Greece can do more to attract foreign investment

Greece has stepped up efforts to attract foreign direct and portfolio investments but has yet to remove some of the measures that make foreign investors either unwilling to commit funds or enhance their presence here to make the country a significant international investment destination. Undoubtedly, the country has done well in luring in foreign portfolio investments. Based on official figures from Central Securities Depository SA, foreign investors controlled 44.41 percent of the total market capitalization of the Athens Stock Exchange at the end of September, up from 43.30 percent at the end of the previous month, meaning stocks of listed firms worth more than 60 billion euros were in their hands. The presence of foreign funds, companies and individuals was more pronounced in the larger listed firms. According to the same data, they owned more than 47 percent of the 60 largest Greek firms on the Athens bourse at the end of September. If pundits are right, it is just a matter of time before this percentage surpasses the 50 percent mark. At the same time, foreign investment houses, brokerages, hedge funds and others account for some 60 percent of the daily average turnover on the Athens exchange and even local brokers admit this is bound to rise. It is not difficult to figure out why a small stock market almost abandoned by the international investment community after its upgrade to a developed market back in 2001 became one of the darlings of the same community a few years later. Undoubtedly, the lowest interest rates in generations and the ensuing abundant liquidity in the international financial system played a major role. But ample liquidity willing to take on higher risk would not be enough if Greece did not have a credible growth story to offer. The country’s strong GDP growth during a period most of its eurozone partners were struggling provided the base for building a credible story. Greece’s under-banked market offered the first dish of banking stocks for starters and turned out to be a delicious one, luring in more foreign investors seeking a higher return. Greek firms were able to deliver or beat the promised financial results quarter after quarter, generating the kind of superior returns adjusted for risk that all foreign investors and speculators can appreciate. The higher free float and the greater liquidity of their stocks simply improved their appeal. The increased holdings of local companies by foreign investors more than made up for the exodus of the Greek retail investors and the weakening of the institutional investors, sending the major indices to fresh five-year highs this year. If Greece has done superbly in attracting foreign portfolio investment, it has done a poor job in luring foreign direct investment (FDI) as the latest report by UNCTAD (United Nations Conference on Trade and Development) shows. The country ranked 23rd among the other 25 fellow members in the EU (European Union), just above Malta and Slovenia, since FDI inflows reached just 607 million euros in 2005 from some 2.1 billion a year earlier. Greece joined Malta, Latvia, Slovenia and tiny Gibraltar among developed countries in being unable to attract more than 1.0 billion euros in FDI inflows. Although Greece ranks 121st among 141 countries in FDI effectiveness and is doing very poorly as a potential hub for multinationals, UNCTAD recognizes its potential for luring FDI flows by placing it in 36th position. To be more precise, Greece is thought to have done better in 2006, something to be noted in next year’s UNCTAD World Report, following the sale of a majority stake of Emporiki Bank to France’s Credit Agricole, the purchase of Hyatt by a private equity fund, BC Partners, and other smaller sales. Greece faces a more challenging environment in attracting FDIs today than a few years ago. Being an EU and eurozone member, political stability is taken for granted while the arguments for higher GDP growth rates, improving fiscal finances, cuts in corporate taxes and more generous and targeted investment law incentives may help but apparently do not make the difference in a neighborhood where competition for FDI from Bulgaria, Romania, Turkey and others is on the rise. It is noted than Turkey attracted some 10 billion euros in 2005, mainly thanks to the sale of state assets and this trend is bound to continue this year and next for the country to finance its huge current account deficit with fresh capital inflows. There are some simple things which can be done to strike two birds, that is, foreign portfolio investments and FDI, with one stone. One of them is to allow foreign investors to vote in the general shareholder meetings of listed companies. According to the current law, shareholders will have to submit their shares and keep them «locked» for five working days prior to the meeting to able to participate and vote. In many cases, doing something like this runs contrary to the charter of some foreign funds. In other cases, funds do not want to do it for investment reasons, i.e. they are locking in their shares for a rather extended period, therefore exposing themselves to unwanted market risk. In general, for some funds that are not long-term, investors do not want to be caught in a market downturn holding onto shares they would have liked to unload. By allowing all shareholders on record to vote on the day the general shareholders meeting is held, foreign investors who are more sophisticated can have a bigger say in the decisions of the company they have an equity stake in. In doing so, it is likely they will impose greater discipline on the company, better safeguard the interests of minority shareholders and instill a greater degree of transparency in the firm. In other words, they make the board and the management of listed Greek companies more accountable and more sensitive to the demands of the shareholders. In doing so, they can make the companies more suitable for foreign direct investment. The government can help to attract more foreign portfolio investment and duplicate its success with FDI if, in addition to privatizing state-controlled companies, streamlining bureaucracy and doing away with unnecessary regulations, it takes the step of giving foreign investors a greater say in the direction and operations of Greek listed companies. This can be achieved by doing away or at least easing restrictions significantly to allow them to vote in the general shareholder meetings.