Superficial examination of aggregate gross cross-border capital inflow data suggests that there
was no substitution between portfolio inflows and bank loans in recent years. However, our
novel analysis of disaggregate inflows (both by types of instrument and borrower) shows
interesting heterogeneity. There has been substitution of bank loans for portfolio debt securities
not only in the case of corporate and sovereign borrowers in advanced countries, but also
sovereign borrowers in emerging countries. In the case of corporate borrowers in emerging
markets, the relationship corresponds to complementarity across types of gross capital inflows,
especially during periods of positive capital gross inflows after the global financial crisis. A
large part of these patterns does not seem to be driven by a common phenomenon across
countries associated with the global financial cycle, but rather by country-specific factors.
Small emerging economies, despite their significant growth, lack the scale to develop thriving capital markets from their local investor and issuer base that are able to deliver the benefits of a large, mature market. Slovenia is such an example. Despite the necessary infrastructure in place, trading has remained thin and issuance activity has been dormant. This paper proposes a two-pronged strategy for capital market development that leverages the existing setup in the context of regional integration such as within the EU. While using the case of Slovenia, this path might be indicative for other small countries that are part of a larger economically integrated region.