Croatia market investment to rise as EU entry draws nearer
ZAGREB – Portfolio investors are still giving Croatian financial markets a wide berth, despite its progress toward the European Union and few legal restrictions. The authorities do not seem displeased – preferring that to a flood of short-term speculators – and analysts say things are likely to pick up when Zagreb implements reforms and moves closer to EU membership, which it expects around 2010. They say local stocks and corporate bonds will probably offer the best prospect for investors, although no one expects an investment boom of the scale of the post-communist transition in Poland, Hungary or Slovakia in the 1990s. «Croatia is a small market with a stable exchange rate, so there is limited volatility that could attract short-term speculative investors. And it does not look like there will be a huge boom soon,» said Ivailo Vesselinov of Dresdner Kleinwort in London. «But the EU accession process may play a part and would provide a stronger anchor for investors. If and when we see more progress in EU talks, we are likely to see some increase in investors,» he said. The situation is almost a replay of what happened with the latest EU members, Romania and Bulgaria. The absence of liquid investment instruments kept investors at bay, though foreign direct investment shot up to record levels after EU entry became certain. Most investments in Romania are in short-term money market deposits and stocks, while currency trading is thin. Bulgaria’s currency board regime largely deters money managers. Croatia’s central bank, which keeps the kuna in a managed float, has vowed to maintain the stable exchange rate and to intervene to prevent sudden rate movements until the country is ready to adopt the euro. Reforms first A top central bank official said interest rates on the money and bond markets were low and without the differentials that could attract foreign investors. «At current valuations, I don’t believe the equity market is very attractive for foreigners either. Therefore, the lack of speculative investors here is hardly surprising, but… our aim is for speculative investors to stay away,» the official said. February stock and bond turnover on the Zagreb bourse totaled some 9.7 billion kuna (-1.32 billion), an increase of 77 percent over a year ago, but trade remains mostly driven by domestic capital. Last week’s global sell-off on emerging markets only brushed Croatia, causing a slight correction on the bourse. CAIB analyst Goran Saravanja said the local market, although shallow, was not plagued by chronic low liquidity. «What we lack is good companies and quality paper to invest in. This means, once again, that structural reforms are of paramount importance, implementing EU competition policy, efficient judiciary, transparency,» he said. «If EU talks progress and reforms are implemented, there is more room for growth in the stock market, the corporate bond market – which is quite rudimentary unlike the government bonds – and real estate funds,» he said. Another analyst at a leading local bank, who asked not to be named, said that though more and more companies were raising capital through securities, most issues were very small in global terms. «Furthermore, foreigners may be wary of investing because they do not know our companies well and the transparency of local businesses is still not quite up to European standards.»
