While the government has trumpeted the success of legislative packages designed to boost a limping Slovak corporate sector, chiefs within the industry say domestic finance for investment is still in painfully short supply.
Following approval of a new bankruptcy law this year, and with a costly 12 months of banking sector reforms aimed at promoting more corporate lending just finished, the corporate sector by rights should be buoyant about its prospects. However, while company heads have agreed that the situation is improving, not all are happy with the progress that has been made.
Adrián Ďurček, head of the Slovak supermarket chain Jednota, said that 30% of investment activity in western countries is financed internally, with the remainder coming through loans taken from banks. "In Slovakia, it is vice-versa, which means that only a few companies have enough money to invest. Despite the fact that we are managing to expand, this is partly the situation we face too," Ďurček said.
He added that to get a 50 million crown loan from a bank would take a company of Jednota's size three days in Germany, while in Slovakia the process takes as long as nine months. "Also, interest rates for loans reach a maximum of 5% abroad," he says. In Slovakia the figure is around 12%.
Banks have remained reluctant to lend to companies after building up often massive portfolios of classified and non-performing loans and seeing companies default on sometimes huge credits. By introducing new bankruptcy laws which make it easier for banks to recover assets in the event of bankruptcies and allow companies to carry on functioning through bankruptcy proceedings, as well as by cleaning up banks' portfolios and putting new management in the largest financial houses, the government intended to provide an impetus for loans to start flowing to companies hoping to finance growth.
However, Ďurček's comments have been echoed across the corporate sector, with similarly frustrated businessmen finding banks still unwilling to lend. The main reason, analysts have said, lies in the upcoming privatisation of key financial institutions.
According to Matthew Vogel, senior economist for emerging markets at Merrill Lynch in London, the whole aim of banking reform was to keep banks' balance sheets at a suitable level. "As these banks approach privatisation, officers and lenders are going to be instructed to be more careful in what loans they extend because the government knows that future buyers of the banks don't want any surprises as they will be looking at the banks' balance sheets. This is the reason why lending has become much more conservative in Slovakia. But the legislative changes that the government is undertaking are good and they are definitely moving faster than [similar ones in] the Czech Republic," Vogel said.
Government warnings
With analysts predicting that corporates will be waiting some time for loans and companies themselves feeling frustrated, even the government has warned that there is unlikely to be a lending boom for some time to come.
"The change obviously won't come overnight, but we have been creating the legislative framework as well as implementing other measures supporting the corporate sector restructuring process," says Vladimír Tvaroška, an advisor to Deputy Prime Minister for the Economy Ivan Mikloš.
According to Tomáš Kmeť, an analyst with the state-owned bank Slovenská sporiteľňa (SLSP), banks are still extremely cautious with loans, despite the fact that they have enough deposits to increase current lending levels. "To be profitable, a bank has to get 14 out of 15 loans provided repaid, which means that it has to be very careful. And that's why conditions which have to be fulfilled in order to get a loan are strict. The fact that bad loans to the value 100 billion crowns were moved from the major Slovak banks to Konsolidačná banka and other agencies during the restructuring process doesn't mean that the banks will now go crazy providing new loans," Kmeť said.
Tvaroška pointed out that despite what may appear to some an insufferable wait for the full effect of reforms to take place, figures have already shown an upturn in the corporate sector.
Recent data suggest that there was a slight increase in industrial production, a key component of corporate sector output, over the first seven months of this year, in comparison with last year. The average index of industrial production for the period was 8.91% higher than the same period in 1999.
Tvaroška added that the recently passed Bankruptcy Law was key to boosting corporate sector output, adding that interest rates have dropped since the government came to power two years ago. "Apart from that [the bankruptcy law], interest rates have dropped considerably over the last two years. In October 1998, the interest rate on loans for corporates was 23%. Now it's 12%. I think we could call that a considerable improvement," Tvaroška said.
Ďurček agreed that while the unwillingness to lend still remained, the picture was brighter than it had been even one year ago. "The current situation is undoubtedly much better than back in 1998 when loans were issued according to political links, and not according to the quality of a project," Ďurček said.
Taking a new approach
According to Kmeť, improvements such as those Ďurček called for - faster decisions on loans and easier access to credit lines - are not likely to be seen in Slovakia soon. He said that it would take a few years to see the results of the banking sector reform and corporate sector growth.
"Companies shouldn't rely on banks' willingness to provide them with loans under less strict circumstances after they are privatised. They have to be more active, find new partners and create stronger entitites and offer something that is more trustworthy than just the company itself," Kmeť warned.
Ján Tóth, an analyst with ING Barings bank, said he believed that foreign backing or ownership brought new possibilites to a company, both in terms of finance and know-how, as well as good corporate governance. This ownership, he argued, is as important as having necessary legislation passed and a stable economic climate.
Most companies without a foreign partner, according to Tóth, find themselves making losses and end up on the verge of bankruptcy, often having to sell their company to foreign entities anyway. "Past privatisation deals proved that the best way is to sell to a foreign entity because domestic companies have troubles geting financial sources to boost their production, leaving them reliant on equity capital only. Moreover, there was and still is also a lack of good managers, especially at the top level of many domestic companies," Tóth explained.
Foreign investments into former wholly domestic companies such as the nearly-completed takeover of Košice-based steel manufacturer VSŽ by US Steel have proven that foreign direct investment has had an immeasurable effect on the Slovak corporate sector.
Vogel was equally convinced of the role foreign firms will have in raising the corporate sector from its current doldrums. He pointed to the productivity gains already seen in the export-oriented foreign businesses present in Slovakia. "Just look at how big an influence foreign investments have had on export growth, productivity gains and a country's economy in somewhere like the Czech Republic. We know that Slovakia is pretty much on the same path," Vogel said.
