FINANCIAL SYSTEM should be increased to achieve a stable stock exchange based on internal financing. Chart 4-20: Distribution of ownership of the shares issued by Hungarian non-financial corporations at the end of 2017 6
3
1
Non-financial corporations Credit institutions
4
Insurance companies, funds 58
20
Other financial corporations State
8
Hungarian institutional investors’ share should increase to 22–27 percent relative to stock market capitalisation. A sound financing structure means that the external financing of businesses does not depend too much on either bank financing or capital market financing. Currently, almost 90 percent of Hungarian companies’ financing comes from banks, which indicates a one-sided financing structure. The banking system’s operation is procyclical, and therefore a mature capital market is needed that provides an alternative to companies for acquiring funds during a slowdown in lending.
Households Foreign
Source: MNB.
The main reason behind the subdued interest in the Hungarian equity market is not the lack of capital, but a general distrust in the capital market and its institutions and the lack of incentives supporting equity investments. Moreover, the public’s financial awareness should be enhanced and self-care should improve so that capital market deepening does not become constrained on the demand side.
4.4.2 SPECIFYING THE OBJECTIVES NECESSARY FOR THE 2030 MACROECONOMIC PATH Having been launched in 2016, the strategy of developing the stock exchange, which is now in Hungarian hands, is around the halfway mark. However, the domestic supply and demand side should be stimulated more to further deepen the capital market, and the state may play a major role in this. The supply side must strengthen considerably until 2030, on both the equity and the bond market. In parallel with real economic convergence, stock market capitalisation should rise from its current 22–23 percent level to 50–60 percent of GDP. Equivalent in value to this goal and also important in order to avoid excessive concentration is to raise the number of listed firms to around 150–200. This could be mainly achieved by the listing of the medium-sized enterprises prepared for this and state-owned enterprises. Utilisation of the capital market should also increase in terms of loan-type funds, and in connection with this the bond portfolio of non-financial enterprises should reach HUF 2,000–2,500 billion. To this end, households’ equity holdings should be expanded to 11–16 percent as seen in the countries with more mature capital markets, while
4.5 Capital raising by start-ups 4.5.1 CAPITAL RAISING PROBLEMS FACED BY START-UPS Small and medium-sized enterprises (SMEs) are key in sustainable convergence. From the perspective of SME financing or their access to external funds, young companies should be differentiated from mature businesses. Young firms are small, and a large proportion of them cease their operation soon. Providing bank financing to start-ups entails huge risks to credit institutions because the former has no meaningful economic past, both their bankruptcy rate and the number of failed firms are high, which is exacerbated by their limited ability to provide collateral. Due to the high funding risks, start-ups are usually excluded from the market for bank loans. One option for acquiring funds instead of bank loans is to raise capital at institutions specialising in this. Among new companies, the capital-raising opportunities of innovative businesses (with high growth potential) are adequate, but the issues of start-ups engaged in traditional activities related to the acquisition of funds can be attributed to both supply-side and demand-side factors. Entrepreneurs are usually overly optimistic regarding the projected earnings potential of their ideas which they seek to implement, while investors focus on the risks of implementation. The access to financing necessary for growth may be hampered by demand-side constraints such as the lack of capacities or competencies related to acquiring the funds, which is most readily observable in the case of administrative tasks and the preparation of business and financial plans. Another constraint is that obtaining the funds may take a long time, on account of the complex, GROWTH REPORT • 2018
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