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. Last Updated: 07/27/2016

Investors Remain Wary of Serbia

BELGRADE, Yugoslavia -- Serbia's reformist rulers have won international praise for their economic policies but many foreign investors are still wary about taking the plunge.

The country offers the largest single market of the old Yugoslavia, a central location in the Balkan region and a government with ministers boasting Western business experience.

But an image closely tied to a decade of wars, risks of further political instability and a legal framework that still needs much reform are delaying investors.

Many are also worried about being the victims of a "feeding frenzy" for the state, their workforce and customers -- all short of cash in impoverished Serbia -- who may think Christmas has come early if a foreign firm sets up shop here.

The Serbian state alone eats half of gross domestic product while trying to restore order in a system that crumbled during the rule of Slobodan Milosevic, who was ousted in October 2000.

Gavin Ryan of Creditanstalt Investment Bank, which is advising the government on the privatization of three chemical companies, confirmed the nightmare scenario among Western firms but said some could still conclude it was worth the risk.

"It's kind of: 'rich Westerner walks into the company and the feeding frenzy begins,'" said Ryan, director of corporate finance at the Belgrade office of CAIB.

"Like fish that have not eaten for days, all of a sudden everyone jumps in and tries to suck you dry," he said. "But investors would have to factor that in."

The World Bank and the International Monetary Fund told a recent investor forum run by the Greek branch of events organizer PGI that Yugoslavia's reforms were firmly on track and the business environment had somewhat improved in the past year.

"We are beginning to see early contact on investment in companies. I think there's clearly an improved investment environment as investors are more interested," said Rory O'Sullivan, head of the World Bank's Belgrade office.

Serbia, which along with Montenegro forms Yugoslavia, vowed last month to amend some 30 laws, most of them by June, to reshape the business environment, hoping to attract up to $300 million in foreign direct investment in 2002.

And Finance Minister Bozidar Djelic, a high-flying Harvard-educated economist on leave of absence from management consultant McKinsey, said a government team was exploring ways of creating the most attractive tax environment in southeast Europe by September.

"Serbia wants to have its fair share of foreign residents in the region," he said. "We want to add some fiscal charm."

The government has begun a privatization program, selling off majority stakes in three cement plants late last year to France's Lafarge, Swiss Holcim and Titan Cement of Greece.

It plans to privatize 20 to 40 important enterprises in 2002 in sectors including food processing, construction materials, furniture and chemicals.

"It's good that Serbia is privatizing good companies first. Not putting rubbish on offer improves Serbia's image among investors," said Marc Eline of BNP Paribas, which is advising Serbia on the sale of fuel chain Beopetrol.

Economists believe if this year's privatizations go well, the amount of foreign companies in Serbia may reach a critical mass, which would make others less nervous about getting involved.

But experts also argue the country has a long way to go to create a fully business-friendly environment.

Emmanuel Koenig, managing director of PricewaterhouseCoopers in Belgrade, said an incomplete legal framework, particularly a lack of laws safeguarding foreign investment, was the main obstacle to more money coming to Serbia.

He urged Serbia to offer more tax incentives to investors.

Some economists also worry about the current political situation and wonder if non-party business-friendly ministers can survive a power struggle between Yugoslav President Vojislav Kostunica and Serbian Prime Minister Zoran Djindjic.

"There is still a perception of risk in Serbia and investors who come must have a good understanding of the country to rightly appreciate the degree of risk," BNP's Eline said.