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Development of the Corporate Bond Market in Latvia Doctoral Thesis in Economic Science Subfield: Finance and Credit

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Development of the Corporate Bond Market in Latvia Doctoral Thesis in Economic Science Subfield: Finance and Credit UNIVERSITY OF LATVIA FACULTY OF BUSINESS, MANAGEMENT AND ECONOMICS Development of the Corporate Bond Market in Latvia Doctoral Thesis in Economic science Subfield: Finance and Credit Author: Natalja Tocelovska Scientific supervisors Biruta Sloka, Dr.oec., professor Inese Vaidere, Dr.oec., professor Riga 2018 Abstract The goal of this thesis is to provide a theoretical background for measuring the develop- ment of the corporate bond market in Latvia, to identify the key determinants of the development of the corporate bond market in Latvia, and to produce recommendations for actions needed for the development of the corporate bond market in Latvia within the Capital Markets Union. The first part of the thesis contains the theoretical analysis of the frameworks measuring the development of the corporate bond market, its staging process, and determinants. In addition, the first part includes the exploration of the ongoing shift in the paradigm of the corporate fi- nancing in Europe as stimulated by the financial crisis of 2008-2013 and supported by the Capi- tal Markets Union (CMU) as the significant external factor influencing the corporate bond mar- kets. The second part of the thesis contains an in-depth analytical study of the corporate bond market in Latvia applying the expositive and comparative elements frameworks, the effect of the introduction of the CMU is estimated for the corporate bond market in Latvia. The third part con- tains the practical exposition of the determinants of the corporate bond market development in Latvia applying the statistical analysis complemented by the in-depth interviews and surveys. In the result of the theoretical, analytical and practical analysis, the Author develops a Corporate Bond Market Development model and measures the development of the corporate bond market in Latvia. Within the scope of theoretical-methodological analysis of the thesis the critical review of the existing methods and frameworks for measuring the development of the corporate bond mar- ket is performed, determinants are identified, staging framework is developed. Moreover, the paradigm shift in the perception of financial markets in a country is revealed by analysing the role of the borrowed funding in the bank-based and market-based economic systems in a country and the recent developments in the CMU initiative are investigated for Latvia. Empirical research based on the secondary data of the corporate bond market in Latvia as well as primary data col- lected through means of surveys and in-depth interviews is performed in order to verify the hy- pothesis. The thesis consists of 187 pages and includes 49 figures, 30 tables, 4 formulas and 4 ap- pendixes. The literature list contains 273 sources. 2 Explanations The following terms are used in this thesis Bloomberg Bloomberg information system Lursoft Company register in Latvia Nasdaq Baltic Nasdaq Baltic stock exchange Abbreviations The following abbreviations are used in this thesis ASEAN-5 Countries: Indonesia, Malaysia, the Philippines, Singapore, Thailand ASEAN-5 Chief Financial Officers CFO Commonwealth of Independent States CIS Capital Markets Union CMU Corporate Bond Market Development Model CBMD Enterprise Income Tax EIT Euro EUR European Bank for Reconstruction and Development EBRD European Central Bank ECB European Commission EC European Monetary Union EMU European Union EU Financial Sector Development Indicators FSDI Financial Sector Issuer FSI Financial and Capital Market Commission FCMC Gross Domestic Product GDP International Accounting Standards Board IASB International Financial Reporting Standards IFRS International Monetary Fund IMF International Organisation of Securities Commissions IOSCO Initial Public Offering IPO Nasdaq CSD Societas Europaea (former Latvian Central Depositary) LCD Latvian Currency Lats LVL Latvijas Hipotēku un zemes banka LHZB Microfinance Institution MFI The Markets in Financial Instruments Directive MiFID Morgan Stanley Capital International (used as an abbreviation only) MSCI Non-Financial Companies NFC Organisation for Economic Cooperation and Development OECD Over-The-Counter OTC Peer-to-Peer P2P Personal Income Tax PIT Quantitative Easing QE Small Business Act SBA Small and Medium Enterprise SME United States of America Dollar USD Yield To Maturity YTM 3 Table of contents Abstract ........................................................................................................................................... 2 Table of contents ............................................................................................................................. 4 Table of figures ............................................................................................................................... 5 List of tables .................................................................................................................................... 7 Introduction ..................................................................................................................................... 9 1. Theoretical background and development measurement of a corporate bond market ............. 22 1.1. Analysis of the definitions of a corporate bond ..................................................................... 22 1.2. Frameworks for the analysis of the development of a corporate bond market ...................... 24 1.3. Corporate bond market as part of the financial system of a country ..................................... 40 1.4. Recent development of Capital Markets Union .................................................................... 53 1.5. Existing research gap ............................................................................................................. 58 2. Analysis of the development of the corporate bond market in Latvia ...................................... 61 2.1. Expositive elements framework ............................................................................................. 61 2.2. Comparative elements framework ......................................................................................... 83 2.3. Effect of Capital Markets Union introduction to the corporate bond market in Latvia ...... 108 3. Determinants of the development of the corporate bond market in Latvia ............................ 114 3.1. Quantitative factors: selection and analysis for the corporate bond market in Latvia ......... 114 3.2. Qualitative factors: selection and analysis for the corporate bond market in Latvia ........... 121 3.3. Corporate Bond Market Development model ...................................................................... 143 Conclusions ................................................................................................................................. 147 Recommendations ....................................................................................................................... 152 Literature ..................................................................................................................................... 157 Appendices .................................................................................................................................. 172 4 Table of figures Figure 1. Conceptual model of the research ................................................................................. 59 Figure 2. Latvian bond market: the issues outstanding in Nasdaq Baltic, 2018 (million EUR) .. 62 Figure 3. Maturity structure of Latvian corporate bond market, 2016 (EUR) .............................. 65 Figure 4. Latvian stock market: the turnover, 2000-2017 (million EUR) .................................... 68 Figure 5. Latvian stock market: the turnover, 2000-2017 (number of shares) ............................. 68 Figure 6. Newly granted loans in Latvia, 2014-2017F (million EUR) ......................................... 72 Figure 7. GDP in Latvia, quarterly, 1998-2017, thousand EUR ................................................... 74 Figure 8. Dynamics of RIGIBOR, 2005-2011 (%) ....................................................................... 75 Figure 9. Number of primary domestic issues organised by the Treasury of the Republic of Latvia, 2002-2017 ......................................................................................................................... 78 Figure 10. Amount of domestic issues organised by the Treasury of the Republic of Latvia, 2002- 2017 (million EUR) ...................................................................................................................... 79 Figure 11. Average amount per issue of domestic sovereign bond auctions organised by the Treasury of the Republic of Latvia, 2002-2017 (million EUR) .................................................... 80 Figure 12. Ratio of public sector debt to GDP for Germany, Latvia, Sweden, and the USA, 2008- 2017 (%)........................................................................................................................................ 84 Figure 13. Ratio of private sector debt to GDP for Germany, Latvia, Sweden, and the USA, .... 85 Figure 14. Ratio of international debt to GDP for Germany, Latvia, Sweden, and the USA, 2008- 2017 (%)........................................................................................................................................ 86 Figure 15. Cost of capital of sovereign debt for Germany, Latvia, Sweden, and the USA, 2016 (%)................................................................................................................................................
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