The stability of the Bulgarian lev driven by the nominally pegged rate to the Euro is a solid ground for direct and portfolio investments in public and private companies in the country. When analyzing the macro-data, the current account deficit and the external debt in particular, the pros and cons of the fixed-rate are pretty much debatable. From the point of view of the capital market, however, the fixed rate means one and only one thing to the foreign investors – minimum foreign currency risk.
The admission of Bulgaria in the Eurozone is a small step, but one that will take the business and the government along a long and thorny road. The benefits for the capital markets would be more sensible in the scope of stable government and central bank policy through fulfilled political engagements, which thence would be reflected in the market via a premium or / and lower discount rate.
Practically, the only difference should be focused on the change of the degree of trust of the foreign investors, not any expectations of shifts in the fixed nominal rate.
2 comments:
I agree that the fixing of the BG currency (Lev) to the Euro is a positive measure for showing to investors that the BG central bank has taken steps in comparing to and holding the state of the economy in close proximity to the ones of the European Union; and that was at the time of fixation. However, more business policies should be instituted for those who choose to use the capital markets to mandate the accurate representation of performance and responsibility for communicating it openly and properly in order for the capital markets to flourish. Only more and meaningful participants will help determine the appropriate representation of the exchange rate ratio. Nothing is ever perfect [in business], but it should make sense!
Now, the challenges facing the central bank are to follow the monetary policies of the "pegged-to" currency as well as maintain proper reserves [of foreign currency (Euros)] to legitimately maintain that level of fixation [until the Euro currency is adopted]. Other pressure that exists is that the bank continues to understand, if indeed it does, the value creation in the economy. Here, the very important matter of transparency must be highlighted. And, as pointed in a previous blog entry, the guidance from management on that [true growth of] value creation appears illusive may make it somewhat difficult for inflation expectation and management.
That said, if investors do not have confidence in the representation of the business state through the required reporting and ownership of that guidance, they will have less preference to invest through the capital markets and more so through direct investments. Direct investments and management appear to make more sense [at this stage] because investors would have better information about the management expectations, control over the destiny of their investments, and communication of true value [of the investments] when needed by them. The purpose of capital markets is to provide efficiency in business value transfer and they will underperform until investors demand their better performance, by voting with their dollars, when choosing how to transact.
On the other hand, it is in the best interest of business owners to accurately participate in the capital markets, when the cost of reaching out to investors is less via them, or at exit, when more participants are sought. My position is that at this stage of business activity, it will be costly to maintain meaningful representation on the capital markets. More firms need to reach mature, stable states to draw the attention of investors. Otherwise, money is better invested privately. Therefore, I am willing to assert that a fixed relationship between the Lev and other currencies is more of a move of determination to encourage high level of foreign investments, rather than a true representation of the valuation of the currency. From a far, this is my understanding of the economic forces in BG and I am sure that there are other opinions on the matters.
emil, what a comment... no time to read it, although it might be interesting
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