"A recent survey conducted by the Slovak agency for foreign investment has discovered something that is known to most investors already - political instability was the greatest fear in the minds of would-be investors into the country."
Slovak government officials, local businessmen and foreign economic experts all seem to agree that Slovakia has achieved the kind of stable market environment that foreign investors seek. But they also appear to be unanimous in saying that while the country must revive its capital market and tighten its corporate laws, Slovakia's international image as a political maverick must be overhauled for large-scale investment to occur.
"Over the next four years we expect the flow of foreign direct investment into central Europe to reach $20 billion a year," said David Brown, a European Union advisor to the Slovak National Agency for Foreign Investment and Development (SNAZIR). "Slovakia is now well positioned to attract a large share of that capital."
Brown based his confidence on Slovakia's "continued GDP growth, which shows that many elements of government policy are working, and its budget deficit of $1.6 billion, which is not unreasonable at this stage in the transition process."
Not only does the country offer stable conditions for investment, Brown continued, but it is also entering the so-called third wave of privatization, "which will open up domestic businesses to foreign capital and offer significant investment opportunities."
Jozef Šesták, state secretary at the Slovak Foreign Affairs Ministry, speaking at a September 22-23 international conference in Bratislava called "Investing in Slovakia," cited the country's 6.9 percent GDP growth for 1996, current inflation rate of 6 percent and unemployment rate of "below the acceptable 15 percent" as "positive trends in macroeconomic development."
On the other hand, he conceded, Slovakia's worsening trade deficit and the continuing dominance of heavy industry in the economy suggest that the necessary "structural changes are still not completed."
Capital market's low liquidity
Slovakia's capital market is one area of the economy that is in dire need of structural change, conference speakers concluded. Stephen Watson, director of Framlington Investment Management Limited in London, said that one of the greatest hindrances to portfolio investment in Slovakia is the low level of liquidity on the country's capital market. The government, he said, was to blame.
"If the government stopped absorbing so much private capital for financing its budget deficit," he said, "there would be much more capital available, and investors would have more confidence that they could sell their stocks and recover their investments." Watson singled out steel giant VSŽ Košice and the oil refinery Slovnaft as examples of undervalued blue-chip stocks. For investors, such targets are usually attacked as a red cape to a bull, but on Slovakia's moribund stock market, even VSŽ sells poorly.
"In the next several years," Watson predicted, "we will see the revitalization of Ukraine's economy, and VSŽ stands to make a big profit out of this. But if there is physically no stock to buy and sell, if there is no liquidity, it is very hard to reassure a client that we could sell out and repatriate."
Tighten protection for small shareholders
Part of the problem, investors claim, is that the legislation necessary to protect investors and win their confidence has not been fully created. Watson cited full minority investor protection as essential to stock market health.
Kevin Connor, a specialist in international business law with Squire, Sanders and Dempsey L.L.P., agreed that "minority shareholders have limited protection under the law."
Moreover, he suggested, with the Slovak government determined to maintain majority control of 'strategic' state enterprises during the next wave of privatization, minority investor protection would be particularly important to secure.
However, he insisted that "the tools are there and can be used - you just have to think about it."
Connor's "overriding message" to queasy investors was that "the law works - there is not a lot of precedent, but if you are patient you can safely get what you want."
Jennifer Martin, head of Price Waterhouse's Bratislava tax office, offered a similar evaluation of Slovakia's corporate tax structure. "It's a normal system, nothing unusual, although a little more restrictive than in Poland, Hungary and the Czech Republic," she said.
Both Connor and Martin, however, were concerned that existing legislation may not be sufficient to support the next stage of growth. Commenting on recent changes to the corporate tax law, Martin said that "the government has been moving towards neutrality, i.e. not making any special deals, from its early pro-investment stance. I wonder if this is not too soon for Slovakia."
Politics and bad press
So why, with a healthy economy and steadily maturing legislation, is Slovakia having such a hard time attracting foreign money?
A recent survey conducted by SNAZIR may offer an answer long known to many, having discovered that political instability was the greatest fear in the minds of would-be investors.
Ominous reports that have appeared in the foreign press recently of the Slovak government's market meddling and 'repatriation' of its Hungarian minority prove that this worry has not been put to rest.
Brown said Slovakia's poor international image had been created by irresponsible media reporting. "There is a tremendous amount of good news out there," he argued, "but perception [gained from negative press] is reality for the prospective foreign investor."
Elaborating on the issue, Šesták said, "We don't have a problem with political substance, just with political culture - we are immature, and we need time to grow up."
But many delegates said that there is enormous worldwide competition for investment capital at the moment, and investors have become more conservative towards politically immature democracies like Slovakia.
A Czech real estate company director, who asked not to be named, was worried that the foreign companies on whom his Bratislava investments depend were being scared away.
"If I buy property, I have to get my money back in ten or fifteen years," he said. "But given the present climate, will investors keep coming here? Will we have clients like [German automaker] VW at all?"
Mixed messages
Most of the businesspeople who attended the conference left with ambiguous impressions. For one thing, the meetings were sparsely attended, with VW and legal counsel for IBM among the few foreign investors represented.
To make matters worse, Prime Minister Vladimír Mečiar, scheduled to be the keynote speaker, did not show up at all, while Economy Minister Karol Česnek strolled in hours late for his engagement.
At a conference designed to polish Slovakia's international image, the obvious lack of official interest achieved precisely the opposite effect. "It's just such a pity," said one delegate, "because the message to foreign investors is so clear: you just aren't important enough for us to come."
