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.

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Government's Strong Presence in Business
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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."

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Slovenia Still Wary of FDI
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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

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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.)

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Worries About the Future
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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.

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Jankovic: The Great Independent Hope?
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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