What is the gap compared to the EU average?
CEE is behind the European average in the importance of securities markets in financing. As for non-financial corporates, CEE companies only have 0-6% of GDP in debt securities on their liability structure, as opposed to the nearly 12% on the EU level. The role of listed shares is between 2.4%-20.7% in CEE, whereas in the EU, this is nearly 47% of GDP. The gap is proportionately lower for loans, however, with CEE ranging between 37%-51% of GDP, while the EU standing at 65%.
Savings of households paint a similar picture. CEE countries are very heavy in cash and deposits (ranging between 27-63% of GDP), barely below the 69% of the EU average, while savings in listed shares is just 0.3%-3.9% in CEE compared to nearly 10% of GDP in the whole EU. CEE also remains well behind the EU in terms of insurance, pension and guarantees, and investment fund shares. As for debt securities, Hungary might look quite developed, but its high share is attributable to large holdings of 5-year retail government securities. These bonds offer a valuable put option after coupon payment and a yield to maturity nearing 5%, making this investment competitive to deposits.
With the low interest rate environment, households have started to seek higher returns. In recent years, investing in real estate has gained in popularity, as ownership of a tangible asset has been seen as a “safe long-term investment” and superior to investment in securities. It is only a matter of time before investors realize that real estate investments also have their cons – they are less liquid, require a high initial payment, lack diversification, and are more demanding in terms of property management and maintenance in the case of second-home ownership.
Pension savings could enhance the role of capital markets in CEE
Pension savings is another area where improvements could potentially enhance the role of capital markets in the region. Besides the pay-as-you-go (PAYG) systems as the first pillar, several regional countries introduced second and third pillars. Second pillar reforms (which means that some part of social contributions was needed to be channeled from the PAYG system) were reversed in Hungary and in Poland in recent years, however. The second pillar was also liquidated in 2016 in Czechia, downsized in Slovakia and temporary open for opting out. In Romania, the second pillar was only established in 2008, but Croatia established it in 1998 already. The latter has over 20% of GDP in pension assets. Due to the second pillar, Croatia scores relatively well in pension system sustainability1, despite its ageing population and negative migration balance. Tax benefits for third pillars exist everywhere in CEE, but these pillars are mostly completely voluntary.