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Emerging Europe: Slovenia buys time with reform package

15 companies slated for privatization; Eyes on Russian, Turkish buyers

Slovenia’s new reform package unveiled last month displayed unprecedented readiness to make divestments from the country’s highly indebted corporate sector. It included plans to privatize 15 companies.

Analysts say investment from abroad into this export-dependent economy – into a corporate sector largely state funded until now – is the key to solving the banking crisis that has plagued Slovenia since 2009.

"More foreign direct investment and lower corporate debt levels are crucial for Slovenia," says Lindsey Liddell, ratings analyst at Fitch. "A bad bank can clean the books, but in the longer term local banks need a growing, and less leveraged corporate sector to lend to."

Last month the government said it would sell 15 firms including Nova Kreditna (the second-biggest bank), Telekom Slovenije and national airline Adria.

The 15 firms constitute the tip of the iceberg of Slovenian state ownership. But as a privatization wish-list, it is unprecedentedly explicit, says Saso Stanovnik, chief economist at Ljubljana-based Alta Invest.

"Previously there was only a statement of which firms were strategic holdings and which not," he says. Yet, like most, Stanovnik has doubts about how easy it will be to attract buyers from abroad for the assets.

Little foreign exposure

Slovenian banks’ bad debt level (around 15% at the end of 2012) is similar to that of Cyprus. Like Cyprus, Slovenia is a small country that entered the eurozone shortly before the global financial crisis, and foreign ownership of banks is relatively low.

Unlike those in Cyprus, Slovenia’s banks have little exposure to other peripheral eurozone sovereign debt. Cyprus’s banking sector accounts for around 800% of GDP, compared with around 125% in Slovenia – a result of Slovenian banks’ domestic focus.

Slovenia’s anomaly lies in it being perhaps the world’s most industrially developed country with a recent communist past. Partly as result, its banks’ problems lie in its heavily indebted, largely state-owned local corporate sector.

The reform document unveiled last month says the new bad bank will reduce nonperforming assets of the top-three banks (all state-owned) from 24.6% to 8.8% between June and September, reducing sector bad debt to 10% of GDP.

Yet some fear lingering aversion to foreign direct investment might have influenced the new government’s decision to extend the projected life of the bad bank, which could otherwise sell equity stakes earlier, after debt conversions.

"The thinking might have been that if you prolong the programme, these companies would maybe be bought by Slovenians," says Stanovnik.

Such fears speak to the atmosphere, after corruption charges led to protests and the government’s collapse in February. Slovenians now wonder if politicians’ past aversion to foreign capital was as much practical as ideological.

Failure to tackle the underlying problems in the country’s banking sector led to Slovenia almost following Cyprus in succumbing to an international bailout earlier this year – an event seen as forcing change.

In early May, Slovenia raised $3.5 billion in five-year and 10-year notes, issued at 4.95% and 6%. That has offset concerns over funding the budget and redemptions until the end of 2014, according to Fitch Ratings.

BNP Paribas, Deutsche Bank and JPMorgan arranged the deal. It happened days after Moody’s downgraded the sovereign to sub-investment grade. Existing bond yields were already trading above those of junk-rated states such as Hungary and Serbia, according to RBS.

A week later, the new centre-left government unveiled its reform document. The measures are designed to comply with EU rules, targeting a structural balance by 2017, and stabilization of government debt below 55% of GDP.

The package tweaks the democratic framework, blamed for delaying anti-crisis measures; it will alter the electoral system to produce more stable coalitions and restrict the use of referendums. The plan also contains spending cuts and tax increases.


Cuts to public-sector wages, however, have already had to be softened subsequent to negotiations with unions. Moreover, the bad bank will increase general government debt by up to 11.4% of GDP in one swoop.

The government has set aside 3.7% of GDP for bank recapitalizations in 2013. Added to the other burdens, this makes privatization revenue and investment from abroad even more pressing – but more difficult to achieve.

With local banks’ return on equity negative for the past three years, according to Raiffeisen, finding a strategic investor in state-owned bank Nova Kreditna might be particularly hard.

Ivan Kurtovic, head of brokerage at Zagreb-based InterCapital
Ivan Kurtovic, head of brokerage at Zagreb-based InterCapital

Russian and Turkish banks are known to be expanding in the region. But they will not do it at any cost. Cultural, political and commercial links with Russia are stronger in Serbia (and Cyprus). In other sectors, one precedent could be VTB Capital’s €130 million buyout of state-owned Bulgarian telecoms firm Vivacom last year. VTB Capital told Euromoney last year that it was looking at such opportunities in Slovenia.

Like Serbia, Bulgaria has stronger links to Russia than Slovenia has. Nevertheless, Ivan Kurtovic, head of brokerage at Zagreb-based InterCapital, reckons Telekom Slovenije might be the first asset to be privatized.

The company is profitable and, says Kurtovic, Slovenians are familiar with competition in the telecoms sector, so have probably become accustomed to the idea that Telekom Slovenije would be privatized.

"It is important that the government demonstrates it is serious about privatization," says Kurtovic. "At least a small asset sale would help – even just opening the tender for the advisory work."

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