Download Strengthening of Lithuanian capital market

Strengthening of Lithuanian capital market competitiveness
Prof. Arvydas Paškevičius
International Business School at Vilnius University
Saulėtekio ave. 22, LT-10225 Vilnius, Lithuania
E-mail: [email protected]
phone:+37068738766
This research was funded by a grant (No. 008/2012) from the Research Council of Lithuania.
Article keywords: capital market; initial public offering; Lithuanian stock market
1. Introduction
The effectiveness of the capital market is an important factor in determining the economy growth of a
country, by distributing capital surplus in accordance with greatest needs. The capital market as part of
financial system performs three main functions, i.e. mobilizes savings, decreases the misbalance of
information between the borrowers and lenders, and gives means for risk management. The
development level and effectiveness of the capital market are important criteria which indicate the level
of the development of a country, its competitiveness, as well as the opportunities for the investors to
attract money should the need arise.
The problems and effectiveness of the capital market involve many factors, such as legal requirements,
tax environment, behavior of the investors, the economic situation of the country, market liquidity and
depth, the availability and transparency of information, the education and available knowledge of the
participants of the market, the influence of globalization, as well as the competitiveness created by
other countries offering services of their own markets, and many more. While analyzing Lithuanian
capital market emphasis should be made on the identification of the existing problems and prospects of
the capital market, on the development of the best available investment attracting models and complex
problem solving alternatives, as well as on the insight of the already existing scientific studies. With the
improvement of the environment and effectiveness of the capital market of the country its
competitiveness would considerably expand; the conditions for the participants of the market to attract
investments would improve due to the reduced costs of the attracted investments and the bigger part of
the added value created with the investments staying within the country.
This paper represents the results of research carried out by a group of scientists under the project
„Research of Atracting Investments into Lithuanian Capital Market“ which is funded by a grant (No.
008/2012) from the Research Council of Lithuania. The results include:
 A brief description of Lithuanian capital market development and its challenges;
 The peculiarities of investment attraction in the capital markets under the conditions of
globalization;
 The impact of stock market development on economic growth;
 The study of the impact of Lithuanian capital market to country competitiveness.
2. A brief description of Lithuanian capital market
In August 23, 1994, there was the first trading session in Lithuanian National Stock Exchange. In the
period of 1994 and 1998, stock turnover has not been high, and only a few companies’ shares were
actively traded, but the number of listed companies and market capitalization has increased rapidly.
This growth was rather artificial and caused by Lithuanian government regulations providing all state
owned companies to be registered as public companies and to be included in the List. In 1997-1998,
Vilnius stock exchange turnover and stock indexes grew. This growth in large part was driven by the
fact that the price of public companies often was based on the book value, which was significantly
lower than the market value. The growth of stock price was caused by the increasing interest of foreign
investors as well. In 1998, the start of the Asian and Russian crisis decreased the interest in Lithuanian
companies and the quotations were significantly lower than their book value. Mass privatization
allowed all residents to have the opportunity to obtain shares in state-owned companies, and therefore
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the number of small shereholders made the dominance of public company structure in the market. In
1998 - 2002, illiquidity in the market and low prices very rapidly took ownership concentration. A
group of persons acquired a controlling interest in the company and re-registered a closed joint-stock
company and opt out the Exchange. Trends in the stock exchange began to change rapidly when
dispersed doubt that Lithuania will soon become a member of European Union.
Fig. 1. NASDAQ OMX Vilnius indexe 2000-2013. Source: compiled by the author according to
www.nasdaqomxbaltic.com. [as of February 15, 2014].
In Fig 1., we can see that since 2003 the share index increased rapidly and reached an annual growth
rate of 98 per cent. To a large extent this growth was stimulated by foreign investment funds, such as
East Capital's investment. Further interest in the Lithuanian capital market is driven by other factors
such as accession to the European Union on 1 May 2004. Another factor happned in May 28, 2004,
when the largest Northern Europe's stock exchange operator OMHEX and the State Property Fund
completed a transaction under which OMHEX acquired 44.3 percent of The National Stock Exchange
and 32 percent of SC Lithuanian Central Securities Depository shares. The period of 2003 -2006 should
be described of rapidly growing trading in Vilnius Stock Exchange.
NASDAQ OMX Vilnius
The total turnover EUR m.
2500
2000
1500
1000
500
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Fig. 2. The total turnover of NASDAQ OMX Vilnius 2000-2013 (EUR m.) Source: compiled by the
author according to www.nasdaqomxbaltic.com. [as of February 15, 2014].
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In Fig. 2., we can see that market turnover of 573 million euros in 2003 jumped by 2051 million euros
in 2006. In 2007, the global financial crisis has radically changed the direction of stock market indices.
Although the stock index after a very sharp drop in 2007 has now reached pre-crisis levels, the
circulation continues to decline. On February 28, 2008 NASDAQ and OMX completed the transaction
and merged into a new organization NASDAQ OMX Group, Inc.Vilnius Stock Exchange OMX joined
the new organization NASDAQ OMX. But even this fact did not change the contraction in capital
market development. This is explained by several factors. First of all, during the crisis period, foreign
investment funds realized their profits and withdrew from the Lithuanian capital market. Their example
was followed, and local investors were moving their investments to foreign investment funds. Similarly
behaved and local investment funds, which started to form their portfolios of the U.S., Russian and
Western European stocks.
In order to attract foreign investors in the domestic market, the stock market of the country firstly
should be interesting to the local investors, as the basis and grounds of the capital market are the
institutional investors, only to be followed by foreign investors. The absence of the basis of local
institutional investors prevents major foreign investments. A number of countries, Poland among them,
consider the retirement funds as major institutional investors, therefore trying to keep their capital
within the country in order to strengthen their own rather than foreign economy. For instance, Iceland
does not follow the EU principles of free capital movement, thus preventing the capital to leave the
country after the latter economic crisis. In 2011 the ratio of the market capitalization to the GDP in
Iceland was 14.4 percent with the tendency of yearly introductions of new companies into the market.
Finland invests 30 to 40 percent of the raised capital into the stocks of listed companies assuming that
the investments into local enterprises create jobs and increase the number of the contributors to the
future retirement funds.
The Lithuanian experts are stressing the necessity to pay attention to the structure of the investments
of the retirement fund. For example, tier II pillar pension funds in Lithuania have accumulated about
4.7 billion LTL, which equals to 4 percent of the GDP. Based on the Lithuanian Bank statistics, the
capital investments of these funds into stocks and collective investment undertakings before 2012 were
equal to 34 percent of their value. The direct investments in the stocks were under 1 percent, thus the
major investment went through the collective investment undertakings. The entire asset of the pension
fund is distributed through more than 100 states worldwide. Meanwhile in Lithuania, the direct and
indirect investments into the stocks of Lithuanian companies made up only about 0.5 percent of the
value of the entire pension fund portfolio. In 2012 this number was even smaller – as little as 0.2
percent of the fund assets value of 4.4 billion LTL. One has to realize the importance of where to
invest the pension fund capital, because it greatly affects both the local capital market and the entire
economy. (Statistics Lithuania. 2013)
A model should be found which would encourage investing the bulk part of the pension fund to the
Lithuanian capital market and would increase its liquidity, decrease the shallowness and boost its
turnover ratios. Experts have noticed that such voluntary capital redirection could not be so easily
possible in a country with foreign banks domination. Since most of the decisions regarding tier II pillar
pension funds investments are made in Stockholm rather than Vilnius, and banks in their turn are not
interested in making separate investment plans for separate countries.
3. The Peculiarities of Investment Attraction in the Capital Markets under the Conditions of
Globalization.
Rapid growth of capital markets opens vast possibilities for companies to attract capital. One of the
most important spheres of finance management of a company is the selection of the structure of the
sources of financing. The growth of a company is influenced by its capital expenses which occur due to
the efficiency with which the debt capital is being used. When a company issues shares during the initial
public offering (IPO) it attracts capital flows. Most efficiently it can be used for stimulating new
investments in developing industries, where the value of mortgaged assets is insufficient and the
investment return is vague (Plakys & Ambrusevič, 2009). The decisions of company listings are
influenced by the competition among stock-exchanges for attracting shares from other countries
especially with emerging markets. Such competition mostly shows itself in the relation between tax and
listing conditions in the hope of the largest long-term profit (Chemmanur & Tian, 2012). The behavior
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of a company while making the decision in favor of a stock exchange is determined by a number of
factors, the identification of which could help systemize the results of various studies published in
scientific literature as well as perform a new quality analysis of the listing practice of Lithuanian
companies.
The process of selecting a stock exchange starts with a vision. The following factors should be taken
into consideration by a company: i) the selection of a country of the stock-exchange (home country or
foreign), ii) the listing requirements of the stock exchanged under consideration, iii) prospective profit
for the company, iv) the reputation of the stock exchange under consideration.
Companies in search for new markets under the conditions of entire globalization show considerable
qualitative changes in their investment behavior. The preliminary results of the studies published in
scientific literature indicate a recent growth in the number of companies choosing to list their shares in
foreign stock exchanges. For example, many European companies list their shares in the New York
Stock Exchange (NYSE). Companies from the countries of emerging markets or economies, such as
India, China, and Israel, list their shares in various stock exchanges of Europe, Asia, and the US
(Mudambi et all., 2012; Luo, Fang, & Esqueda, 2012; Lau & Lin, 2012). As early as before the
beginning of the financial crisis experts have stated that the behavior of the issuers is determined by a
number of factors, the assessment of which is extremely complicated due to the differences in the
issuers approach towards the prestige of the stock exchange, listing fees, rules, and various
requirements (Bayar & Chemmanur, 2011). Future investors are cautious and before deciding to invest,
try to thoroughly analyze the advantages and disadvantages of stock exchanges.
The financial crisis of 2008 has confused the investment laws earlier discovered by the scientists, and
has altered the traditional behavioral logics of the issuers and investors: listing in foreign stock
exchanges still remains one of the most important factors influencing world economy under the
conditions of globalization (Dimovski, Philavanh & Brooks, 2011). For example, the BRIC countries
and other emerging markets offer more opportunities to attract issuers to the financial centers in their
respective countries. The geography of investment banks also show considerable changes, such as: after
multiple failures, the controlling interests of a number of US banks have shifted into the hands of Asian
investors. The growing Chinese economy increases the demand to strengthen its securities market by
opening it to foreign investors and issuers. Thus, the global foreign capital market and the geography of
financial centers are considerably affected. The reorganization of investment banks which has followed
the financial crisis, adds more uncertainty to the future of the IPO market. The tendency of the
globalization of financial markets being particularly obvious in the recent years creates the need for an
integral global legal basis which would regulate the securities market. The coordination of the existing
methods of the regulation of capital markets should be based on the deep analysis of various economic
systems of finance management and the behavior of issuers (Chemmanur & Krishnan, 2012;
Abrahamson, Jenkinson & Jones, 2011; Brau, Couch & Sutton, 2012). Therefore, having in mind the
process of globalization and the interests of individual countries, the peculiarities of investment
attraction in capital markets require a more complex definition.
The survey of the problems of Lithuanian issuers seeking a listing in the Vilnius securities stock
exchange and executing initial public offering is being done in the context of the development of the
securities stock exchanges of the three Baltic States. According to Lieksnis (2011), the securities stock
exchanges of the Baltic States have undergone many changes related to the process of globalization.
Those stock exchanges have become part of the OMX group of the world largest securities stock
exchange company NASDAQ. According to the 2010 figures, this group had 3700 listed companies,
while the three Baltic stock markets and the Central Depository was managed by NASDAQ OMX.
The authors of this paper ascertain that the analysis of the situation of the Baltic stock exchanges is
being performed sporadically and that scientific literature offers no publications on continuous studies.
Past ten years offer no more than ten articles dealing with the problems of the changes of investments
in the Baltic capital markets and the behavior of issuers (Lyn & Zychovitz, 2004; Devyžis & Jankauskas,
2007; Norvaišienė & Stankevičienė, 2007; Stasiukonytė & Vasiliauskaitė, 2008; Plakys & Ambrusevic,
2009; Lieksnis, 2010; Paškevičius & Sačilka, 2010; Mongrut et all., 2010; Lieksnis, 2011; Paškevičius &
Norkaitytė, 2011; Paškevičius & Mickevičiūtė, 2011; Gudonytė & Tvaronavičienė, 2012).
It should be noted that the research's still not enough, because the main problem remains unsolved.
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The OMX Vilnius stock exchange data show that both the total stock and the amount of the capital
attracted during the initial public share offering are extremely small. The statistical data also shows that
within the last ten years the number of share offerings has decreased.
Another phenomenon worth analyzing is the initial public offerings of Lithuanian companies in foreign
countries without listing shares in the Vilnius stock exchange. The biggest competitor of the Vilnius
stock exchange is the Warsaw stock exchange WSE, where three Lithuanian enterprises within the past
few years have successfully distributed their shares. Table 1 shows the share offerings of Lithuanian
companies in the WSE.
Table 1. Share offerings of Lithuanian companies in the WSE.
Issuer
Abbreviation
Nominal
value, PLN
Amount of
issue, units
Beginning of listing
Capital attracted by
IPO, in LTL
AVIA SOLUTIONS GROUP AB
ASG
55,15
5893333
03.2011
ND
AGROWILL GROUP AB
AWG
1,2
84820986
07.2011
ND
AB INTER RAO LIETUVA
IRL
25,75
20000000
12.2012
96700000
Source: Warsaw Stock Exchange. Market Data. compiled by the authors according to www.gpw.pl. [as of May 15, 2013].
In 2011 AB bank Snoras listed its shares in the German XETRA stock exchange, and also was
seeking listing in the London LSE stock exchange. At the same time, one can notice a tendency for the
companies of Lithuanian capital to consider cross listing, while the Agrovil group has already done that
by seeking listings in the stock exchanges of both Vilnius and Warsaw.
Lithuanian capital market experts note that without state support the national capital market continues
to weaken. In their view, the Lithuanian capital market recovery is available, if only the state agrees to
include 10-20 percent of the shares of currently state-owned enterprises into the Vilnius Stock
Exchange. In this way, the state energy, transport companies could attract additional funds to the
public sector modernization. Furthermore, institutional and private investors would discover an
attractive investment as well.
4. The impact of stock market development on economic growth
The debate on the link between financial development and economic growth primarily revolve around
four major hypotheses: the first, supply-leading hypothesis, confirms unidirectional causality running
from development of financial markets to economic growth (King and Levine, 1993; Levine and
Zervos, 1998; Deb and Mukherjee, 2008); the second, demand following hypothesis, states that
development of financial markets follows economic growth, or as Robinson (1952) considers that
“where enterprise leads, finance follows”. Financial development simply responds to developments in
the real sector, but does not spur economic growth (Levine and Zervos, 1996); the third,
interdependent hypothesis, claims mutual impact of financial sector development and economic growth
(Odhiambo, 2005; Majid, 2007; Deb and Mukherjee, 2008). Both financial and economic developments
are therefore interdependent and their relationship could lead to bi-directional causality (Zivengwa,
Mashika, Bokosi, et al., 2011); and the last one, independent hypothesis, argues that financial and
economic developments are not causally related, so financial intermediaries and market intermediaries
play inconsequential role in economic growth (Stern, 1989; Lucas, 1988).
The authors distinguish two views according to the sign of this effect: the first sees financial
development as a key determinant of economic growth which fosters capital accumulation and leads to
productivity gains thanks to a better allocation of resources (Bencivenga and Smith, 1991; King and
Levine, 1993); and the second view ascribes effects to finance but focuses on its potential negative
impacts on output growth (Van Wijnbergen, 1983). According to Urbsiene, Matvejeva and
Staskeviciute (2012) the improvements of the resource allocation would not necessarily lead to higher
economic growth. In fact, higher returns on savings, which result in financial sector development,
under certain conditions can reduce savings rates and negatively impact economic growth. Similarly, if
development of the financial markets lowers the liquidity constraints of individuals, the overall savings
rate may decline, leading to weaker economic growth.
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The development of the stock market is described by four independent financial indicators, namely,
size, value traded, turnover, and financial depth, seeking to reflect financial sector development in
Lithuania more comprehensively.
Table 2. The calculation of independent indicators
Stock market development indicators
Size
Market capitalization
=
GDP
Liquidity
Turnover
Value traded
Total value of trades
Total value of trades
=
=
Market capitalization
GDP
Financial Depth
M3
=
GDP
The dependent variable, Growth, is the real growth domestic product as an indicator of economic
development (Arestis, Demetriades and Luintel, 2001; Hondroyiannis, Lolos, Papapetrou, 2005; Deb
and Mukherjee, 2008). To exclude seasonality, chain-linked method is used (Waheed and Younus,
2010).
Correlation analysis, Granger causality and regression analysis are applied for empirical research of
stock market-economic growth nexus in Lithuania.
Concerning the summary of the main results there is an unidirectional causality that runs from stock
market liquidity (measured by the Value Traded and Turnover) to economic growth, which is
supported by a supply leading hypothesis; and there is a significant bi-directional causality between
other two stock market development indicators (Size and Depth) and GDP, which is supported by
interdependent hypothesis. There is no evidence for a demand following hypothesis and independent
hypothesis.
After performing Granger causality tests by using 3 or 4 lags respectively the following insights could
be made: size of the stock market (capitalization) and financial depth have a potential to cause real
GDP in Lithuania and vice-versa only in the long period of time. Long-run stock market liquidity
(measured by the Value Traded and Turnover) – economic growth nexus in Lithuania should be
characterized by unidirectional Granger causality from stock market liquidity to GDP. In other words,
accelerating stock market liquidity in the country has a long-term potential to stimulate economic
growth, but not vice-versa.
The regression analysis framework is applied to generate quantitative estimates of stock market
development-economic growth nexus. Table 3.9 below reports the OLS regression results of two
models for Lithuania in order to explain the variations in GDP by stock market development
indicators.
Table 3. The OLS regression results of two models
I model
Coefficient
3698,06
(0,1236)
lSizet-1
3495,55
(0,0000***)
lValue Traded
-1566,54
(0,0001***)
Turnover
37093,90
(0,0000***)
Deptht-2
1718,67
(0,0007***)
GDPt-2
0,2855
(0,0070***)
dq3****
1918,70
(0,0000***)
Adjusted R-squared
Variables
const
t-ratio
1,5780
7,3567
-4,4097
5,5589
3,7237
2,8630
5,1145
0,8312
II model
Coefficient
-452,82
(0,0021***)
Size
-1375,41
(0,0063***)
Value_Tradedt-5
-3216,77
(0,0000***)
Turnover
3771,58
(0,0000***)
Depth
-5478,94
(0,0000***)
GDP t-2
-0,1136
(0,0242**)
dq2****
1743,31
(0,0003***)
Adjusted R-squared
Variables
const
t-ratio
-3,3697
-2,9369
-6,3736
8,2560
-5,1553
-2,3747
4,0741
0,9528
*p value is given in parenthesis
**Significant at 5% level
6
***Significant at 1% level
***l letter before indicator denotes a log
****dummy variables for quarters 2 and 3
Variables included in model 1 are transformed using log transformations. The equation for model 1 can
be written as (1):
GDP=3698.06+3495.55 lSizet-1–1566,54 lValue Traded +37093,90 Turnover +1718,67 Depth t-2+0,2855 GDPt2+1918,70 dq3+ ut
(1)
Results of the model 2, where variables are integrated of order two seeking to avoid the spurious
regression problem can be written as (2):
GDP= -452,82–1375,41Size–3216,77Value Tradedt-5+3771,58Turnover–5478,94Depth–0,1136GDPt-2+1743,31dq2+ ut
(2)
Overall, the findings of the current research of the stock market – economic growth nexus in Lithuania
in the period 2002 Q1-2012 Q4 are consistent with those of Arestis, Demetriades and Luintel (2001),
Hondroyiannis, Lolos and Papapetrou (2005) who found that stock markets are able to contribute to
long-term economic growth, although their effect is a small fraction of the total financial system. There
are also similarities between the attitudes expressed in this empirical analysis and those described by
Zivengwa, Mashika, Bokosi, et al. (2011), Ho and Odhiambo (2012). Their findings corroborate the
idea of a unidirectional causality operating from stock market capitalization to economic growth.
However, the findings of the current research is unable to demonstrate that a significant correlation is
between trading volume and economic growth, and therefore differ from some studies previously
published such as Atje and Jovanovic (1993). Following the idea that the impact of the stock market
development on economic growth may vary depending on the specific market where it occurs.
5. The study of the impact of Lithuanian capital market to country competitiveness
Capital market competitiveness is very closely related to the country's economic competitiveness. One
of the most prestigious global competitiveness assessment centers - the World Economic Forum
(World Economic Forum, further WEF), known from its annual international conference , a meeting
of the Forum in Davos (Switzerland), which brings together the most prominent businessmen, visiting
intellectuals and journalists, and political leaders to debate of the most pressing questions and concerns.
The World Economic Forum is an annual inventory of the World Competitiveness Index, which
measures the world's competitiveness. In this study, competitiveness is defined as a group of
institutional, political and economic, and other factors that determine the level of productivity in the
country. Global Competitiveness Index assesses the competitiveness of each country according to the
twelve factors of competitiveness: the country's institutions, infrastructure, macroeconomic stability,
health and primary education, higher education and profesional education, goods and labor market
efficiency, financial market development, technological development of the country, market size,
business progress and innovation.
In this paper, we will study the World Economic Forum's recent reports: “The World Global
Competetiveness Report 2013-2014"and "The World Global Competetiveness Report 2012-2013“,
trying to link the reports indicators with Lithuanian capital market and the entire financial sector.
Global Competitiveness Report (2013) covers the analysis of 148 countries indicators. More than 100
indicators are being estimated, each of which is also derived, and therefore the estimates are sufficiently
complete and accurate. In 2012, according to the overall global competitiveness index, Lithuania was in
45th position, collected 4.4 points out of 7. Compared to the Global Competitiveness Index of the year
2011, Lithuania fell one place below. In 2013, Lithuania fell down by three positions to the 48 place.
Thus, over the past few years, Lithuania has lost its international competitiveness. The main evalutation
areas of the World Economic index are 12 piliar for a developed society and business: the first four
(institutions, infrastructure, macroeconomic environment, health and primary education) are called as
the basic requirements without which the state can not function. In 2013, Lithuania by this subindex
raised from 49th to the 43rd place. It's pretty average rating, but the improving trend is seen in this area
(see Table 4). In 2013, Lithuania has the best assessments in health and primary education – 50th
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position and infrastructure – 41th position. The worst assessment for Lithuania is given in
macroeconomic and institutional environment - 58 and 61 places. Poor evaluation of macroeconomic
environment has a negative impact not only on Lithuanian economy, but also on the competitiveness
of the capital market. However, in comparison with last year's report, the assessment of the
macroeconomic environment in 2013 is much better; Lithuania in this area jumped more than 17
positions up (see Table 4). The other six pillars (higher education and proffesional education, goods
market efficiency, labor market efficiency, financial market development, technological readiness, and
market size) are known as the effectiveness and efficiency inducing factors. Lithuanian estimates
according to this index descended one step down - from 46 to 47th place. As in previous years, the best
Lithuania ratings are in higher education and profesional training - 27 place, and technological readiness
- 35th place. The worst ratings are given to Lithuanian financial market development - 87 place and size
of the market – 78th place. These estimates endorse the unsatisfactory evaluation of financial market.
The last two "pillars" are innovation and development factors (business progress and innovation).
Lithuania under this subindex rose from 47 to 44th place.
Table 4. Lithuania's competitiveness determinants rating accourding the Global Competitiveness Index
Vieta
2010
2011
2012
2013
47
44
45
48
52
49
49
43
Institutions
60
62
60
61
Infrastructure
43
43
40
41
Macroeconomic environment
71
73
75
58
Health and primary education
52
46
39
50
Efficiency enhancers (50.0%)
49
48
46
47
Higher education and training
25
26
26
27
Goods market efficiency
73
64
56
49
Labor market efficiency
48
54
65
69
Financial market development
89
89
87
87
Technological readiness
33
34
33
35
Market size
77
79
74
78
Innovation and sophistication factors (22.5%)
48
48
47
44
Business sophistication
49
54
56
48
Innovation
51
48
43
44
The number of countries participating in the study 139
142
144
148
The Global Competitiveness Reports 2013–2014. Source: compiled by the author according to
http://www.weforum.org/reports/global-competitiveness-report-2013-2014
Global Competitiveness Index
Basic requirements (27.5%)
In table 4, the areas of the best evalution in Lithuania are marked green, thereas the problem areas are
marked red. In 2013, financial market development demonstrates that it is an area of a great gap from
the common country assessment: Lithuania is ranked 48th out of 148 countries, while financial market
development is given only 87th place.
Table 5. The assessment of financial market development by the Global Competitiveness Index
8th pillar: Financial market
development
Availability of financial services
Financing through local equity market
Ease of access to loans
Venture capital availability
Soundness of banks
2012
74
82
106
86
90
2013
58
73
109
84
111
8
Regulation of securities exchanges
Legal rights index,
50
89
65
89
Source: The Global Competitiveness Reports 2013–2014. Compiled by the author according to
http://www.weforum.org/reports/global-competitiveness-report-2013-2014
In the 5th table, the assessments of financial market development in the years 2013 and 2012 are
introduced. The worst evaluation is given to the possibility of obtaining loans and bank credibility. The
latter, in 2013, was awarded a 21 position below the 2012th award.Such assessments were influenced by
the bankruptcies of bank Snoras and Ūkio bank. In 2013, access to financial services, financing through
local equity market and the availability of venture capital were evaluated more favorably than in 2012.
However, the overall level of development of financial markets internationally is low and it is the
evident of the poor Lithuanian capital market competitiveness.
6. Conclusions
1. Lithuanian capital market has grown rapidly in the period of Lithuania's integration into the
European Union. Index values increased from 84.78 points on 1 January 2003, up to 492.65
points on 31 December 2006, and the annual turnover from 573 million euros in 2003 to 2,051
million in 2006. The global financial crisis has radically changed the Lithuanian capital market
trends. While the NASDAQ OMX Vilnius stock exchange share index today is not significantly
different from the pre-crisis period, the stock exchange turnover, in 2013, was only just 158.43
million.
2. During the crisis period, foreign investment funds realized their profits and withdrew from the
Lithuanian capital market. Their example was followed by local investors, who moved their
investments to foreign investment funds. Similarly behaved and local investment funds, which
started to form their portfolios of the U.S., Russian and Western European stocks.
3. Lithuanian capital market analysis has shown that the biggest competitor of the Vilnius stock
exchange is the Warsaw stock exchange WSE, where three Lithuanian enterprises within the
past few years have successfully issued their shares.
4. Lithuanian capital market recovery is available, if only the state agrees to include 10-20 percent
of currently state-owned enterprises shares into the Vilnius Stock Exchange. In this way, the
state energy, transport companies attract the additional funds to the public sector
modernization and institutional and private investors discover an attractive investment.
5. The findings of the research of the stock market – economic growth nexus in Lithuania are
consistent with those of Arestis, Demetriades and Luintel (2001), Hondroyiannis, Lolos and
Papapetrou (2005) who found that stock markets are able to contribute to long-term economic
growth, although their effect is a small fraction of the total financial system. However, the
findings of the current research is unable to demonstrate that a significant correlation is
between trading volume and economic growth, and therefore differ from some studies
previously published such as Atje and Jovanovic (1993). Following the idea that the impact of
the stock market development on economic growth may vary depending on the specific market
where it occurs.
6. Lithuania aims to develop its overall financial sector focusing on banking sector because this is
the most effective way to foster the progress of small and medium-size enterprises, which are a
key source of economic growth in a country. While the contribution of the stock market to
growth in an emerging economy is rather limited with a little trading activity and value traded as
a share of market capitalization. The local corporations are not very eager to enter the stock
exchange and choose banking services as a rule. The direct raise of funds in the capital market
is rarely considered.
7. The Global Competetiveness World Report of The World Economic Forum showed that
Lithuania's competitiveness index could be much higher if the financial markets would be rated
in a higher position. Conversely, the higher the country's competitiveness index facilitates the
conditions for foreign investors to pay attention to the country.
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