It now seems the dim and distant past when Slovenia seceded peacefully from the then Yugoslav Republic. Although it really is not that long ago, the small republic has come a long way since. While the world concentrated on the rebuilding of the republics shattered by the Balkan war, Slovenia was gearing up for EU membership.
It is ironic that in the same month that the national football team qualified for the 2002 World Cup, the country should also appear near the top of another league table. This was produced by the EU, and indicated which of the countries aspiring to become fully-fledged members of the union had achieved the goals set for them. To the surprise of no one Slovenia was confirmed as being firmly on-track. It is no longer a question whether or not Slovenia will become a full member of the EU and the European Monetary Union; the procedure should most probably be finalised in the following two years.
Although international capital flows, particularly in the form of portfolio investment in equity and debt securities, increased significantly in the last decade, the government has recognised that a number of changes are necessary to encourage the free-flow of capital into the country. The changes in the international financial environment have been accompanied by the transformation of the whole Slovene national business life into a market driven economy. The Stock Exchange emerged as one of the new important subjects of the economy, and the government realised its importance. With the introduction of the 1999 Pension Fund legislation and the activation of pension funds last year, the role of the market has taken on new importance.
With some 30 funds in existence, but only three or four really active, Uros Ivanc of Staock Portfolio Management in Kamnik anticipates consolidation will begin to take place soon. On investment, he says the funds remain cautious. “The guaranteed rate of return is tied to government bond yields, although it is not a truly transparent link,” he says. “Because of this the majority of our investment is in those bonds, as well as some foreign bonds. When we last debated this with the government we asked them to liberalise the standard to allow us to invest more in equities, their response was to suggest a link to deposits. Clearly we did not support that, and so we are still stuck with the bond link.”
Meta Skok, an investment manager at Kapitalska Druuba in Ljubljana agrees that the funds are severely limited in how they can utilise the vibrant stock exchange. “Investment policy is effectively set by the government, and we have little room for manoeuvre as things stand at the moment. Even though we are very young organisations, as pension funds we must take a long-term view, but we hope the government will make some changes once we have some figures in for this year, which are due in January.”
The government has indicated that there may be some liberalisation of investment policy, and one pointer was the recent decision to lift restrictions on foreign investment.
In 1997, the Bank of Slovenia introduced custody accounts for foreign portfolio investors who purchased Slovenian securities with the investment horizon shorter than seven years and holdings less than 50% of the issue. The custody accounts were meant to reduce the investors’ risk by splitting the investment books of the financial intermediaries or brokerage houses into their own and their customers’ books. The Bank of Slovenia treated foreign portfolio investments as ‘hot money’ and thus imposed a stringent regime for such holdings. The essence of the regulation was that the commercial banks with the licence to open custody accounts for non-residents, were forced to balance their books regarding the inflow of such short-term funds. The interest rate differential between the Slovene tolar and foreign currencies made such balancing extremely expensive. Banks transferred those costs to the customers.
By the decree of Bank of Slovenia, published in June, foreign portfolio investment in long-term securities (stocks and bonds) in Slovenia was completely liberalised as of July. The central bank abolished all restrictions and additional central bank’s costs associated with custodian accounts for non-residents. This move can be considered as a new direction of the Slovene central bank in its efforts for further development of the domestic financial market and to attract foreign investors. On top of that, all shares listed on the Ljubljana Stock Exchange are freely available to foreign investors, and repatriation of capital, dividends, interest and all other income are without any restrictions.
Portfolio investments and customer accounts are now regulated by the Securities Market Act published in July 1999. The act encompasses all financial services directives of the EU and thus treats equally residents and non-residents. It requires that custodian accounts be opened for customers business as a risk management tool
to separate proprietary and clients trading.
Both Ivanko and Skok believe that the new legislation and instruments will lead to a more liberal investment climate for the pension funds. “Obviously we have not seen any great impact yet, although there is a clear increase in the inflow of foreign investment, I do believe that this will lead to a more transparent and liberal approach to pension fund investment.” Skok concurs adding “As we get closer to the EU and to countries with developed pension and mutual funds I am sure our portfolio make-up will alter, and for this we need the government to act on our behalf.”
The government is aware that outside events will impact. The accession talks with the EU will mean there will be certain criteria to be met. The up-coming massive privatisation programme will also need investors, be they foreign or domestic institutional. This will include the sale of the state owned commercial bank Nova Ljubljanska Banka, of telecommunications, insurance and energy (electricity) sectors and national railways. Finally the investment climate of the region is changing all the time, and the funds are sure to benefit from this.

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