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Cablegate: Croatian Fdi Suffers Without Large Privatizations

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DE RUEHVB #0592 2731307
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R 301307Z SEP 09
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UNCLAS ZAGREB 000592

TREASURY FOR INTERNATIONAL AFFAIRS LARRY NORTON

SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV EIND HR
SUBJECT: CROATIAN FDI SUFFERS WITHOUT LARGE PRIVATIZATIONS

1. Summary. The Croatian National Bank (HNS) reported that foreign
direct investment (FDI) declined 50% through the first six months of
2009 compared to the same period in 2008. Senior economists from
private banks blame the financial crisis for the drop, but also
point to high labor costs, red tape, and land ownership problems
that hinder CroatiaQs attractiveness for investors. Croatia has
reported relatively high levels of foreign investment since 1993
thanks in part to continuing privatizations of state owned
industries. With few remaining large assets planned for sale,
Croatia will be forced to address fundamental problems with the
investment climate in order to attract new investment. End
summary.

2. Croatian National Bank (HNB) Senior Advisor Alan Skudar reported
on September 17 that CroatiaQs Foreign Direct Investment (FDI)
amounted to 900 million euros for the first six months of 2009, a
decline of 50% compared to the same period in 2008. Skudar said
that the HNB expected a similar if not greater decline in the second
half of 2009. He noted that the financial services sector receives
about 41% of total foreign investments in the country, whereas the
manufacturing industry claims only a 27% share of investment.

4. Senior financial analysts from Croatian commercial banks
commented in the press that the current economic crisis is the main
reason for the decline in CroatiaQs FDI. However, Italian
UniCreditQs chief economist for Croatia told us that with
privatizations of major state owned enterprises almost complete,
Croatia has lost its major source of FDI. The last significant
state owned industry planned for sale is the shipbuilding industry,
with six yards currently up for tender. However, the government
will realize little if any income from the sale as the bid price for
most of the yards is one kuna, with bidders submitting investment
and debt repayment plans for consideration by the privatization
fund.

5. Notwithstanding the drop in FDI this year, Croatia has recently
been the leader in FDI for southeastern Europe, based on 2008
figures: Croatia ($3.3 billion), Serbia ($2.9 billion), Bosnia and
Herzegovina ($1 billion), Albania and Montenegro ($950 million) and
Macedonia ($598 million). HNB reported that CroatiaQs banking and
telecommunication sectors have lately been the strongest performers
as evidenced by the fact that foreign investors have had sufficient
earnings in these sectors to make withdrawals to cover losses in
other areas.

6. Comment. The low FDI figures for 2009 reveal a disturbing but not
surprising trend. Buoyed for years by the privatization of large,
relatively well-managed companies with competitive products such as
Pliva and Hrvatski Telekom, Croatia enjoyed FDI revenue much higher
than its economic and investment climate might normally dictate.
Croatia now must attract investment on its own economic merits. The
low share of foreign investment going into manufacturing, and the
even lower share that can be categorized as green field investment,
testify to CroatiaQs weaknesses in this regard.

WALKER

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