NEW ECONOMY MINISTER GIVES DOWNBEAT ASSESSMENT OF

C O N F I D E N T I A L SECTION 01 OF 02 ZAGREB 000082 SIPDIS DEPT FOR EUR/SCE, TREASURY FOR INTERNATIONAL AFFAIRS LARRY NORTON E.O. 12958: DECL: 02/03/2020 TAGS: ECON PREL HR SUBJECT: NEW ECONOMY MINISTER GIVES DOWNBEAT ASSESSMENT OF CHALLENGES AHEAD REF: ZAGREB 66 Classified By: Econ Officer Derek Westfall for reasons 1.5 (b) and (d) ¶1. (SBU) Summary. Recently appointed Minister of Economy Duro Popijac sat down with Ambassador on February 2 to discuss Croatia's upcoming shipyard privatization effort, new economic stimulus measures, and potential reforms to improve Croatia's anemic business and investment climate. The Minister is focusing on ensuring a successful shipyards tender this month - a critical step for Croatia's EU negotiations. He also described a new program of government backed loans and guarantees for struggling small and medium enterprises. The Ambassador engaged the Minister in a discussion of the many economic reforms needed to improve an inhospitable business climate. The Minister agreed with the Ambassador's points, but expressed frustration with the extreme political challenges facing even the most modest reform initiatives. END SUMMARY. ¶2. (C) In a meeting February 2 with the Ambassador, Minister of Economy Duro Popijac conceded that the environment for shipyard privatization was far from ideal. He also noted that Croatia was not in a position to change many details in the offer from the previous privatization effort last fall, due to strict EU requirements for the structure of the tender. The previous tender failed to attract any acceptable bids, and the Minister was not optimistic regarding the upcoming round. Nevertheless, he said he and his team were working hard to give the privatization the best possible chances for success, meeting frequently with shipyard management teams and unions. ¶3. (SBU) The second major initiative underway in the ministry is the rollout of a three-part economic bailout fund for small and medium enterprises consisting of a subsidized loan scheme, a government guarantee fund, and creation of a private equity investment fund (reftel). The idea was originally the initiative of the central bank and the Prime Minister's economic advisors, but will be managed by commercial banks in cooperation with the state-owned Croatian Bank for Reconstruction and Development (HBOR). Minister Popijac was guardedly optimistic the plan could succeed, but complained that it was difficult convincing the commercial banks to offer a competitive below-market interest rate. Without adequately preferential rates, he said, the scheme will have a negligible effect in stabilizing the economy. ¶4. (SBU) While the loan and guarantee funds will hopefully help resolve the liquidity problems that plague companies, the Minister said, the planned private equity fund will enable new investments. But this fund of private investors, gathered together with an as yet unspecified degree of state support, will not be in place until at least May. The State Secretary for Industry, who accompanied the Minister in the meeting, commented "I hope we can keep our companies alive that long." (Comment: Croatia noticeably lacks a private equity or venture capital industry. There are only 2 such funds of note in the country, both relatively small. This will be a welcome initiative and hopefully an effective program with which to leverage government resources. End comment.) ¶5. (SBU) Ambassador Foley raised with the Minister the many problems that hurt the Croatian business and investment climate in the eyes of foreign investors and local entrepreneurs alike. These include the numerous regulatory burdens, administrative delays, para-fiscal fees, high taxes, inflexible labor markets, and ongoing problems with corruption. He told the Minister that Prime Minister Kosor had been impressive in her first six months primarily because she had been able to make tough decisions on solutions that, while imperfect, succeeded in moving issues forward (such as the arbitration agreement with Slovenia on the border). He suggested that Kosor's tenure therefore offered an opportunity to tackle difficult economic reforms, if the right decisions could be framed for her. Foley also noted it was worth testing the opposition SDP's offer to work cooperatively with the government for the next six months in addressing the country's challenges. ¶6. (C) The Minister agreed with the Ambassador's assessment of Croatia's problems, and expressed frustration with the political realities in Croatia that prevent change. He said Croatia has no industry that could be considered "leading" and that all industries with potential in Croatia, such as manufacturing, agriculture, or tourism, suffer from deep ZAGREB 00000082 002 OF 002 structural problems. He said development is further hampered by roughly 600 municipal government structures, which greatly increase the complexity and delays in realizing commercial projects. Commenting on local resistance to government initiatives to streamline investment, the Minister said, "the people want everything and nothing at the same time," i.e. they want economic development but oppose allowing outside investors easier access to local markets. Popijac also suggested that Finance Minister Suker was a significant obstacle to improving the fiscal climate for business investment given his responsibility for financing the government's bloated budget. ¶7. (C) Comment. Since his appointment as Minister last November, following the resignation of his predecessor over corruption allegations, Minister Popijac has kept a low profile. He attributes this to his hard work and focus on the shipyard issue. He recognizes that another failure at privatization of the shipyards will damage Croatia's EU negotiations and would likely mark him as a failure as Minister. Nevertheless, his relative invisibility strikes us as odd, given the economic challenges Croatia faces. One of Prime Minister Kosor's economic advisors told us privately yesterday that the PM is frustrated with the dearth of initiatives or leadership coming from her cabinet on economic issues. Clearly this will have to change. While a program such as the economic bailout fund could prove to be a very good idea, throwing money at the economy is a relatively easy step. When it comes to tackling the far-reaching structural problems in the economy, such as cutting bloated pensions, shrinking public administration and laying off government employees, or closing failing State enterprises, the Prime Minister will need Ministers and advisors who are bold thinkers and who can exploit her own political strengths. The Ambassador will pursue these issues in his February 5 introductory meeting with Suker. FOLEY