invest their savings in T-Bills, and businessmen who buy shares in informal market to take-over companies they privatized from the state. CONCLUSIONThere are financial institutions carrying out the intermediary services in Albanian securities industry. Thus, despite the sole stock exchange, ASC provided with license SRC which makes possible the settlement of share transactions; brokerage houses which are supposed to carry out any securities public offer or secondary market trade (actually there are 10 subjects licensed by ASC to intermediate in securities. There are no specialized intermediaries such investment banks, custody banks or depositaries for securities, however, given the actual development stage of the market, it is not considered as a problem in a mid-term.[footnoteRef:18] All securities in Albania are kept in book-entry form. Only privatization vouchers were in a physical form. [18: Gjergji Artan, (2004), Financing of Albanian business through Exchange, MONITOR Economic Magazine]

It is submitted that the biggest reason for the stumbling and nascent development of the stock exchange is that there is complete lack of financial transparency and tendency of the local business to avoid taxes. Hence, even though the banking system doesnt fulfill their financial needs, local companies do not see stock exchange as a financing alternative in the short run. They are afraid of testing new financial alternatives, different from classical banking system, and wait for state to make the first step by listing a state-owned company in exchange. However, it is worth to mention that, there are many companies which comply with the listing requirements of TSE. Meanwhile, besides banking system, private companies in Albania continue to rely primarily on their own retained earnings and informal market as the means of financing their activities. However, it is also submitted that secondary market for government papers remains undeveloped because of the over-liquidity of the main actors, commercial banks, which hold these instruments in their portfolios until the maturity. Even though BoA made efforts to increase the participation of individual investors in the primary market by opening a retail window[footnoteRef:19], it doesnt brought any change in making active the secondary market for public debt securities. [19: Albania: Financial System Stability Assessment , IMF Country Report, August 2005]

THE HEALTH OF THE CANADIAN STOCK MARKETINTRODUCTIONCanadiansecuritiesregulationis managed through laws and agencies established by Canada's 13 provincial and territorial governments. Each province and territory has a securities commission or equivalent authority and its own piece of provincial or territorial legislation.Unlike any other major federation, Canada does not have a securities regulatory authority at the federal government level. Provincial governments began to establish regulatory agencies in 1912 (in Manitoba), and the Privy Council decided in Lymburn and Mayland, [1932] A.C. 318 that such legislation is authorized under the provincial property and civil rights power.Notwithstanding the lack of a federal regulator, the majority of provincial security commissions operate under apassport system, so that the approval of one commission essentially allows for registration in another province. However, concerns with the system remain. For example, Ontario, Canadas largest capital market, does not participate in the Passport regime. Concerns with the provincial system of securities regulation has led to repeated calls for a national securities system in Canada. Currently, the Government of Canada is working towards establishing a national securities regulatory system that it says will provide: better and more consistent protection for investors across Canada; improved regulatory and criminal enforcement to better fight securities-related crime; new tools to better support the stability of the Canadian financial system; faster policy responses to emerging market trends; simpler processes for businesses, resulting in lower costs for investors; and more effective international representation and influence for CanadaEach province has its own securities regulator, which is either a self-funded commission or an entity funded within a larger government department. The securities regulator administers the provinces securities act and, correspondingly, promulgates its own set of rules and regulations. The securities regulator relies on the work of two national self-regulatory organizations, the IIROC (Investment Industry Regulatory Organization of Canada) and the MFDA (Mutual Fund Dealers Association) for most aspects of regulation of the organizations' member firms and their employees. Accountability for securities regulation extends from the securities regulator to the Minister responsible for securities regulation and, ultimately, the legislature, in each province. The largest of the provincial regulators is theOntario Securities Commission. Other significant provincial regulators are theBritish Columbia Securities Commission, theAlberta Securities Commissionand theAutorit des marchs financiers (Qubec).The provincial and territorial regulators work together to coordinate and harmonize regulation of the Canadian capital markets through theCanadian Securities Administrators(CSA). The major provincial securities regulators also participate in various international co-operative organizations and arrangements.The CSA has focused its efforts on: developing uniform rules and guidelines for securities market participants; coordinating approval processes; developing national electronic systems through which regulatory filings can be made with and processed by all jurisdictions; and coordinating compliance and enforcement activities.The most important CSA effort is the implementation of the passport system. Under the passport system, a market participant can obtain a decision from its principal regulator and, through a simple filing, have the same decision deemed to be issued under the legislation of all other participating jurisdictions, in essence providing a passport to undertake capital markets activity across Canada. The passport system covers prospectus filings, registration of securities firms and individuals, and certain types of discretionary exemptions. Ontario is recognized by the other jurisdictions as a principal jurisdiction for passport decisions but the Ontario Securities Commission has not adopted the passport rule itself. As a result, Ontario market participants have access to other jurisdictions through the passport system but participants from other jurisdictions do not have access to Ontario. Instead, the Ontario Securities Commission follows a "mutual reliance" policy in which it decides in each case whether to accept the decision of the principal regulator. Ontario says it supports the harmonization and improved coordination of securities regulation in Canada; however, it does not wish to participate in the passport system because it would prefer creation of a national securities regulator.Public education on financial literacy, investment and financial decision making is a secondary focus of the provincial regulators. The Ontario Securities Commission (OSC) set up the non-profit organization Investor Education Fund (IEF) for this sole purpose. Funded by the OSC but acting independently, IEFs primary goal is to provide Canadians with financial tools and information to improve financial literacy.On February 21, 2008, the Government of Canada appointed an Expert Panel on Securities Regulation to provide advice and recommendations on securities regulation in Canada.On January 12, 2009, the Expert Panel on Securities Regulation released its final report, in which they highlighted several concerns with the current structure.First, the Panel was concerned that the fragmented structure, requiring decisions to be coordinated across up to 13 jurisdictions, makes it difficult for Canadian securities regulators to react quickly and decisively to capital market events. One illustration of this difficulty was the adoption in September 2008 by some of Canadas international counterparts, including the United States and United Kingdom, of restrictions of short-selling of certain stock as a temporary stability measure. The Canadian response lagged behind the coordinated efforts of the United States and the United Kingdom, and was not uniform across the provinces. A second illustration was the delay between the freezing of the non-bank Asset Backed Commercial Paper (ABCP) market in August 2007 and the release of a consultation paper by the Canadian Securities Administrators to seek input on a number of proposals that aim to prevent similar capital market failures in the future.The Panel found that the fragmented Canadian securities regulatory structure is prone to foster slow securities regulatory responses, which makes Canada vulnerable to market and reputational risks.Second, the Panel expressed concern that the Canadian system of provincial mandates is incongruent with the national response required to address developments in capital markets that are increasingly national and international in scope. They found that one of the important lessons from the recent capital markets crisis throughout 2008-2009 is that systemic risk is increasingly presenting itself in capital markets rather than being solely confined to banking institutions. The Panel reported that effectively addressing systemic risk requires the coordination and collaboration of all financial sector regulators in Canada. It also requires working effectively with international counterparts. The Panel did not believe that the multiple provincial and territorial securities regulators are able to work effectively as part of a national systemic risk management team, as structural challenges will likely compromise its ability to be proactive, collaborative, and generally effective in helping to address larger capital market issues on a timely basis. A delayed response, which is poorly managed by any one of the securities regulators, could have a detrimental impact on the integrity of Canadas capital markets as a whole.Finally, the Panel reported that the current structure fundamentally misallocates resources, causing securities regulation to be less efficient and effective. Resources must be devoted to keep 13 separate securities regulators operating in Canada. This is inefficient since each jurisdiction dedicates a different level of resources to securities regulation, which causes the intensity of policy development, supervision, and enforcement activities to vary across Canada. In addition, most efforts are duplicative, which results in unnecessary costs, overstaffing, and delays. Canadians, in turn, are afforded different levels of investor protection depending on the jurisdiction in which they reside or invest. Second, market participants will continue to be burdened with undue compliance costs, even with the full implementation of the passport system. Market participants will still have to pay fees in up to 13 jurisdictions. They will still have to deal with the general inefficiencies associated with differences between provincial statutes and regulations, the ongoing use of local rules, and variations in the interpretation of national rules.The value of the Canadian dollar relative to other national currencies plays an important role in the political and economic life of the nation. However, it is not often clear exactly how the price of the dollar is determined, or what role governments and other financial actors play in this process. This article provides an introduction to the process of valuing the Canadian dollar relative to other nations' currencies. Specific topics discussed include the modern system of currency exchange, market and government influences on the value of the dollar, as well as important economic, political, and social consequences caused by changes in the dollar.FACTORS AFFECTING STABILITY IN CANADIAN STOCK MARKET:Business Activity in the Canadian EconomyOne of the most important forces affecting the supply and demand for the Canadian dollar is the general level of business activity in the economy. Increases or decreases in the level of business activity, relative to other national economies, can often have a corresponding impact on supply and demand for the dollar and its value relative to other currencies. When business activity increases (there are more businesses operating, producing and selling more goods and services, and employing more workers), demand for the Canadian dollar rises in order to cover the higher levels of activity. If supply is not adjusted accordingly, then the price of the dollar relative to other currencies may also increase. Similarly, if the level of business activity decreases, then demand for the Canadian dollar follows suit. If the supply is not adjusted accordingly, then the value of the dollar may fall relative to other currencies.Movement of International InvestmentAnother closely related factor is the movement of investments in and out of the Canadian economy. Every day companies, financial institutions, and individuals make investments around the world, be it purchasing foreign stocks and bonds, buying foreign exports, or engaging in business activities in another country. Changes in the flow of these investments between Canada and other countries can, in turn, impact the value of the Canadian dollar.Take the following example: an American investor decides to sell his/her American stocks and buy Canadian ones. S/he begins by liquidating his/her American stocks into American currency. In order to buy the Canadian stocks, however, s/he must first acquire Canadian dollars which takes place by exchanging the American dollars for Canadian ones in the currency exchange markets. Once those Canadian dollars are in hand, Canadian stocks can be purchased accordingly.A similar process occurs whenever any foreign investor makes an investment in Canada, be it the buying of stocks or bonds, making a business investment, or purchasing Canadian exports. In order to make these investments in Canada, the foreign investor must first acquire the necessary Canadian dollars in the international currency markets. Growth in the level of foreign investments, therefore, result in increased demand for the Canadian dollar. If the supply of the dollar is not adjusted accordingly, then its price may also rise in value relative to other currencies.An opposite effect can occur whenever investments leave the country. This happens when there is a downturn in foreign purchases of Canadian stocks, bonds, businesses or exports, or when there is growth in Canadian investments in other parts of the world. This causes lower demand for the Canadian dollar and an increase in its supply, resulting in a lower price unless the currency supply is adjusted accordingly.Speculative Trading & the Canadian DollarJust as in stock markets, there is also a high level of speculative activity in international currency markets. Many investors trade national currencies not because they need them to make actual business investments, but because they looking to make profits on changes in the value of currencies over time. These investors will buy large amounts of a currency on the speculation that it will increase in value over time, and that they will be able to sell the currency for a profit at a later date.These speculative activities can impact the price of the Canadian dollar relative to other currencies. When speculative investors believe the price of the Canadian currency will increase over time, they will change their holdings from other currencies to the Canadian dollar. This, in turn, increases demand for the Canadian dollar and will consequently increase its price relative to other currencies, if the supply is not adjusted accordingly. Similarly, if speculative investors believe the dollar is weak and will lose value over time, then demand will fall and supply will rise as investors sell off their investments. This, in turn, can result in a sharper decrease in the price of the Canadian dollar relative to other currencies.GOVERNMENTAL FACTORS:What is Monetary Policy?While the Canadian government participates in a floating exchange system, this does not mean it is a complete bystander in regard to the value of its currency. In fact, the Government of Canada regularly intervenes, both directly and indirectly, in the currency exchange markets to influence the supply and demand of its currency and also, in turn, the price of the Canadian dollar relative to other currencies.These government policies and activities regarding its currency are commonly referred to as monetary policy. While the Canadian government today no longer pursues a monetary policy in which it attempts to keep the price of the Canadian dollar fixed or pegged relative to other currencies, it nevertheless has important monetary objectives. For example, it is usually the case that the government will prefer slow and moderate changes in the market value of its currency rather than drastic and extreme ones. The government may also prefer the Canadian dollar to be neither too weak nor too strong relative to the currencies of important trading partners or foreign investors.Bank of Canada & Monetary PolicyWho exactly in the Canadian government oversees the nations monetary policy? The answer is the Bank of Canada, the nations central bank. The Bank of Canada observes and analyzes domestic and international economic/financial trends and highlights important national goals. Moreover, it has the authority to manipulate important financial levers, such as the money supply and interest rates, in order to achieve these goals and objectives. As such, the Bank of Canada plays a significant role in the economic and financial life of the country, and has a great influence on the value of the Canadian dollar.Regulating the Money SupplyHow exactly does the Bank of Canada influence the price of the Canadian dollar? One way is through direct manipulation of the money supply in currency exchange markets. The Bank of Canada accomplishes this by buying and selling Canadian currency in the market in order to adjust the supply of dollars available for investors and speculators.Take, for example, a situation in which market investors and speculators are selling off their holdings of Canadian dollars in large quantities. Such a situation could lead to a drastic fall in the price of the Canadian dollar, as demand weakens and a flood of Canadian dollars hit the market. In order to moderate this change in price, the Bank of Canada will intervene by using its foreign currency reserves to buy massive quantities of Canadian dollars. This, in turn, reduces the supply available and should stabilize the dollars price.It is important to note that, in some cases, individual governments and central banks simply do not have the financial reserves necessary to cope with drastic fluctuations in the value of their currencies. As a result, central banks will often work closely with one another when such interventions become necessary. This may include lending money to one another, or coordinating interventions in the currency markets in order to stabilize a vulnerable currency.Manipulating Interest RatesAnother important factor is the level of interest rates in Canada. Interest rates constitute the amount lenders charge individuals and businesses to borrow money. Suppose the interest rate in Canada is higher than in the United States (particularly after each countrys rate of inflation is taken into account). This means that lenders can get a higher rate of return for lending in Canada than in the United States. In order to take advantage of this higher rate of return, international investors will shift their portfolios (for example, government bonds) from the United States to Canada.These sorts of shifts cause an increase in demand for Canadian dollars. In order to buy Canadian government bonds, investors first have to purchase Canadian dollars; the result is an increase in the demand for Canadian currency. Meanwhile, the demand for the US currency would fall as investors divest themselves of US government bonds in order to reinvest that money in Canada, where they can gain a higher rate of return. The overall result: a rise in the value of the Canadian currency relative to its US counterpart.As such, the Bank of Canada can attempt to influence Canadian dollar exchange rates by manipulating the interest rates. If the Bank wishes to stop or slow a drop in the value of the Canadian dollar, it may raise interest rates to levels higher than in other nations; this, in turn can spur investment in Canada relative to other nations and demand for the dollar. Conversely, if the Bank wishes to stop or slow a rise in the value of the dollar, it can do so by lowering interest rates below other countries, thus causing lower relative investment and demand for the dollar.It is, however, important to note that manipulation of interest rates for monetary policy is a very complex task. For example, while higher interest rates may spur higher demand for the Canadian dollar amongst lenders, it can also reduce demand amongst other economic actors. As explained earlier, the value of the dollar depends in large part on the level of business activity and foreign investment. High domestic interest rates often have the result of slowing down general economic activity and investment, as businesses and consumers cannot cheaply borrow the money they need to continue or expand their operations or make consumer purchases. This economic slowdown can, in turn, reduce domestic and international demand for Canadian dollars.Controlling Inflation RatesAnother important tool in monetary policy is controlling inflation rates. Inflation is the rate at which prices for goods and services rise over time. For example, in the 1950s, a bottle of soda pop cost Canadians a dime, while today that same bottle costs nearly two dollars. This increase in price over time (inflation) represents a long-term erosion of the purchasing power of the Canadian dollar; whereas one Canadian dollar used to be able to purchase 10 bottles of pop, now it can only purchase half a bottle.While every modern economy experiences a certain level of inflation, businesses and investors generally prefer an economy with low and stable levels of inflation. Not only does this protect their investments from eroding substantially in value, it also allows for long-term business planning and investing. With low and stable levels of inflation, businesses can predict what their production costs (for equipment, technology, and labour) will be over the long-term. This, in turn, makes those investments safer and encourages companies and individuals to do business in the economy.It is at this point that we can see the importance of inflation and the value of the Canadian dollar. If inflation in Canada is higher than in other countries, domestic and foreign investors will prefer to do business in other nations. This, in turn, causes lower demand for the Canadian dollar and a downward pressure on its value in international currency markets. The exact opposite is true if inflation in Canada is low relative to other countries; low inflation will spur the flow of investment dollars into Canada, increase demand for the Canadian dollar, and place an upward pressure on its value.In order to control inflation, the Bank of Canada actively pursues inflation targets, and does so by manipulating interest rates (or the cost of borrowing) and consumers' spending habits. Take, for example, a situation in which inflation is rising at high levels (meaning that prices for goods and services are increasing substantially each year). To combat such increases, the Bank of Canada will raise interest rates. These higher rates will lead to lower consumer demand in the economy, as it becomes much more expensive to borrow in order to purchase goods and services. Lower consumer demand should, in turn, cause prices to stabilize over time, thus bringing inflation under control.The housing market is a useful illustration of this. Higher interest rates mean that home mortgages become more expensive. This leads to lower demand in the housing market, as many buyers cannot afford the higher mortgage payments. With fewer home buyers, the housing market usually cools down, meaning that home prices stabilize or even fall.Ensuring Political StabilityWhile not a part of monetary policy, another important method of influencing the value of the Canadian dollar is by ensuring political stability. Investors generally prefer economies that are very stable politically, as this allows for long-term business planning and investing. If a nation becomes politically unstable, domestic and international businesses tend to become more cautious in their investments. This, in turn, can reduce demand for Canadian dollars and lower its value in international currency markets.CONSEQUENCES OF THE INSTABILITY/STABILITY FACTORS:International Trade & the EconomyAlmost every country in the world engages in trade with one another; countries import goods and services from other nations, as well as export their own domestic products. Exchange rates have an important role in this process. When Canadians import goods and services from the United States, for example, they usually do so in American currency. Canadian importers must first exchange their Canadian dollars for American funds, and then use those funds to buy American products. The same is also true with regard to Canadian exports: when buying Canadian goods and services, foreign consumers must first exchange their currencies for Canadian dollars.Changes in exchange rates, therefore, can causes changes in the price of Canadas imports and exports. If, for example, Canadas currency significantly increases in value relative to the currencies of its trading partners, then importing foreign goods and services becomes much cheaper. Canadians gets a bigger bang for their buck when exchanging their Canadian dollars and purchasing foreign products. At the same time, however, Canadian exports also become more expensive for other countries to purchase, as foreign importers must exchange more of their currencies in order to buy Canadian products. The exact opposite effect can occur when Canadas currency drops significantly in value relative to its trading partners. Foreign imports become more expensive, while the nations exports become cheaper for other nations to buy.These changes in exchange rates and import/export costs can have significant consequences for Canadas economy. When the Canadian dollar rises in value, Canadian producers are often faced with stiffer foreign competition at home, as the cost of foreign imports becomes cheaper. A higher Canadian dollar also means Canadian exporters must deal with higher prices for their products abroad, with the possibility that foreign consumers may look elsewhere for cheaper prices. There are, however, some benefits to a higher Canadian dollar. Many Canadian producers depend on foreign imports when producing their goods or services (such as raw materials, machinery, or technology). A higher Canadian dollar means lower production costs and greater competitiveness for these Canadian producers.Again, the exact opposite effect can occur when the Canadian dollar drops in value. A lower Canadian dollar means less competition for Canadian producers at home, as foreign imports come more expensive for Canadians to purchase. Canadian producers that depend on foreign imports when producing their goods and services, however, face higher production costs. Finally, Canadian exporters gain a price advantage internationally, as their products become cheaper for foreign consumers to purchase.It is important to note, however, that recent improvements in technology and international transportation have made it possible for modern economies, including Canadas, to reduce the risks of currency fluctuations. Many North American companies, for example, have developed networks of domestic and international suppliers for many components of their products, or stages of their production processes. Factors such as the rising import content of Canadian exports and just-in-time inventory management systems have allowed many Canadian producers to withstand the drastic increase in value of the Canadian currency relative to the US dollar that took place in the late 1990s and early 2000s something that might have put them out of business in an earlier era.International Trade & the Cost of LivingThe relationship between exchange rates and international trade impacts not only Canadian producers, but also Canadian consumers; in particular, the cost of living for consumers (or the average cost of basic goods and services, such as food, shelter, and clothing). Canadians today depend on many foreign imports for their basic needs, be it agricultural products, building supplies, manufactured garments, and so forth. Changes in Canadian exchange rates can make these foreign goods and services more or less expensive to import, which, in turn, influences how much Canadians must pay to cover their basic needs.For example, during the winter months, Canadians usually depend on fruits and vegetables imported from the southern United States. If the Canadian dollar decreases in value relative to the US dollar, then Canadians are forced to pay more in their domestic currency to purchase these basic goods imported from the US. As a result, the daily food cost for Canadians rises and they experience an upward pressure on their cost of living.These sorts of changes can have important social impacts, especially for low-income or fixed-income earners. Drastic increases in the cost of living means that persons have less purchasing power to pay for imported goods and services they depend upon. For those close to the poverty level, this can have dire consequences. Conversely, a rise in the value of the Canadian dollar means cheaper foreign imports, and a decrease in the cost of living. As a result, persons have a greater financial capacity to buy their basic goods and services.International Tourism & TravelAnother area where exchange rates have an impact is international travel and tourism. A fall in the Canadian dollar, for example, has the dual effect of making international travel for Canadians more expensive, while making vacationing in Canada for foreign tourists cheaper. Such a situation can spur Canadas tourism industry, as more Canadians vacation at home instead of abroad, and as more foreign tourists come to Canada to take advantage of the cheaper exchange rate.A rise in the value of the Canadian dollar, however, can have a negative impact on the tourism industry. Such a rise means that foreign tourists must pay more than before to vacation in Canada, with the possibility that they may look elsewhere for cheaper vacations. Moreover, a higher Canadian dollar means that it is cheaper for Canadians to travel abroad, making it easier for them to take vacations outside of the country.Exchange Rates & Foreign DebtExchange rates also can have an important impact on government finances. Canadian territorial, provincial and federal governments, like most governments in the world, have some level of foreign debt that is, debt they owe to foreign financial institutions or governments. In many cases, this foreign debt is held in a foreign currency (be it that of the lender or of a major foreign currency, such as the United States or the European Unions). As such, changes in exchange rates can have considerable implications for the costs associated with maintaining and paying back this foreign debt.In this context, lets look at another example. Say, for instance, the Canadian federal government borrows $1 billion in American currency from a US bank when the Canadian dollar is valued at US $0.90 (meaning one Canadian dollar is worth 0.90 American dollars, or 90 cents). The cost of paying back that loan (without interest) would be around $1.1 billion in Canadian currency. If, however, the value of the Canadian dollar was to drop to US $0.62 (so that one Canadian dollar equaled only 62 American cents), then the cost of paying back that same loan in Canadian currency would climb to CAN $1.6 billion, an increase of $500 million Canadian dollars. The exact opposite holds true when the dollar increases; loans taken out at a lower exchange rate become much cheaper to maintain and pay back as the currency value rises in relation to the lenders currency.These sorts of changes can have further political and social impacts. If the value of a nations currency were to fall, and the cost of maintaining loans (held in foreign currency) were to rise substantially, then governments must find ways to compensate. This may mean increasing taxes, reducing social spending, or running a deficit. The opposite is true if the currency rises; with lower loan costs, additional funds are available for cutting taxes or investing in social programs.THE STABILITY OF THE STOCK MARKET IN BELGIUMGeneral developmentsFollowing a onedirectional move lower during 2012, Belgian bond yields showed a more diverse pattern in 2013. In early 2013, the downtrend resumed and the 10year Belgian yields reached a record low of about 1.9% in early May.The start of thedebate in the US about the tapering of its QE asset purchase programme triggered a turnaround in the trend , which lifted Belgian bond yields too. The Belgian 10year yield reached a year high around 2.90% at the end of June. In the general climate of rising yields, Belgian 10year yield spreads versus the German anchor widened from about 60 basis points to 100 basis points. Also the French 10year spread widened , but to a lesser extent, notably from about 45 to 65 basis points. Following a downward correction during summer, Belgian yields climbed again to about 2.90%in early October, but the 10 year yield spread topped now at a lower level of about 80 basis points and the spread to the French 10year yield amounted to about 25 basis points from 35 basis points at the June peak.Since early 2014, there is again a one directional move lower in yields. The Belgian 10year yield dropped from about 2.55% early January to 1.70% going toward the end of June, which resulted in juicy returns on bonds in the first half of this year. Weakness in US eco data during the winter months, expectations that the Fed would still wait long before tightening policy,a sharp drop in EMU inflation, a further easing of ECB monetary policy all conspired to push yields and yield spreads lower. Looking forward, it is unlikely that Belgian bonds will repeat their outstanding performance since the start of the year. There is maybe still a window of opportunity of a few months in which yields may decline slightly more, but by autumn, stronger US economic data may rekindle fears that In depth review: Belgium Economic recovery takes further shape Growth outlook however remains surrounded by doubts Public finances unlikely to derail, but still a lot of austerity ahead Risk from a protracted government formation is the lack of structural reform Rating outlook Belgian bonds upgraded Average term to maturity lengthens to above 7.5 years Belgian bonds remain interesting in relative value perspective the start of the Feds tightening cycle is coming closer. So, US yields may turn higher. This will exercise upward pressures on German (and Belgian) yields too. However, these upward pressures should be less intense than in previous cycles, due to the sharply different economic situation and monetary policy stance. So, USGerman 10 year spread widening should continue. From a relative value perspective though, we still see opportunities to invest in Belgian bonds. The Belgian fundamentals are solid and improving. The sovereign deficit is below 3% and debt has stabilized, albeit at a high level (about 100%). The economic growth potential isa bit higher than the euro area averagedue to demographic developments. The country has certainly some handicaps like the loss of competiveness due to high wage costs, the ageing of the population and a fairly rigid labour market. However, consciousness that they need to be tackled has grown raising chances that the government effectively will take measures. More in particularly compared to France, the Belgian situation is better and thus its debt may still outperform Frances. S&P lowered last year Frances rating to AA, at par with the Belgian one. Moodys and Fitch rate France still 2 and 1 notch higher. Funding review The Belgian debt agency successfully launched two syndicated deals this year: 10yr OLO 72 (5B 2.60% Jun2024) and 20yr OLO 73 (5B 3% Jun2034). Together with the regular taps, this lengthensthe average term to maturity of Belgian debt. At the end of 2013, this indicator stood at 7,59 years, the highest of the past ten years and one of the highest in the whole euro area. The Finance Minister asked the Debt Agency in the 2014 guidelines to keep the average term to maturity above 7.5 years. The Debt Agency recently stated that it expects a further increase of the average term to maturity, which means that the guideline will certainly be respected. At the end of June, the Belgium treasury already completed 71% (21.39B) of this years funding target (30B) by OLO issuance. Because of this advantageous situation, the Belgian treasury will most likely complete this years funding through the 5 remaining OLO auctions. In past years, the Belgian debt agency launched at least 3 new OLOs each year.

ConclusionBelgium is highly rated at the big three rating agencies: Aa3 at Moodys, AA at S&P and Fitch (all stable outlook). S&P and Moodys raised the outlook earlier this year. S&P stated in its last reportthat Belgium strengths outweigh sporadic political stalemates. It singled out the gradual consolidation of Belgiums multilayered governance framework in the context of the ongoing state reform and the implementation of economic and structural measures, coupled with stabilizing credit as positive developments. Moodys cited a stabilization of the banking sector, leading to receding risks on the governments balance sheet as justification of its outlook upgrade. Accordingly to the new rule book on rating agencies, EU sovereigns will be reviewed at least twice a year.The next possible rating reviews are scheduled forJuly 4 (Moodys), July 25 (S&P), November 7 (Moodys) and November 14 (Fitch). The Belgian national elections ended with a big victory of the right wing NVA (New Flemish Alliance) in Flanders at the expense of the farright parties. However, the three traditional parties (ChristianDemocrats, Socialists and Liberals) all in all kept their composure and together have a majority in both Flanders and Wallonia. In Wallonia, the Socialist party, traditionally the dominant party in the region, lost 78% of the popular vote, but still keeps, albeit narrowly, the leading place in the region ahead of the MR (Liberals) who made good progress. The King mandated Mr. De Wever, head of the NFA , with an information remit. He tried to form a government composed of his party, the Walloon liberals and the Christian democrats of both regions. In the meantime, in Flanders, the NVAstarted coalition talks with the Cristian democrats, while in Wallonia, the Socialists and the Christian democrats are in talks to form a regional government. The different composition of the formation talks on the regional and on national level proved a too difficultexercise and Mr. De Wever had to abort his effort to form a national government. The King asked Mr. Michel, leader of the Walloon liberals, to look how the deadlock can be solved.While Belgian politics offer regularly surprises, it looks like the formation of the new national government will again be timeconsuming. Currently it is having no impact on the Belgian bond market and we expect this to remain the case for the time being. Ultimately a solution will be found, however we cannot but consider the deadlock as a potentialsmall negative for the sovereign standing in the market. The recovery that started in spring 2013 has gradually gained strength. In Q1 2014, the economy grew 0.4% M/M, compared with 0.2% Q/Q in Q2 2013 and 0.3% Q/Q in Q3 and Q4 2013. With these figures Belgium is doing better than neighbouring France and the Netherlands, but less well than Germany. Cumulatively the Belgian economy has grown since spring 2013 by 1.2%, compared with 2.3% in Germany, 0.8% in France and 0.9% in the Euro Area. The Dutch economy continued to struggle, with a further contraction of 0.3% since the beginning of 2013. The growth figures for the individual EMU member states continue to diverge widely. Notwithstanding the differences most of the economic indicators continue to point to a further recovery of the European and also Belgian economy. In Belgium private consumption has clearly been contributing to growth for a longer time. After the growth of consumption had slipped in H2 2013, following the strong revival in H1, it rebounded again in Q1 2014. Net exports and corporate investment showed the most notable movement in Q1 2014, the former in a negative sense, the second in a positive. Since exports fell more than imports, the contribution of net exports to growth turned negative. Corporate investment surprised with quarteronquarter growth of no less than 2.2%. Household investment in residential building, finally, continued its tentative recovery of autumn 2013. Recovery of investment from a low level The recovery of corporate investment follows the improved demand prospects. Since the beginning of this year, the capacity utilisation ratio of industrial production capacity has risen above the longterm average. That has given rise to expansion investment. Despite the recovery, corporate investment still remains over 8% below the peak level of spring 2008. The rebound from a low level has moreover not been coupled with stronger demand for credit. This may be partly explained by the fact that companies are in general less dependent on credit for their investments, as they are able to meet their financing requirements out of their ample cash balances and/or are also increasingly resorting to the bond markets for debt finance. Also investment in housing has been growing again since summer 2013, in line with the recovery of consumer confidence. The revival in construction of new dwellings nevertheless remained highly limited and took place from a low level. In Q1 2014 housing investment remained 16% off its peak reached at the end of 2007. In the years preceding the financial crisis, residential building had expanded vigorously. In recent years it has gone through a very difficult period, with just a shortlived period of visibly higher activity in 2010. Leaving the recovery phase of 2010 out of the count, investment in housing shrank in every quarter between the beginning of 2008 and mid2013. The modest recovery of investment in residential building in recent quarters was initially coupled with a gradual improvement in the economic barometers . From autumn 2013 onwards, however, sentiment among contractors once again deteriorated, thereby illustrating that the climate in construction remains uncertain. This uncertainty is also being fed by the uncertainty surrounding the tax treatment of mortgage loans now that the regions in Belgium are taking over responsibility from the federal government. This could induce households to postpone their building plans a little longer. We believe that, as the situation on the labour market improves, investments by households in residential buildings are likely to continue recovering in 2014 and 2015, albeit at a moderate pace. Cautious growth estimateTogether with investment, private consumption will support GDP growth this year and next. The potential for consumption to grow will however be restricted by the limited increase in incomes as a result of the wage restraint and sluggish improvement of the labour market. The inconsistent pattern of consumer confidence in the spring reflects the uncertainty of households over the employment situation. Although there have been clear signs of improvement for some time now including the number of vacancies, temporary employment and the youth unemployment rate the picture in the labour market remains diffuse. Employment may have been on the increase again since summer 2013, but at an underlying level the developments in this area are less favourable than the raw figures might suggest, as the dynamic of employment is highly flattered by the increase in the number of governmentsubsidised jobs. In industry and construction the job market generally remains weak. That is also reflected in the subcomponent of the NBB indicator for employment expectations. These have improved in construction, but the level remains very low. In manufacturing industry the expectations for the coming months have again deteriorated. Only in market services there has been a clear improvement. INTRODUCTION TO THE ECONOMY OF BULGARIA:The economy of Bulgaria functions on the principles of the free market, having a large private sector and a smaller public one. Bulgaria is an industrialised upper-middle-income country according to the World Bank. It has experienced rapid economic growth in recent years, with an average monthly wage of 812 leva (554 USD). GDP per capita is estimated at $14,400 (PPP, 2013).Since 2001, Bulgaria has managed to attract considerable amounts of Foreign Direct Investment (FDI). During the Financial crisis of 20072010, Bulgaria marked a decline in its economy of 5.5% in 2009, but quickly restored positive growth levels to 0.2% in 2010, in contrast to other Balkan countries.The currency of the country is the lev (plural leva), pegged to the euro at a rate of 1.95583 leva for 1 euro. The lev is the strongest and most stable currency in Eastern Europe. The strongest sectors are energy, mining, metallurgy, machine building, agriculture and tourism. Primary industrial exports are clothing, iron and steel, machinery and refined fuels. Low productivity and competitiveness on the European and world markets alike due to inadequate R&D funding and a lack of a clearly defined development policy remain a significant obstacle for foreign investment and economic growth.REFORMS OF 1990s AND EARLY 2000s:Members of the government promised to move forward on cash and mass privatization upon taking office in January 1995 but were slow to act. United Nations sanctions against Yugoslavia and Iraq (19902003), two of the country's most significant trading partners, took a heavy toll on the Bulgarian economy. The first signs of recovery emerged in 1994 when the GDP grew and inflation fell. The first round of mass privatisation finally began in January 1996, and auctions began toward the end of that year. The second and third rounds were conducted in Spring 1997 under a new government. In July 1998, the UDF-led government and the IMF reached an agreement on a 3-year loan worth about $800 million, which replaced the 14-month stand-by agreement that expired in June 1998. The loan was used to develop financial markets, improve social safety net programmes, strengthen the tax system, reform agricultural and energy sectors, and further liberalise trade. The European Commission, in its 2002 country report, recognised Bulgaria as a functioning market economy, acknowledging the progress made by Prime Minister Ivan Kostov's government toward market-oriented reformsREFORM FROM THE CRISIS OF 1997:In April 1997, the Union of Democratic Forces (SDS) won pre-term parliamentary elections and introduced an IMF currency board system which succeeded in stabilizing the economy. The triple digit inflation of 1996 and 1997 has given way to an official economic growth, but forecasters predicted accelerated growth over the next several years. The government's structural reform program includes:1. privatization and, where appropriate, liquidation of state-owned enterprises (SOEs);2. liberalization of agricultural policies, including creating conditions for the development of a land market;3. reform of the country's social insurance programs; and4. reforms to strengthen contract enforcement and fight crime and corruption.Despite reforms, wea1k control over privatization led many successful state enterprises to bankruptcy. The SDS government also failed to stop the growing negative account balance, which has since then continued to increase, reaching a negative of $12.65 billion in 2008. The government elected in 2001 pledged to maintain the fundamental economic policy objectives adopted by its predecessor in 1997, specifically: retaining the Currency Board, implementing sound financial policies, accelerating privatisation, and pursuing structural reforms. Both governments failed to implement sound social policies.The economy really took off between 2003 and 2008 and growth figures quickly shot up, fluctuating between figures as high as 6.6% (2004) and 5.0% (2003). Even in the last pre-crisis year, 2008, the Bulgarian economy was growing rapidly at 6.0%, despite significantly slowing down in the last quarter.ECONOMIC DOWNTURN OF 2009:The country suffered a difficult start to 2009, after gas supplies were cut in the Russia-Ukraine gas dispute. Industrial output suffered, as well as public services, exposing Bulgaria's overdependence on Russian raw materials. The global financial crisis started to apply downward pressure on growth and employment in the last quarter of 2008. The real estate market, although not plummeting, ground to a halt and growth is expected to be significantly lower in the short-to-medium run. During the course of 2009, the grim forecasts for the effects of the global crisis on the Bulgarian economy largely materialized. Although suffering less than the worst-hit countries, Bulgaria recorded its worst economic results since the 1997 meltdown. GDP shrank by around 5% and unemployment jumped. Consumer spending and foreign investment dropped dramatically and depressed growth in 2010 to 0.3%. Unemployment remains consistently high at around 10%.NEW GOVERNMENT AND FISCAL DISCIPLINE:The Government of Boyko Borisov elected in 2009 undertook steps to restore economic growth, while attempting to maintain a strict financial policy. The fiscal discipline set by Finance Minister Djankov proved successful and together with reduced budget spending it placed Bulgarian economy on the stage of steadily though slowly growing in the midst of world crisis. On 1 December 2009, Standard & Poor's upgraded Bulgaria's investment outlook from "negative" to "stable," which made Bulgaria the only country in the European Union to receive positive upgrade that year. In January 2010 Moody's followed with an upgrade of its rating perspective from "stable" to "positive."Bulgaria was expected to join the Eurozone in 2013 but after the rise of some instability in the zone Bulgaria is withholding its positions towards the Euro, combining together positive and realistic attitudes.[39][40] The Bulgarian lev is anyway bound to the euro. Bulgaria regards becoming a member of the Eurozone at present as too risky. The 2012 Transatlantic Trends poll found that 72 percent of Bulgarians did not approve of the economic policy pursued by the government of the (then) ruling center-right GERB party and Prime Minister Boyko Borisov.CURRRENCY OF BULGARIA:Bulgarias unit of currency is the lev (pl., leva). In October 2006, the U.S. dollar was worth 1.57 leva. In 1999 the value of the lev was pegged to that of the German Deutschmark, which was replaced by the euro in 2001. Following the Bulgarias admission to the EU, the lev is scheduled to be replaced by the euro. In 2003 Bulgarias inflation rate was estimated at between 2.3 and 3 percent. The rate was 6 percent in 2004 and 5 percent in 2005.BULGARIAN STOCK EXCHANGE:The Bulgarian Stock Exchange Sofia is a stock exchange operating in Sofia, the capital of Bulgaria. It was originally founded as Sofia Stock Exchange on 15 April 1914 through a tsar's decree, but ceased to operate after the Second World War as Bulgaria became a communist state. It was re-established in late 1991. As of November 2011, the total market capitalization of the Bulgarian Stock Exchange is around $8.5 bln. The exchange has pre-market sessions from 09:00am to 09:20am, normal trading sessions from 09:20am to 01:45pm and post-market sessions from 01:45pm to 04:00pm on all days of the week except Saturdays, Sundays and holidays declared by the Exchange in advance.The Bulgarian Stock Exchange publishes the following indices: SOFIX BG40 BGTR30 BGREITAs of May 2010, the Bulgarian Stock Exchange is 44% owned by the Bulgarian government, which is looking for potential worldwide investors, some of them being the Frankfurt Stock Exchange, Athens Stock Exchange, OMX, the Prague Stock Exchange, etc. BSE-Sofia operates within the framework of the national legislation. The Stock Exchange internal organization and structure ensures the execution of its activities in compliance with the provisions of the law. BSE-Sofia organizational structure and management are in accordance with the Rules and Regulations of the Exchange, adopted by the BSE-Sofia Board of directors.The main acts regulating the local capital market and the BSE-Sofia activities are the Markets in Financial Instruments Act and the Public Offering of Securities Act. Taxation of income from trading in financial instruments admitted to trading on a regulated market is governed by the Personal Incomes Tax Act and the Corporate Income Tax Act. Capital gains from securities transactions realized on the local regulated market are not subject to withholding tax and tax on dividends and liquidation proceeds is 5%.BSE-Sofia main mission is to facilitate the establishment and development of an organized capital market which guarantees the Exchange members and their clients equal access to market information and equal conditions for participation in the trading in financial instruments.BSE-Sofia organizes and maintains a system for trading in financial instruments and offers additional products and services to investors. BSE-Sofia trading system Xetra was introduced on June 16, 2008 and replaced the RTS trading system which was used in the period 2000-2008. Xetra is one of the most modern and technically advanced systems in the world and its implementation is a significant step in the development of the local capital market. Xetra offers a wide variety of functions, supports a large number of order types and provides investors with the opportunity of using different investment strategies.BSE-Sofia developed a unique internet-based system for electronic placement of orders (COBOS) allowing the end users (investors) to place orders to buy and sell financial instruments that were admitted to trading on the exchange. Since its implementation in 2003 the system has beensubject to ongoing change and improvementin order to meet investors expectations - new modules and functionalities have been implemented, system performance has been improved.SECTORAL ANALYSIS: INDUSTRY AND CONSTRUCTION:Much of Bulgarias communist-era industry was heavy industry, although biochemicals and computers were significant products beginning in the 1980s. Because Bulgarian industry was configured to Soviet markets, the end of the Soviet Union and the Warsaw Pact caused a severe crisis in the 1990s. After showing its first growth since the communist era in 2000, Bulgarias industrial sector has grown slowly but steadily in the early 2000s. The performance of individual manufacturing industries has been uneven, however. Food processing and tobacco processing suffered from the loss of Soviet markets and have not maintained standards high enough to compete in Western Europe. Textile processing generally has declined since the mid-1990s, although clothing exports have grown steadily since 2000.Oil refining survived the shocks of the 1990s because of a continuing export market and the purchase of the Burgas refinery by the Russian oil giant LUKoil. The chemical industry has remained in good overall condition but is subject to fluctuating natural gas prices. Growth in ferrous metallurgy, which is dominated by the Kremikovtsi Metals Combine, has been delayed by a complex privatization process and by obsolete capital equipment. Non-ferrous metallurgy has prospered because the Pirdop copper smelting plant was bought by Union Minire of Belgium and because export markets have been favourable.The end of the Warsaw Pact alliance and the loss of Third World markets were grave blows to the defence industry. In the early 2000s, the industrys plan for survival has included upgrading products to satisfy Western markets and doing cooperative manufacturing with Russian companies. The electronics industry, which also was configured in the 1980s to serve Soviet markets, has not been able to compete with Western computer manufacturers. The industry now relies on contract agreements with European firms and attracting foreign investment. The automotive industry has ceased the manufacture of cars, trucks, and buses. Manufacture of forklifts, a speciality in the communist era, also has stopped. In the early 2000s, shipbuilding has prospered at the major Varna and Ruse yards because of foreign ownership (Ruse) and privatization (Varna).Only in recent years electronics and electric equipment production has regained higher levels. The largest centres include Sofia, Plovdiv and the surrounding area, Botevgrad, Stara Zagora, Varna, Pravets and many other cities. Household appliances, computers, CDs, telephones, medical and scientific equipment are being produced. In 2008 the electronics industry shipped more than $260 million in exports, primarily of components, computers and consumer electronics.Many factories producing transportation equipment currently still do not operate at full capacity. Plants produce trains (Burgas, Dryanovo), trams (Sofia), trolleys (Dupnitsa), buses (Botevgrad), trucks (Shumen), motor trucks (Plovdiv, Lom, Sofia, Lovech). Lovech has an automotive assembly plant. Rousse serves as the main centre for agricultural machinery. Bulgarian arms production mainly operates in central Bulgaria (Kazanlak, Sopot, Karlovo).Construction output fell dramatically in the 1990s as industrial and housing construction declined, but a recovery began in the early 2000s. The sector, now dominated by private firms, has resumed the foreign building programs that led to prosperity in the communist era. The Glavbolgostroy firm has major building projects in Kazakhstan, Russia, and Ukraine as well as domestic contracts.SECTORAL ANALYSIS: ENERGYBulgaria relies on imported oil and natural gas (most of which comes from Russia), together with domestic generation of electricity from coal-powered and hydro plants, and the Kozloduy nuclear plant. The economy remains energy-intensive because conservation practices have developed slowly. The country is a major regional electricity producer. Bulgaria produced 38.07 billion kWh of electricity in 2006 (in comparison, Romania, which has a population nearly three times larger than Bulgaria, produced 51.7 billion kWh in the same year). The domestic power-generating industry, which was privatized in 2004 by sales to interests from Europe, Japan, Russia, and the United States, suffers from obsolete equipment and a weak oversight agency. To solve the latter problem, in 2008 the government set up a state-owned energy holding-company (Bulgarian Energy Holding EAD), composed of gas company Bulgargaz, Bulgartransgaz, power company NEK EAD, Electricity System Operator EAD, Kozloduy nuclear power station, Maritza-Iztok II thermal power station, the Mini Maritza Iztok (Maritza Iztok mines), and Bulgartel EAD. The state holds a 100% stake in the holding company. Most of Bulgarias conventional power stations will require large-scale modernization in the near future. Bulgaria has some 64 small hydroelectric plants, which together produce 19 percent of the countrys power output. The Kozloduy nuclear plant, which in 2005 supplied more than 40 percent of Bulgarias electric power, will play a diminishing role because two of its remaining four reactors (two were closed in 2002) must be closed by 2007 to comply with European Union (EU) standards. Kozloduy, which exported 14 percent of its output in 2006, was expected to cease all exportation in 2007. Construction of the long-delayed Belene nuclear plant resumed in 2006 but will not be complete until at least 2011. Belene, planned in the 1980s but then rejected, was revived by the safety controversy at Kozloduy.Oil exploration is ongoing offshore in the Black Sea (the Shabla block) and on the Romanian border, but Bulgarias chief oil income is likely to come as a transfer point on east-west and north-south transit lines. Burgas is Bulgarias main oil port on the Black Sea. Bulgarias largest oil refinery, Neftochim, was purchased by Russian oil giant LUKoil in 1999 and underwent modernization in 2005. Bulgarias only significant coal resource is low-quality lignite, mainly from the state-owned Maritsa-Iztok and Bobov Dol complexes and used in local thermoelectric power stations. A $1.4 billion project for the construction of an additional 670 MW block for the 500 MW Maritza Iztok 1 Thermal Power Station is expected to be completed by the middle of 2010.Bulgaria ranks as a minor oil producer (97th in the world) with a total production of 3,520 bbl/day. Prospectors discovered Bulgaria's first oil field near Tyulenovo in 1951. Proved reserves amount to 15,000,000 bbl (2,400,000 m3). Natural gas production halted in the late 1990s. Proved reserves of natural gas amount to 5.663 bln. cu m. The LUKOIL Neftochim oil refinery is Bulgaria's largest refining facility with annual revenues amounting to more than 4 billion leva (2 billion euro).Recent years have seen a steady increase in electricity production from renewable energy sources such as wind and solar power.[53] Wind energy has large-scale prospects, with up to 3,400 MW of installed capacity potential.[54] As of 2009 Bulgaria operates more than 70 wind turbines with a total capacity of 112.6 MW, and plans to increase their number nearly threefold to reach a total capacity of 300 MW in 2010.[55]SECTORAL ANALYSIS: SERVICES AND TOURISMAlthough the contribution of services to gross domestic product (GDP) has more than doubled in the post-communist era, a substantial share of that growth has been in government services, and the qualitative level of services varies greatly. The Bulgarian banking system, which was weak in the first post-communist years, was fully reformed in the late 1990s, including stronger oversight from the National Bank of Bulgaria and gradual privatisation. In 2003 the banking system was fully privatised, and substantial consolidation began making the system more efficient in 2004. Several smaller banks grew substantially between 2004 and 2006. These processes increased public confidence in the banks. Although the system still requires consolidation, loan activity to individuals and businesses increased in the early 2000s. The insurance industry has grown rapidly since a market reform in 1997, with the help of foreign firms. An example is the Bulgarian Insurance Group (BIG), a pension-fund and insurance management company owned by the Dutch-Israeli TBI Holding Company and the European Bank for Reconstruction and Development (EBRD). The introduction of health and pension insurance plans has expanded the private insurance industry. A series of reform laws in the early 2000s enabled the Bulgarian Stock Exchange to begin regular operation. As of 2005, stock market activity was limited by lack of transparency, although the growth rate increased beginning in 2004.After a decline in the 1990s, in the early 2000s the tourism industry has grown rapidly. In 2004 some 4 million foreigners visited Bulgaria, compared with 2.3 million in 2000. This trend is based on a number of attractive destinations, low costs, and restoration of facilities. Most of the industry had been privatised by 2004. Infrastructure items such as recreation facilities and booking services require improvement. Development of Bulgarias retail sales sector was slow until the early 2000s, when a large number of Western-style outlets began to appear, and Sofia developed as a retail center. By 2006 several major European retail chains had opened stores, and others planned to enter the Bulgarian market.Bulgaria has attracted considerable investment from foreigners buying property either for their own use or for investment. In 2006, more than 29% of property deals were signed by foreigners, more than half of whom were UK citizens. Various companies, such as Bulgarian Dreams, actively marketed Bulgarian properties to buyers overseas.In 2007 Bulgaria was visited by 5,200,000 tourists, ranking 39th in the world. Tourists from Greece, Romania and Germany account for 40% of visitors. Significant numbers of British (+300,000), Russian (+200,000), Serbian (+150,000), Polish (+130,000) and Danish (+100,000) tourists also visit Bulgaria. Most of them are attracted by the varying and beautiful landscapes, well-preserved historical and cultural heritage, and the tranquility of rural and mountain areas.Main destinations include the capital Sofia, coastal resorts Sunny Beach, Albena, Sozopol, Sveti Vlas; winter resorts Bansko, Pamporovo, Chepelare and Borovetz. Arbanasi and Bozhentsi are rural tourist destinations with well-preserved ethnographic traditions. Other popular attractions are the 10th century Rila Monastery and the 19th century Euxinograd chteau.SECTORAL ANALYSIS: Agriculture, forestry and fishingIn the communist era, Bulgarias agriculture was heavily centralized, integrated with agriculture-related industries, and state-run. In the postcommunist era, the process of restoring agricultural land to private owners in a form that ensures productivity has been slow. Bank investment and insecurity in the land market contributed to slow development in the 1990s. By 2004 some 98 percent of the workforce and output of Bulgarias agricultural sector was private, including a number of large private cooperative enterprises. A significant amount of food also is produced for direct consumption by non-farmers on small plots, which are an important support for parts of the population. In 2000 and 2003, droughts limited agricultural production, and floods had the same effect in 2005. Bulgarias main field crops are wheat, corn, and barley. The main industrial crops are sugar beets, sunflowers, and tobacco. Tomatoes, cucumbers, and peppers are the most important vegetable exports. Production of apples and grapes, Bulgarias largest fruit products, has decreased since the communist era, but the export of wine has increased significantly. The most important types of livestock are cattle, sheep, poul