AFSA: Capital Markets development in Albania for 2022 and challenge for 2023

Pronunciation of the Financial Supervision Authority

for the "MONITOR" Magazine, 14 January 2023

 

The Albanian Financial Supervision Authority (AFSA) estimates that the financial markets under the supervision of this institution were stable during 2022, despite the uncertainty that high inflation caused in the economic environment.

In a statement for the "Monitor" economic magazine, this institution states that the most visible effects appeared in the activity of investment funds, mainly due to the increase in the interest rates of securities.

AFSA informs that it has monitored the situation through an increased frequency of reporting of the main indicators and, in particular, of the liquidity indicators, in order to ensure the implementation of the legal and regulatory basis for meeting the repayment requirements of investors.

According to the AFSA, the effects of inflation and the increase in interest rates are expected to be present during 2023, so the main challenge for these markets will be to ensure their stability, but also to support their further development.

In particular, AFSA intends to further deepen the digitization process, modernizing the reporting and financial analysis systems, as well as advancing towards full risk-based supervision for all markets.

How do you assess the overall performance of the financial markets under your supervision during 2022?

As a whole, in 2022, although a year accompanied by uncertainty and fluctuations, the markets under the supervision of the Authority appear stable in terms of the main indicators of financial health.

The insurance market, although under the effects of successive shocks, such as the earthquake, the pandemic and the recent situation with increased inflation, the main financial indicators have marked further improvements.

Referring to the data, there is an increase in income from gross written premiums, as well as an increase in paid claims, both in number and value. Also, there was an increase in assets at the market level, as well as an improvement in the capital adequacy indicator for Non-Life, at the level of 189%, from 184% that was at the end of 2021.

The number of pending claims in the 9th month of 2022 has decreased by about 24.5% compared to the same period a year ago. This has also come as a result of recommendations made during the thematic inspections of the Authority, with a focus on damages.

Brokerage commissions have decreased to a market average of 17.5%, from over 27% before the AFSA regulation came into force in January 2022.

As for investment funds, the rapid cycle of interest rate increases has had an impact on these funds, as well as influencing the behavior of investors.

There is a change in the behavior of investors, being oriented towards the direct purchase by individuals of Government securities, where during the 9th month of 2022 there was an increase of 138% compared to the same period last year.

The market of private pension funds has continued to grow during 2022, both in terms of net assets and in terms of the number of members. The new draft law "On private pension funds", recently approved by the Council of Ministers and currently in parliamentary proceedings, achieves an alignment with the European Directive IORP II, as well as aims to promote the further development of this market.

Some of the main objectives that are intended to be achieved with this draft law are the protection of the interests of the members of the pension fund, through the establishment of high standards for good information and transparency, the promotion of participation in the scheme through the automatic inclusion of all employees by employers, the creation of fiscal facilities, the strengthening of the supervisory and regulatory framework, as well as the increase of professionalism in the administration of funds, through increased requirements for the governance of the administrative society and the suitability of key personnel.

As for the capital market, in 2022 AFSA has also supported the creation of all the preliminary conditions that are necessary for the development of this market. The last set of draft regulations, in implementation of the new law "On Capital Markets", drafted with the assistance of foreign consultants, is in the approval phase.

The capital market has a lot of room for new issuers on the supply side. The growing trend of bonds issued by private offering by entities operating in Albania (mainly banks) clearly shows the potential that exists from the supply side for issuance through public offering as well.

The bond market with private placements counts 7 issuers (mainly Banks) and has had an upward trend even in 2022, reaching nearly 13 billion ALL (around 115 million EUR), with double-digit growth compared to previous periods.

The Albanian economy during 2022 has faced the highest inflation in more than two decades. What effects has high inflation and rising interest rates had on non-banking financial markets?

The effects of high inflation have been limited to the insurance market and that of private pension funds, but the increase in the interest rates of securities has brought an impact on the market of investment funds.

Taking into consideration the continued pressure of rising inflation, central banks are significantly normalizing their monetary policy stance, as well as tightening financial conditions from the beginning of 2022. This situation has been accompanied by an increase in repayment requests from investment funds, especially from funds that invest mainly in bonds.

The same situation has also appeared in the Albanian market, where the increase in the interest rates of securities has devalued the portfolios of investment funds licensed in Albania, which invest mainly in the market of Albanian Government securities and in international markets, bringing their negative performance. This has influenced the behavior of investors, causing requests for repayment of quotas especially in the third quarter of 2022.

On the other hand, the purchases of individuals in the primary market of bonds and bonds increased by 138% in the 9th month of 2022, compared to the same period last year, marking a displacement of investors towards direct investments in securities of the Government.

The increase in interest rates has brought visible negative effects especially on the performance of investment funds. How has the market coped with this shock and do you see risks that this period could shake the confidence of investors in these funds?

Investment funds with public offering, with open participation licensed in Albania, give investors the opportunity to sell their shares at any time, which requires that the funds have an appropriate level of liquidity, in order to meet repayment requirements from investors. 

The investments of this market in securities of the Republic of Albania are considered illiquid assets, which exhibit high return volatility, especially in periods of market stress.

The negative effects that fund investments can have on the share price prompt investors to sell their shares, forcing funds to sell their portfolio assets to create liquidity.

This is also the reason why appropriate policies in liquidity management are required for these funds. Faced with the increasing demands for the repayment of quotas, the need for the sale of assets increases, which affects the fall in the prices of illiquid assets and, consequently, the prices of the quotas of these funds.

Given that the evaluation of the government securities, which the funds hold in the portfolio, is done according to "mark-to-model", in order to have an evaluation as close as possible to the market value, the change in the interest rates of the government securities affects in the opposite direction to the value of the fund's portfolio.

In order to manage the growth of negative flows, measures have been taken in the market of investment funds by reducing the indicator that measures the sensitivity of price movements from the change in interest rates of the fund portfolio, increasing liquid assets through the administration of the maturity of securities in portfolio of funds, as well as the sale of securities with high volatility.

Also, the management companies, during this period, have increased communication with investors, through sales agents, making available to investors all the necessary information regarding the factors influencing the situation created.

The authority has monitored the situation through an increased frequency of reporting of the main indicators and, in particular, of the liquidity indicators, in order to ensure the implementation of the legal and regulatory basis in meeting the repayment requirements of investors.

Even the year 2022 did not bring concrete innovations in terms of the development of the capital market in the country. Have you noticed signals of interest from the market this year and what are your expectations regarding the future of the Stock Exchange?

The year 2022 marked important developments in terms of the further completion of the regulatory framework, in implementation of the new law on capital markets, as well as the market infrastructure, which is already complete.

During this year, two entities (banks) extended their license for the first time, to also perform the function of underwriting financial instruments, a necessary function for the realization of the emission process, through the public offer.

As a result of these positive developments, in the direction of building the complete infrastructure for a well-functioning and well-regulated capital market, there is an increase in interest from market subjects to issue publicly offered bonds and trade them on the Stock Exchange.

On the other hand, the bond market with private offer, with 7 issuers currently, mainly the Bank, has had an upward trend even in 2022, reaching a value of about 13 billion ALL (around 115 million EUR), with a double-digit increase compared to previous periods.

However, the development of the capital market requires the commitment of many participants or institutions with a key role in this market. The Authority, in cooperation with the Ministry of Finance and Economy, has finalized the drafting of a strategic document for the development of the capital market.

The promotion and compatibility of the demand from investors to invest in the capital markets with the offer from the issuing companies, to offer new and attractive financial instruments, constitute a necessity in the reformation of the Albanian capital market.

Note: The original article is longer and in Albanian