The issuance of civil bonds in Serbia would be an important step in development of the financial system in Serbia. In this way, the market would be “democratized”, providing an alternative to saving, financial inclusiveness, but on the other hand, caution is needed, because excessive issuance of bonds can crowd out other participants in the market, leaving them without funds and leading to an increase in interest rates.
Providing citizens with an alternative to traditional savings deposits would broaden the investor base and encourage financial inclusion. There are around 15 billion euros in savings in banks, and it is estimated that at least a few billion more are in the “strawbox”. If you add another 70 percent of sight deposits to that, it’s clear that the money potential is there.
The development of the financial market is an imperative for any society wishing progress. The issuance of civil bonds would represent a significant step towards the revival of the capital market, as it was done in the countries of the region, such as Croatia, North Macedonia and Slovenia. As our interlocutors pointed out, this move would be a challenge, but it would bring numerous benefits to citizens, the state and financial organizations. Serbia, we learn, for now is only considering this option, but is still not sure that it will opt for it.
The “reservedness” of the state is understandable. Too much bond volume could disrupt the market. Excessive borrowing threatens to leave the banks with a shortage of available funds because part of the savings would be transferred to bonds, especially if the interest rate is higher than the interest rate on savings, which is now between 4 and 5 percent. According to the latest data, the state borrows on the market at an interest rate of around six percent. On the other hand, banks should not be so afraid, because they could make additional money in this process by providing logistical support and administering the entire process.
Democratization of the capital market
Professor Nikola Stakić, at the Business Faculty of Singidunum University points out that the issuance of civil bonds would activate the capital market, especially debt instruments, and significantly “democratize” the capital market by expanding the investor base. This would also create an optimal allocation of funds. These bonds would represent an alternative to savings, with a shorter maturity and state support, and would encourage the dinarization of the financial system.
According to his words, citizens and profit-making legal entities are limited in their investments today. They keep money either in savings or in real estate, and that, apart from insufficient alternatives, creates certain deformities in the market. Thus, real estate in Serbia, due to the fact that money from savings flows into them, become extremely expensive.
In addition, such initiative would encourage financial inclusiveness and contribute to the development of citizens’ financial literacy, giving them the opportunity to learn about different forms of investment and financial instruments. It would be a quality alternative to classic savings deposits, with low investment risk, and issuing bonds would preserve the value of savings in inflation conditions. Experiences from Croatia and North Macedonia indicate a great interest of citizens in these forms of investment, which can be expected in Serbia as well.
Aleksandar Zavišić, portfolio manager from the Ilirika Investments Belgrade Fund, believes that it would be an excellent move. He emphasizes that national bonds are a profitable form of savings that benefits both citizens and the state. In addition to financial interests, this move promotes savings, discipline and financial literacy. The state becomes a cheaper and more accessible creditor, citizens can make a solid return. Also, a high level of domestic debt in the total debt of a country can be beneficial, as is the case with Japan.
Zavišić points out that although banks could lose their exclusivity in the area of savings, the issuance of civil bonds would enable them to logistically organize and implement that process, bringing them financial benefits. He also emphasizes that in an informal conversation with a high-ranking official, he heard that such a possibility is being considered in Serbia, but that in his opinion the probability of such a thing happening is less than half.
Zavišić states that he is aware that several types of national bonds have been issued within the region: in Slovenia, Croatia and North Macedonia, with profits ranging from 3.4% to 5% in accordance with the credit rating of those countries. Hungary implemented a similar process to reduce dependence on foreign creditors ten years ago. Interest in these bonds was significant in all countries.
Dario Bjelkanović, fund manager at “InterCapital Asset Management” in Zagreb, says that the issuance of national bonds in Croatia represented an important step towards strengthening financial stability and a resilient financial system and that it benefited both the Government and the citizens, and this issuance was also part of the anti-inflation policy.
“The success of the issuance in Croatia is visible because around three billion euros were collected. “The key motive of the government was for citizens to invest in government short-term securities, which offer lower risk and a higher interest rate than traditional bank deposits”, explains Bjelkanović.
Bjelkanović points out that a significant advantage of these investments in government bonds represents the fact that capital gains tax is not paid on such investments, while the same tax is paid on funds in case the investment period is shorter than two years.
“The impact on the banking sector was not significant, considering the total size of citizens’ deposits,” emphasizes Bjelkanović. In addition, he adds, this strategy encouraged banks to increase interest rates on savings in line with the ECB’s reference interest rate and encouraged as well the strengthening of financial literacy among wider population.
By the way, to note, in Croatia, the amount of savings on accounts was around 35 billion euros. In March of this year, exactly one year has passed since the issuance, so citizens will be paid the first interest, bringing a return of 3.65 percent on the invested amount. This way, for example, those who paid a minimum of 500 euros will receive 18.25 euros, and those who paid 10,000 euros will be richer by 365 euros.
Slovenia also recently successfully issued “people’s bonds” with an interest rate of 3.4%, collecting around 260 million euros and exceeding the planned value of 250 million euros. Aleš Čačovič, from Triglav Savings Fund, points out that this move is long-awaited and very welcome for Slovenian savers. Citizens were given a direct opportunity to move their savings from bank accounts to a more profitable and financially secure option than bank deposits, which in Slovenia offer practically no return. The reservation of citizens towards this form of capital collection in Slovenia is higher than in Croatia, and this is primarily due to the low awareness of citizens about this form of savings. In Slovenia, bitcoin is more popular among savers and Slovenia is at the very top when it comes to investing in this currency. Cacovic says that the sole reason for this is the proven profitability of Bitcoin in the past.
Mark Jagodić from Ilirike Investments Ljubljana points out that on February 23 this year, Slovenia issued three-year government bonds. The bonds are restricted to purchase by Slovenian citizens only and began trading on the Ljubljana Stock Exchange on February 27, closing the first day of trading at a price of 100.4%. Although there is a low percentage of citizens interested in investing in the capital markets, the issuance of bonds attracted attention, and thus five thousand new trading accounts were opened. However, he believes, further systemic changes are needed in order for the Slovenian capital markets to regain confidence and prosperity.
By the way, he adds, bitcoin is more popular than civil bonds among savers in Slovenia due to the transparency and comprehensibility of prices, while traditional investment classes are less represented. However, he believes that cryptocurrencies are more speculative and are not an adequate substitute for long-term and less risky investment options.
Savings of Slovenian citizens in banks amount around 26 billion euros, but polls have shown less confidence in bonds. Only 25 percent of depositors declared positively, 67 percent said they would not buy the bonds, while the rest were undecided.
What are the possible challenges?
Professor Stakić believes that the challenges are different, especially if the offer of attractive savings products in the bank is high, as is currently the case in Serbia. However, with adequate measures of promotion, education and incentives, it is possible to overcome these challenges and motivate citizens to opt for investing in bonds.
“The previous experiences from Croatia and North Macedonia are positive, taking into account the volume of demand for bonds and the need for additional issues in the coming period. However, what we should keep in mind is the fact that in these countries the average rate on savings deposits was extremely low and that the creation of civil bonds led to a reallocation of capital, taking into account a significantly better ratio of risk and return. Coupon rates were higher than 3% in Croatia and up to 5% in North Macedonia. At the same time, interest on savings was lower in most cases. In Serbia, the situation is significantly different – there were attractive offers for savings in dinars, even up to 6%, and in that sense, it is more difficult task to encourage citizens to decide on a new type of investment that they generally are not familiar with at all and towards which they have doubts, especially older citizens who remember the pyramid schemes of banks and the financial crashes of the 90s”, Stakić points out and emphasizes that regardless of the skepticism and possible reservations of citizens, the issuance of civil bonds would be an important step towards strengthening financial stability, promoting financial inclusiveness and reviving the capital market. He claims that, if there is an adequate mechanism of protection and guarantees, by investing in domestic HOVs, citizens show a kind of “economic patriotism” by lending money to their country as a debtor, as opposed to investing in foreign institutions. In some countries with a highly developed capital market, it is one of the more important factors in making investment decisions.
Zavišić also believes that there is a deformity that makes this process difficult. “Comparison of bank savings rates and government bonds is logically incorrect. The state, by definition, is a more solid debtor than any private institution, or the banks that operate on its territory, even when they carry its explicit guarantee on savings. A bank can fail, but the state cannot, or hardly. Therefore, the interest rate paid by the state to creditors should be lower than the interest rate on savings with the bank as a debtor with more risk, instead of the opposite situation – that the interest rate on savings be lower than the interest, i.e. of the return given by the government bond. It is a current deformity in our country that raises serious questions regarding the management of public finances”, he states. He adds that it is evident that younger people want to participate in the stock market instead of relying only on real estate.
Bjelkanović admits that banks and investment funds in Croatia were partially affected by the state’s decision to implement a bond issuance program, but he believes that in the long run everyone can benefit.
“The banks were the only minor losers through these issues. After these four issues, about 3.3 billion euros went from deposits to government treasury bills and bonds. On the other hand, it is still not a significant blow for the banks, considering that they still hold a high level of citizens’ deposits,” says Bjelkanović.
He adds that 10 percent of the total issued bonds of Croatia and about 7 percent of the public debt were collected. The issues met the expectations of the Ministry of Finance because it was planned that citizens would buy 2 billion euros within four issues, but the interest was higher than planned.
“I would say that investment funds have not lost their assets, but it is more difficult for us to promote money funds, which carry profit of around 3.5%, which is similar to the profit on treasury bills, when new government issues are constantly coming. On the other hand, we also see it as an opportunity because citizens, as educated direct investors, could pay more attention to investing in investment funds in the future,” Bjelkanović points out.
He explains that the challenge is also reflected in the fact that if investors want money before the maturity of the government bond, they must open a brokerage account and pay a brokerage fee for selling on the secondary market, i.e. stock exchange. In addition, the price of the bond may fall at the time of sale, so investors do not have to earn the return they would have had if they had managed to wait for the bond to mature.
Along with the issuance of national bonds, the Croatian government also launched the issuance of treasury bills to citizens, and there is great interest in them as well.
In June 2023, the first civic bonds intended for citizens for investment were issued in North Macedonia. Two-year bonds were issued, and the mandatory minimum investment amount was 10,000 denars (about 19,000 dinars). Bonds worth EUR 50 million were issued. The funds were planned for development projects and the expectation was that they would have a positive impact on the economy. The Ministry of Finance announced at the end of 2023 the second issue of “citizen bonds” worth 600 million denars, with a maturity of two years and an interest rate of five percent. Citizens could subscribe to bonds with a minimum deposit of 10,000 denars, and the total yield was 10 percent. In addition to “civil bonds”, “green bonds” were also introduced as a new product on the market, with great interest from investors.
Digitization of the financial market in Croatia
The Ministry of Finance of Croatia has a digital platform E-riznica, which enables citizens to digitally purchase government securities from the comfort of their homes. This initiative, according to Bjelkanović, facilitates access to investing in government securities, encouraging financial inclusiveness and literacy among citizens. In addition, Croatia has the state payment agency FINA, which indicates the digitization of the capital market. FINA, apart from participating in payment orders and payment settlement between banks, enables citizens to make payments at counters, including utility bills or payments to other accounts. Its advantage is its presence in 170 locations throughout Croatia, providing a channel for the distribution of government securities, independent of the infrastructure of banks.
Why are interest rates on savings in commercial banks in Croatia so low?
“According to the latest data from the ECB, newly opened deposits in Croatia carry an interest rate of 2.2%, while all Eurozone members take one year loans at rates between 3.4% and 3.5%.” In this cycle of interest rate increases, the ECB has problems with the transmission mechanism of monetary policy. Banks have large surpluses of cash liquidity and deposits relative to credit activity, which does not motivate them to raise interest rates at the rate that the ECB does. In Croatia, one of the reasons why interest rates are low is the enormous liquidity of banks created by the release of kuna and foreign exchange reserves after the introduction of the euro, which gave Croatian banks an additional 5 billion euros of liquidity. An additional reason is probably the structure of the Croatian banking system, in which the eight largest banks hold more than 90% of the total bank assets,” Bjelkanović points out.
Author: Maja Jovanov
„The world of insurance”