EBRD SLOVENIA: PESSIMISM GROWING REGARDING REFORMS

C O N F I D E N T I A L SECTION 01 OF 02 LJUBLJANA 000113 SIPDIS SIPDIS DEPT FOR EUR/NCE (SSADLE),USDOC/ITA (CRUSNAK) E.O. 12958: DECL: 02/14/2017 TAGS: ECON EINV ETRD SI SUBJECT: EBRD SLOVENIA: PESSIMISM GROWING REGARDING REFORMS REF: A. LJUBLJANA 0046 ¶B. LJUBLJANA 0132 ¶C. LJUBLJANA 0378 Classified By: COM Thomas B. Robertson for reasons 1.4 (b) and (d) ¶1. (C) SUMMARY. European Bank for Reconstruction and Development (EBRD) regional director Francois Lecavalier described himself as "completely pessimistic" about the Government of Slovenia's (GOS) commitment to necessary economic and institutional reforms. In his view, the GOS is resisting the very reforms it championed when it came into power in 2004. With his regional perspective, Lecavalier stated that Slovenia is no longer the "model" transitional economy, and has strong concerns about Slovenia's competitiveness going forward. However, he sees Ljubljana's new mayor, Zoran Jankovic, as a welcome change to the current status quo, and as someone who has the skills and the desire to bring reforms to Slovenia (or at least to Ljubljana) that the current government seems to have lost the will to implement. END SUMMARY. -------------- Government's Strong Presence in Business -------------- ¶2. (C) At a meeting with COM February 2, EBRD director for Slovenia, Slovakia, Hungary and the Czech Republic, Francois Lecavalier, expressed his disappointment at the snail's pace with which the GOS is implementing economic and institutional reforms. Prime Minister Janez Jansa and his Slovenian Democratic party (SDS) came into power promising to speed up privatization and institutional reforms. Unfortunately, instead of the Government pulling back from business, Lecavalier sees "corporatism" growing in the GOS, citing the Government's resistance to selling profitable government-owned companies such as Nova Ljubljanska Banka (NLB),the continued presence of government officials on the boards of major companies, and business decisions made to "protect the jobs of yesterday with no concern for the jobs of tomorrow." -------------- Slovenia Still Wary of FDI -------------- ¶3. (SBU) According to EBRD's November 2006 "Strategy for Slovenia" Report, Slovenia has a strong macroeconomic foundation and the highest GDP per capita amongst the countries in which the EBRD operates. While lauded for its steady economic growth, the EBRD predicts that Slovenia's economy will hit a "brick wall" if the GOS does not improve competitiveness, reform public administration and enhance labor flexibility. While the GOS has been giving lip service to reducing its presence in the private sector, its actions belie its words. In 2002, as the first phase of privatization, the GOS sold 34 percent of NLB to Belgian bank KBC and 5 percent to the EBRD, with vague promises that KBC could attain majority shareholding in the future. When KBC moved in 2006 to purchase a majority share of NLB, the GOS refused. Then, when KBC said they were willing to accept 49 percent ownership if they could have management control, again the GOS refused. At this point the EBRD entered the fray. To allay the Government's fear of NLB being overwhelmed by a large private entity, the EBRD offered its services as a neutral party on the management board, which the NLB board refused. In response, KBC pulled its board members out of NLB. With the Government's unwillingness to let go of controlling interest in NLB, KBC and the EBRD are looking to sell their shares. Even with Nova Kreditna Banka Maribor (NKBM),a bank that the GOS is keen to privatize, the Government's proposal of 20 percent ownership with no guarantee for future management control has no chance of finding a foreign investor, according to Lecavalier. ¶4. (SBU) Lecavalier expressed further disappointment that the GOS has done a 180 degree turn on its campaign promises to privatize "strategic" businesses. Not only has the GOS said that there is no need to privatize the telecommunication sector any time soon, it is increasing its stake in strategic companies such as Gorenje, Slovenia's largest appliance manufacturer, and intends to take full control of the energy sector. The EBRD has urged government pension fund KAD to dilute its share in Gorenje to less than 25 percent. To facilitate this, the EBRD was prepared to infuse Gorenje with 14 million euros of fresh capital to finance growth. In December 2006, the proposal was rejected by Gorenje's LJUBLJANA 00000113 002 OF 002 supervisory board in favor of 7.63 million euros from GOS pension fund KAD. But now, Gorenje will most likely need another tranche of money next year, at which time the EBRD may get involved. (NOTE: In a meeting with COM, PM Jansa stated that government funds KAD and SOD would decrease their business holdings by 5 to 10 percent, but they seem to be only divesting shares in undesirable companies and holding on tightly to profitable companies. END NOTE.) -------------- Worries About the Future -------------- ¶5. (C) Lecavalier worries that gradualism has run its course in Slovenia. The great success of the country's conversion to the euro, he argued, is based on good policies of the past. He pointed out that structurally, Slovenia is vulnerable to an economic downturn. It has a large number of companies with huge workforces; labor is not mobile; companies have taken on a lot of debt (he claims an average of 20 percent a year since 2004) because credit is too cheap; and Slovene exports are highly reliant on continued economic growth in Germany. Lecavalier warned that one or two significant bankruptcies here could lead to a crisis since the government and companies are so inter-connected. He remarked that Finance Minister Bajuk knows that he has no room to maneuver -- 90 percent of the government budget is non-discretionary. -------------- Jankovic: The Great Independent Hope? -------------- ¶5. (C) Offsetting Lecavalier's disappointment with the Jansa government's minimal economic reforms was his enthusiastic praise of new Ljubljana Mayor Zoran Jankovic. Prior to becoming mayor, Jankovic was the popular and successful CEO of the Mercator company, but he was ousted by a new management board in November 2005. Many pundits believe that Jankovic's friendship with former Slovenian President Milan Kucan made him persona non grata with Jansa. Lecavalier laments Jankovic's removal from Mercator as a classic example of political wrangling overriding good business practices. As the Mayor of Ljubljana, Jankovic is in an influential position and, having won as an independent candidate, has no vested interest in following Jansa's lead. In fact, Lecavalier considers Jankovic and Jansa to be locked in a political battle, with Jankovic representing the strongest hope for a "rise of independent thinking in Slovenia." Jankovic, albeit a success as CEO at Mercator, upset board members by making unilateral decisions without consulting them and made questionable hiring decisions by hiring relatives for key positions. As mayor, Jankovic has said he plans to run the city using business practices. Already he has fired staff from the mayor's office whom he deemed non-productive. Time will tell how he will deal with the realities of life in the political arena. ¶6. (C) COMMENT. Lecavalier quoted Dusan Mramor, former finance minister, saying that for Slovenia, "gradualism has run its course." In reality, the majority of Slovenians are risk averse. In recent years Slovenia has been experiencing 4 to 5 percent annual growth, and most citizens do not want to "fix" what does not seem broken. Lecavalier attributes Slovenia's strong macroeconomic position now to a legacy of good fiscal planning by the previous administration rather than choices made by Jansa's government. The question remains whether the current government will move forward on economic and structural reforms quickly enough to avoid a decline in economic growth, a decline which Lecavalier foresees will have Slovenia looking more like faltering Italy than economic dynamo Czech Republic, the most recent graduate of the EBRD. END COMMENT. ROBERTSON