IDEAL DESTINATION OF FOREIGN PORTFOLIO INVESTMENT

AMONG

(FPI)

ROMANIA, PORTUGAL, SPAIN, SLOVAKIA AND SLOVENIA

FROM THE VIEW POINTS OF

FINANCIAL RISK AND RELEVANT

REGULATIONS AND LAWS

ABSTRACT
The paper seeks to analyse the legal and the financial aspect of Financial Portfolio
Investment in the European countries of, Spain, Portugal, Romania, Slovenia and Slovakia.
The paper deals with the investment scenario of the countries and helps us to understand the
effects of Foreign Portfolio Investment in the respective countries, if further tries to explain
the manner in which the financial risks arise in the said countries and hoaaw the countries
tackle with the risks. The legal framework of the Financial Portfolio Investment of the
countries help us understand the various law and procedures to be followed in the process of
investing in portfolio investment. Finally the paper compares the Financial Portfolio
Investment schemes of all the said countries and provides a conclusion on the basis of
analysis and the charts prepared to determine the best country out of Spain, Portugal,
Romania, Slovenia and Slovakia to make Foreign Portfolio Investment.INTRODUCTION
In economics, foreign portfolio investment is the entry of funds into a country where
foreigners

make

purchases

in

the

countrys stock and bond

markets,

sometimes

for speculation.1
Portfolio investments typically involve transactions in securities that are highly liquid, i.e.
they can be bought and sold very quickly. A portfolio investment is an investment made by an
investor who is not involved in the management of a company. This is in contrast to direct
investment, which allows an investor to exercise a certain degree of managerial control over a
company. Equity investments where the owner holds less than 10% of a company's shares are
classified as portfolio investment.2 These transactions are also referred to as "portfolio flows"
1 Steven M. Sheffrin, Economics: Principles in action, p. 551, Pearson Prentice Hall. (2003).
2 Balance of Payments and International Investment Position Manual, International Monetary
Fund (6th edition)

and are recorded in the financial account of a country's balance of payments. According to the
Institute of International Finance, portfolio flows arise through the transfer of ownership of
securities from one country to another.3
Foreign portfolio investment is positively influenced by high rates of return and reduction of
risk through geographic diversification. The return on foreign portfolio investment is
normally in the form of interest payments or non-voting dividends.
Foreign portfolio investment typically involves short-term positions in financial assets of
international markets, and is similar to investing in domestic securities. FPI allows investors
to take part in the profitability of firms operating abroad without having to directly manage
their operations. This is a similar concept to trading domestically: most investors do not have
the capital or expertise required to personally run the firms that they invest in.
Foreign portfolio investment differs from foreign direct investment (FDI), in which a
domestic company runs a foreign firm. While FDI allows a company to maintain better
control over the firm held abroad, it might make it more difficult to later sell the firm at a
premium price. This is due to information asymmetry: the company that owns the firm has
intimate knowledge of what might be wrong with the firm, while potential investors
(especially foreign investors) do not.
The share of FDI in foreign equity flows is greater than FPI in developing countries
compared to developed countries, but net FDI inflows tend to be more volatile in developing
countries because it is more difficult to sell a directly-owned firm than a passively owned
security.4
In this project the authors will attempt to analyse the financial risks and the legal framework
for the foreign portfolio investment in Slovakia, Romania, Portugal, Spain and Slovenia He
project will first present the financial analysis of these countries markets and the legal
framework thereafter.
THE FINANCIAL RISKS PERTAINING TO FOREIGN PORTFOLIO INVESTMENT
ROMANIA

3 "Portfolio Flows Tracker FAQ". Institute of International Finance.

4 http://www.investopedia.com/terms/f/foreign-portfolio-investment-fpi.asp

Bucharest Stock Exchange

The Bucharest Stock Exchange was established later compared with other countries
from Central and Eastern Europe. The first regulations regarding securities have existed
since 1990, when Law no. 15/1990 on the processing units of state in companies and Law
no. 31/1990 on companies, came into force. The Law no 31/1990 is governing the issue of
shares and bonds by Romanian companies. Given the economic and political context,
the emergence and development of the capital market in Romania was due to the
initiation and conduct of the privatization process. Thus, Law no. 58/1991 regarding the
privatization of state owned companies imposed the emergence of capital market and
related legislation to allow trade, in an organized manner, of the vouchers shared to the
population in the Process of Mass Privatization. Although the deadline imposed by this
law, for adopting the law of securities and stock exchanges was 6 months; the law (no.
52/1994) was introduced in time for the Government, but it was approved by
Parliament until after two and a half years, in 1994.
On the basis of Law no. 52/1994, the National Securities Commission, the Bucharest
Stock Exchange and RASDAQ were created. With the emergence of capital market,
companies are able to mobilize the funds available in the economy and maybe financed
through issues of shares and bonds, which become effective such alternative funding
compared to bank credit. In addition, stock markets provide efficient allocation of
funds, financial investors punishing companies characterized by lack of efficiency or
reduced profitability. Thus, the economic situation of companies is reflected in
themarket price of shares listed on stock exchange and is influencing investors' interest not
only for existing securities, but for shares and bonds subject to public primary offers. Some
offers of bonds issued by private companies were not successful due to the high
degree of indebtedness of the issuing companies. These examples illustrate the exigent
operation in capital market and rational attitude of investors. In addition, stock-market
indexes, calculated by the capital market institutions or brokerage firms, are important
tools used by investors in evaluating the performance of securities and management of
portfolios of financial securities. Since the set up, Bucharest Stock Exchange and
RASDAQ - the two fundamental institutions of capital market in Romania - have gone
several steps to adapt to market requirements and international standards. As a result of
progress in the field of information and communication technology (ICT), capital
market activity in Romania has been computerized since the beginning of its

establishment. Thus, although BSE has made initial transactions in classical system by
brokers meeting in the pit, in present, transactions are conducted with electronic systems.5
RASDAQ market, since its establishment, was an electronic market. Therefore, using
the tools offered by information technology and communications has allowed the
"burning" of some developments stages of stock exchange activity in our country and the
alignment with the practices of major European and American stock exchanges. Submitting
to the trend recorded worldwide in the financial field - consolidation through mergers and
acquisitions - in 2005, Bucharest Stock Exchange and RASDAQ have merged. Instead,
the merger between BSE and Financial and Commodities from Sibiu has not occurred, the
two exchanges trying to start

some

process

of

development

on

their

own and

collaboration with other foreign exchanges. In this respect, we mention the collaboration
between BSE and the Vienna Stock Exchange, with the result of the launch ROTX index
that is calculated based on six blue-chips listed on BSE. In this way, data from Romanian
stock exchange market become accessible to Austrian and European investors.
The development of the Romanian capital market is influenced

both

by

improving

legislation in this area, which was aligned to the European Union standards and the
diversification of securities launched (futures contracts, options, preference rights), that
are in dramatic extension. In this respect, we mention the legislative changes and the
Bucharest Stock Exchanges concern for stability of capital market, resulting in
reducing the number of listed companies, being withdrawn the companies that have not
complied the exchange regulations. Also, in some cases, major shareholders have wanted a
change in societys regime, moving from an open society (listed on the exchange) in a
closed society, especially in the situation of companies with foreign capital. However, the
volume of transactions are conducted on an upward trend (figure 1) between 19952007, although there have been years in which value of transactions fell down compared to
previous years. In this context, years 1998 and 1999 are remarked because, the
decrease of GDP, influenced by weak economic situation, put the fingerprint on stock
activity (compared with 1997, the volume of transactions with shares in 1998
decreased by 5% and in 1999 with nearly 30%).6
5 Analyses of foreign portfolio investment at Bucharest Stock Exchange in Global Financial
Crisis, IBIMA Business Review, Volume 2 (2009).
6 Id.

Financial Risk in the Romanian Portfolio Investment Market

Impact of the American Financial Crisis
The financial turmoil began in 2007 and has encompassed securities market and
banking sectors from developed and developing countries. The financial crises start in
USA after the collapse of subprime mortgage market. The consequences were
bankruptcies,

forced

mergers

and

interventions

of public

authorities.

Short-term

variation of foreign investments in BSE is a transmission instrument of financial crises.

Because foreign direct investments is long term investments, theirs volatility degree is low.
Foreign direct investors set up companies and they are interested in the development on
long term. Portfolio investments have a great grade of volatility and they are soon
affected by financial crises. Despite dramatic actions taken by authorities from developed
countries to prevent the systemic risk and to help banks with liquid assets, financial market
risks remain acute.7 Emerging economies are more vulnerable to turbulence on financial
markets and depends on factors like the development of capital market and monetary
market, the access to foreign funds, the importance of foreign direct investment and the
power of monetary authorities. The capital market in Romania is a market of shares,
bonds market being in a process of development, a phenomenon specific to the
countries of Central and Eastern Europe. Although the legal provisions regarding bonds
have been issued since 1990 (Law no. 31/1990 on companies), the first bonds issue
was occurred quite late and the interest on the bonds has intensified since 2001.
The development of this market is sustained by international financial institutions like
International Bank for Reconstructions and Development and European Bank for
Investment. The bonds market has small dimensions and data of non-residential
investors are not available from Bucharest Stock Exchange. Because of that, we
analyze only the investments in shares at BSE. The macroeconomic stability, the new
legal framework for financial services available from 2004 and listing of companies with
foreign capital, havea dramatic influence in the value of total transactions and on
transactions made by foreign investors. After 2004, we have notice the increase of
transactions made by non-residential investors. These investors have been involved in
purchases and sales of shares, and the trend is a positive sold of transactions made. For the

7 International Monetary Fund, World Economic Outlook, October 2008, p. 30

period 2000-2007 (for which we have data), only in 2001 a negative sold of 2,7 million USD
was recorded.
The most attractive companies for portfolio investments could be grouped in five
categories:
the five Financial Investments Companies (established as a result of privatization
programmethat are in fact investments funds): SIF Muntenia, SIF Oltenia, SIF
Transilvania, SIF Moldova, SIFBanat Crisana;
foreign companies: like ErsteBank;
companies holded by local investors like
Carpatica Bank and Transilvania Bank;
companies with foreign shareholders: Romanian Commercial Banks (that has a major
shareholder Erstebank), Romanian Development Bank (where Societe Generale has the
majority

shares),

Petrom (the former state owned company bought by OMV), Alro

(company sold in privatization program to Marco Industries), Policolor (held by

foreign investments funds), Mechel, Zentiva etc.
state owned companies like Antibiotice, Translectrica or Transgaz.8
The years 2007-2008 bring spectacular changes for foreign investments` trend at Bucharest
Stock Exchange. The impact of financial crisis was shocking and turmoil the BSE
activity, especially in foreign investments, as we see in figure 4. The mass if withdraw of
the foreign capital from the BSE started in July 2007 and continued the whole year and in
the first month of the next year. The beginning of the year known a massive going out
of foreign capital, but the good evolution of Romanian economy has brought foreign
investors, but the amount of the capital was small. The analysis of available data for 2008
shows a decrease of foreign investors interest because the month values for purchase and
sale cut down and the sold diminished, as in figure 5. The impact of financial crises on
Romanian local market is strong. Despite

the

good

financial

results

of

the

companieslisted at BSE, the turmoil of the foreign markets, especially USA markets,
determine the strong decrease of the sharesvalue.
8 Analyses of foreign portfolio investment at Bucharest Stock Exchange in Global Financial
Crisis, IBIMA Business Review, Volume 2 (2009).

Source: Analyses of foreign portfolio investment at Bucharest Stock Exchange in Global

Financial Crisis, IBIMA Business Review, Volume 2 (2009).
BVB allows trade in corporate, municipal, and international bonds, and in 2007, the BVB
opened derivatives trading. The BVBs integrated group includes trading, clearing,
settlement, and registry systems. The BVBs Alternative Trading System (ATS) allows
trading in local currency of 29 foreign stocks listed on international capital markets, of which
eleven are U.S. blue chip stocks. Despite a diversified securities listing, the situation on the
international capital and financial markets has adversely affected the Romanian capital
market, and liquidity remains low. Neither the government nor the Central Bank impose
restrictions on payments and transfers. The red tape associated with capital market access,
still high trading fees, and inconsistent enforcement of the corporate governance rules have
kept Romania within frontier market tier. Country funds, hedge funds and venture capital
funds continue to participate in the capital markets. Minority shareholders have the right to
participate in any capital increase. Romanian capital market regulation is now EU-consistent,
with accounting regulations incorporating EC Directives IV and VII.9
Romania welcomes portfolio investment and is working to develop efficient capital markets.
The Financial Regulatory Agency (ASF) is responsible for regulating the securities market.
The ASF implements the registration and licensing of brokers and financial intermediaries,
the filing and approval of prospectuses, and the approval of market mechanisms. The
9 Department of State: 2014 Investment Climate Statement (June 2014).

Bucharest Stock Exchange (BVB) resumed operations in 1995, after a hiatus of 50 years. The
BVB operates a three-tier system that, at present, lists a total of 104 companies, with 28
companies in the highest tier. The official index, BET, is based on a basket of the 10 most
active stocks listed, while the BET-C index follows the trend of all stocks listed on the BVB.
The BVB also has an over-the-counter market (RASDAQ) that currently lists 964 different
stocks. The BVB allows trade in corporate, municipal, and international bonds, and in 2007,
the BVB opened derivatives trading. The BVBs integrated group includes trading, clearing,
settlement, and registry systems. The BVBs Alternative Trading System (ATS) allows
trading in local currency of 29 foreign stocks listed on international capital markets, of which
eleven are U.S. blue chip stocks. Despite a diversified securities listing, the situation on the
international capital and financial markets has adversely affected the Romanian capital
market, and liquidity remains low. Neither the government nor the Central Bank impose
restrictions on payments and transfers. The red tape associated with capital market access,
still high trading fees, and inconsistent enforcement of the corporate governance rules have
kept Romania within frontier market tier. Country funds, hedge funds and venture capital
funds continue to participate in the capital markets. Minority shareholders have the right to
participate in any capital increase. Romanian capital market regulation is now EU-consistent,
with accounting regulations incorporating EC Directives IV and VII.10
Romanias economic growth prospects for the period ahead are quite positive over the
medium term, benefiting from a return to more favorable consumer and investor sentiment
rooted in positive expectations for its main trading partners. Based on recent economic
developments and the prospects thereby implied, the centre of Romanias macroeconomic
policies over the period covered by this country strategy will likely include a stronger stance
as regards disinflation and concerted efforts to contain the fiscal and external deficits. While
such policy tightening is likely to constrain the growth of real wages and private
consumption, stronger external demand and improved economic competitiveness are likely to
assist economic growth, as should a moderate resumption of credit growth. Export led
recovery is supportive in the short to medium-term to sustained economic growth, but
structural vulnerabilities persist. Therefore, the trend must be supported by additional policies
conducive to sustainable growth. These may include reconsideration of the presumptive
minimum taxation, additional measures for administrative capacity building, and increase in
public investment for improvement of absorption of EU funds. In order to maintain the
10 Id.

budgetary target within achievable limits, some balancing tax base broadening, reassessment
of property taxes, and possibly even a 2 pps increase in the income tax rate may be necessary.
An initial export based output recovery would have additional positive implications for the
stabilization of foreign debt levels initially, and reduction subsequently in the medium to
long-term. As achievement of external and internal balance would be accompanied in such
case by lower inflation, higher savings rate and productivity gains, and would thus support
risk rating upgrades, renewed foreign capital inflows are expected. Such flows would
appreciate the currency, would support the disinflation process, would reduce interest rates
further, would increase investment and employment, and thus would reinforce fiscal revenue
increases and would also ease the servicing of foreign debt. In addition, currency appreciation
to the level of Lei 3.8-3.6 for EUR 1 by mid 2013 (a real appreciation of about 10-12%)
would ease concerns about currency risk associated with the large proportion of foreign
currency denominated credits. Eventually, accession to ERM II would come naturally. While
a subset of such inflows foreign direct investment are beneficial to sustained growth
through their associated transfer of technology and know-how in addition to supplementing
domestic savings, there are also other types of capital inflows the volatile ones which can
induce risks to macroeconomic and financial stability.
Notwithstanding the positive impact of an initial boost to economic growth brought about
through external channels, in the longer-run however, a more broad based growth would be
necessary, and therefore the export demand must be complemented by supporting growth in
the supply of goods and services for the satisfaction of an increased domestic demand for
both investment and consumption. The medium term Government Economic Strategy is
focused on the following objectives: (a) promote the economic recovery and create new jobs;
(b) adjust the current account and public deficits, continue the disinflation process; (c) protect
the population categories most affected by the economic crisis; (d) improve the medium-term
predictability and performance of the fiscal policy, maximize and improve efficiency of the
use of the European Union funds; (e) ensure the long term public finance sustainability; (f)
restructure and improve the efficiency of the public administration (g) firmly implement the
commitments assumed by the multilateral financial agreement with the International
Monetary Fund, the European Commission, the World Bank, and the other international
financial institutions. The Government development priorities are detailed in the
Convergence Programme 2009-2012. The fourth edition of the Convergence Programme
describes Romanias ability of diminishing the structural deficit to less than 1% of the GDP

up to 2014, and creating a safety margin to avoid exceeding the 3% level on the longer run.
The underlying assumption is that the structural deficit will reach 0.7% of GDP in 2014.
However, such a scenario of a virtual circle is based on the assumption that vulnerabilities are
diffused, and risks are well contained. To this end, the Government is contemplating the
conclusion of a precautionary agreement with the IMF and further support from the World
Bank and the EC. Challenges The principal challenge for Romania in the short-to-medium
term lies in the ability of the Government to consolidate public finances and to achieve the
target for structural deficit of 0.7% of GDP. Other challenges are related to the market
perception of Romanias risk, the availability of foreign funding, and the sustainability of
foreign demand associated with the strength of economic recovery in Romanias trading
partners. Continued foreign exchange volatility would contribute to increasing the exposure
and vulnerability of the Romanian economy to global fluctuations, in particular if foreign
exchange portfolio investment and non-resident bank deposits are initially large. A final
vulnerability is related to the increase in the price of oil and other commodities, which may
increase inflationary pressures and derail the incipient recovery. An undesirable outcome of
any of the challenges, such as widening current account deficits and renewed inflationary
pressures, associated with pro-cyclical fiscal contraction increases the risk of a loss in market
confidence and may threaten macroeconomic stability and long-term growth prospects.
Opportunities Despite the challenges that remain a distinct possibility, intensified economic
relations with the EU, which is now Romanias main trading partner, as well as continued
cooperation with international financial institutions provides an anchor for policy consistency
and credibility. Structural reforms should continue to focus on further improving the business
environment, increasing incentives for job creation, and developing the capacity for the
effective utilization of EU funds. Improving business sentiment would provide favorable
conditions for growth. An additional and potentially important opportunity for growth is
represented by the increased trade, investment, and economic cooperation, including policy
coordination, with neighboring countries members of the BSEC organization. The economic
sectors with best prospects for growth, and where Romania appears to have in some cases
underutilized competitive advantage are:

IT, computers, office machinery, and

communications equipment, Energy production, mainly nuclear and renewables (wind, hydro
etc.), Transport Infrastructure, Agriculture, food processing and beverages, Healthcare sector,
Oil and gas, extraction, processing, transportation, Motor vehicles, Wood products, pulp and
paper, Rubber and plastics, Chemicals and pharmaceuticals, Manufacturing of basic metals,

Electrical machinery, Machinery, equipment, appliances, Public utilities. Two industries in

particular, the electrical machinery and the motor vehicles, trailers and parts, have already
shown in 2010 strong growth both in output and exports, leading the recovery in
manufacturing.11
PORTUGAL
Portugal has suffered from low GDP and productivity growth for more than a decade before
the outbreak of the recent crisis. Potential output growth has been on a steady downward
trend, with competitiveness being undermined by rising unit labour costs and deep-rooted
structural problems. As a consequence of persistent current account deficits, Portugal has
accumulated a high external debt, which is reflected in high household, corporate and fiscal
debts. On the positive side, Portugal did not witness a property boom and bust, nor were
banks exposed to toxic assets. Therefore, the financial sector has weathered the first phase of
the financial crisis relatively well.
The period before the request for financial assistance was marked by unfavourable
developments in public finances and a worsening economic outlook. This led to a
deterioration of confidence and rising market pressures on Portuguese debt, accentuated by
the negative developments in euro area sovereign bond markets. Amidst consecutive
downgradings by credit rating agencies of Portuguese sovereign bonds, the country became
unable to refinance itself at rates compatible with long-term fiscal sustainability. In parallel,
the banking sector, which is heavily dependent on external financing, was increasingly cut off
from international market funding and had to step up reliance on the Eurosystem for funding.
Following a request by Portugal on 7 April 2011, the Troika consisting of the European
Commission, ECB and IMF negotiated an Economic Adjustment Programme, aimed at
restoring confidence, enabling the return of the economy to sustainable growth, and
safeguarding financial stability in Portugal, the euro area and the EU. It covers the period
2011-2014. Its financial package will cover up to EUR 78 billion for possible fiscal financing
needs and support to the banking system. One third (up to EUR 26 billion) will be financed
by the European Union under the European Financial Stabilisation Mechanism (EFSM),
another third by the European Financial Stability Facility (EFSF), and the final third by the
IMF under an Extended Fund Facility.
11 Romania: Country Strategy, 2011 2014, Black Sea Trade and Development Bank (April,
2011).

First, a credible and balanced fiscal consolidation strategy, supported by structural fiscal
measures and better fiscal control over Public-Private-Partnerships (PPPs) and state-owned
enterprises (SOEs), aiming at putting the gross public debt-to-GDP ratio on a firm downward
path in the medium term. The authorities are committed to reducing the deficit to 3% of GDP
by 2013.
Second, efforts to safeguard the financial sector through market-based mechanisms supported
by back-up facilities. Central aspects here are measures to foster a gradual and orderly
deleveraging, strengthened capitalisation of banks, reinforced banking supervision and the
sale or unwinding of the BPN bank.
Third, deep and frontloaded structural reforms to boost potential growth, create jobs, and
improve competitiveness. In particular, the Programme contains reforms of the labour
market, the judicial system, network industries and housing and services sectors, with a view
to strengthening the economy's growth potential, improving competitiveness and facilitating
economic adjustment.
1. Portugal has suffered from low GDP and productivity growth for more than a decade.
During the years before the financial crisis (2001-08), average annual real GDP growth was
only 1 percent. Over the last decade, Portugal's economic growth was the second-lowest of
the 27 EU Member States. This is in contrast with the 1991-2000 decade, when the economy
grew at rates above 3 percent per year on average. GDP per capita in Purchasing Power
Standards (PPS) increased to 70 percent of the EU15 average in 2000, but has been
stagnating since. Gross National Income (GNI) deflated by the private consumption deflator,
another indicator of prosperity, grew even less than GDP, reflecting the effect of servicing a
large and growing stock of external liabilities (see Graph 1).
2. Potential output growth has been on a downward trend since the late 1990s. Declining
potential growth reflected decreasing contributions of capital, labour and total factor
productivity (see Graph 2). Latest projections point to stagnating potential GDP, as strongly
negative contributions of labour supply are not fully compensated by slightly positive growth
contributions of capital and factor productivity. Significant wage increases even during
periods of rising unemployment (in 2009-10 compensation per employee increased by 3.3
percent and 1.5 percent, respectively, despite a rise in the unemployment rate from around 8
percent in 2008 to over 11 percent in 2010) point to higher structural unemployment.

3. Deep-rooted structural problems have caused a major loss of competitiveness. Since

the introduction of the euro, Portugal has experienced significant real exchange rate (REER)
appreciation vis-a-vis its trading partners, due to wage growth largely outstripping
productivity advances (Graph 3). However, the competitiveness problem goes well beyond
inadequate price and wage developments. Rigidities and inefficiencies in labour and product
markets, weak enforcement of competition rules, a dysfunctional judicial system,
malfunctioning housing and rental markets, a lack of adequate human capital and of
innovation, have all hampered an efficient use of resources and the dynamism of the
economy.
4.Portugal has been losing export markets shares. The loss in price competitiveness
together with an unfavourable geographical and sectoral export composition translated into a
significant loss in market shares on markets for labour-intensive goods, where Asian and
Eastern European competition has been strengthening. Portugal's export concentration in a
small number of euro area markets, which have grown less than world trade, has also
contributed to its subdued export performance over the past decade. Portugals export
structure is also mostly focused in slow-growing sectors (see Box 1). In spite of some
improvement on diversification in the most recent years towards exports with higher
technological content, their further expansion is held back by the low skills base. In the
services sector, Portugals share in world trade has increased, but faster-growing sectors
represent a very small share of total exports of services.
5. Portugal's external indebtedness is very high. The stock of net external liabilities is
estimated at around 110 percent of GDP at the end of 2010, from less than 40 percent ten
years before. On current projection it would reach 120 percent of GDP in 2012 (see Box 2).
As a result of the depreciation of Portuguese liabilities including government debt owned
by foreigners, there has been a small reduction in external debt at market prices. The annual
net primary income outflow has meanwhile reached 312 percent of GDP and is expected to
keep on increasing in line with net external debt and interest rates.
6. Foreign investors have recently reduced their holdings of Portuguese government
debt. Reflecting the smaller pool of private sector savings, the share of foreign holders of
sovereign debt was structurally high and increasing, reaching 75 percent in mid-2009. By the
end of 2010, however, this share had dropped below 60 percent as foreign holdings of
government debt have increasingly been replaced by domestic investments (see Graph 10).

7. High government deficits were recorded in both 2009 and 2010. The fiscal deterioration
in 2009 reflected the severity of the recession, the operation of the automatic stabilisers, as
well as a discretionary fiscal expansion a small part of it in the context of the European
Economic Recovery Plan. The mild deficit fall in 2010 reflects higher revenue due to some
recovery from the sharp revenue falls in 2009 and an increase in tax rates particularly VAT
adopted in the course of 2010. Furthermore, the headline deficit was also reduced by a large
one-off revenue worth 1.6 percent of GDP, linked to the transfer of the pension fund of
Portugal Telecom to the government sector. On the opposite side, one-off costs related to the
rescue in 2008 of two troubled banks dragged down the balance by 1.3 percent of GDP.
Furthermore, following a decision of the statistical authorities, the headline figure for the
deficit was affected by changes in the government perimeter to include a number of publicprivate partnerships (with a deficit increasing impact of 0.5 percent of GDP in 2010). The
2010 execution also included the spending for the purchase of two submarines of 0.6 percent
of GDP.
8. The financial situation of state-owned enterprises (SOEs) entails large fiscal risks.
Several SOEs have been structural loss-makers and have accumulated large debt. In particular
transport companies (road management, railway, urban transport), but also hospitals, are a
matter of concern. Notwithstanding subsidies, other currents transfers (which are recorded as
government deficit- increasing), and capital injections (which in some cases Eurostat rules
allow to be recorded below the line), these companies have accumulated very large amounts
of debt (SOE gross debt amounts to around 15 percent of GDP), which at some stage might
have to be taken over by the government. In addition to posing risks to public finances, SOEs
have other negative spill-over effects on the private sector: they absorb a substantial part of
bank lending; they are able to impose relatively high prices for their services, and they attract
high-skilled workers.
9. Public Private Partnerships (PPPs) impact on public finances. PPPs have been used
extensively in Portugal to finance mainly transport infrastructure but also other projects, such
as hospitals (see Box 3). The implicit government liabilities in relation to PPPs the net
present value of the flow of payments in relation to the contracts already signed are
currently estimated at over 14 percent of GDP. These commitments limit the flexibility of
government expenditure in the medium term. There seems to have been a lack of adequate
central control for creating public-private partnerships and wrong incentives arising from the

fact that they are a way to loosen the budget constraint in the short term as they are recorded,
according to existing statistical rules, in the private partners balance sheets.
10. The corporate sector is structurally weak and the public sector oversized. Mid- to
large-sized companies that serve international markets are underrepresented in Portugal's
corporate sector, in opposition to predominance of small businesses (some of which with
large external trade activity) on the one hand and large companies concentrated in no-tradable
and sheltered sectors on the other hand. Companies face large administrative and regulatory
burdens, and a complex tax system. By contrast, the State is substantially larger than in
countries with comparable levels of per capita income, and there is a sizable number of SOEs
and other public bodies at the margins of the government perimeter.
11. The period before the request for financial assistance was marked by unfavourable
developments in public finances and a worsening economic outlook. This led to a
deterioration of confidence and rising pressures on Portuguese debt, accentuated by the
negative developments in euro area sovereign bond markets. In parallel, the banking sector,
which is heavily dependent on external financing, was increasingly cut off from market
funding and had to resort extensively to funding from the Eurosystem. The government
stepped out after failing to obtain parliamentary approval for the Stability Programme in late
March. The sovereign credit rating of Portugal was lowered several times over this period,
and ultimately interest rates reached levels no longer compatible with long-term fiscal
sustainability. Box 4 provides the chronology of events during this period.
12. The international financial crisis had triggered only a marginal adjustment of
existing imbalances and weakened public finances further. In 2010, Portugal's GDP grew
at a rate of 1.3 percent. Along with strong export growth, this positive growth performance
was also due to exceptional factors that boosted private consumption, namely the anticipatory
effects of the VAT increases in January 2011 and the relatively low inflation due to falling
energy prices. Notwithstanding the significant growth contribution of external trade, Portugal
lost 0.9 percent in export market share in 2010. The adjustment in price and cost
competitiveness was too slow to redress the current account deficit, which was still high at 10
percent of GDP last year. The weak economy and the steep increase in unemployment,
coupled with a strong countercyclical fiscal stance in 2009, spilled into large government
deficits, above 10 percent of GDP in 2009 and 9 percent in 2010, up from 3.5 percent in
2008.

13. Adequate capitalisation of banks is key to bolster the resilience of the sector in light
of the difficult economic adjustment process. In view of the challenging environment and
to further enhance the confidence in the solvency of the banking system, the BdP will direct
all banks subject to supervision in Portugal to reach a core Tier 1 capital ratio of 9 percent by
end-2011 and 10 percent at the latest by end-2012 and maintain it thereafter. In the event
market based solutions fail and banks are unable to reach these targets on schedule, ensuring
the higher capital standards might temporarily require public provision of equity for the
privately owned banks. The authorities will therefore augment the bank support facility to
EUR 12 billion with resources provided by EU and IMF financing. The banks benefitting
from such equity injections will be subjected to specific management rules, a restructuring
process and restrictions in line with EU competition requirements. Actual funding needs may,
however, be lower than this amount, or non-existent, if banks are able to improve their
capitalisation through market-based solutions. The CGD group will be streamlined putting in
focus its core banking activities, which will benefit from a capital increase to be financed
from internal group resources. Some non-core subsidiaries will be sold in view of optimising
the group's efficiency and governance.
14. In spite of the considerable adjustment planned in the Programme, large financing
needs will have to be partly covered by official financial assistance. The financing gap
between June 2011 and September 2014 has been estimated at EUR 78 billion (see Annex 2).
Official financial assistance from the EU/euro area and the IMF is planned to amount to some
EUR 38 billion in 2011, EUR 25 billion in 2012, EUR 10 billion in 2013, and EUR 5 billion
in 2014. Around four-fifths of the Programme amount will be used to cover public sector
financing needs, while the rest is aimed at possible banking sector support. The EU
contribution amounts to two-thirds of the total (EUR 52 billion) and will be financed through
loans from the EFSM and the EFSF (see Box 7). The IMF loans will be provided on the basis
of an Extended Fund Facility (EFF).

The assessment of market risk has long posed a challenge to many types of economic agents
and researchers (see, for instance, Granger (2002) for an overview). Market risk arises from
the random unanticipated changes in the prices of financial assets and measuring it is crucial
for investors. Besides its interest to portfolio managers, the assessment of market risk is
relevant for the overall risk management in banks and bank supervisors. Although bank

failures are traditionally related with an excess of non-performing loans (the so-called credit
risk), the failure of the Barings Bank in 1995 showed how market risk can lead to bankruptcy.
Furthermore, market risk has received increasing attention in recent years as banks financial
trading activities have grown.
Although the measurement of market risk has a long tradition in fi- nance, there is still no
universally agreed upon definition of risk. The mod- ern theory of portfolio analysis dates
back to the pioneering work of Harry Markowitz in the 1950s. The starting point of portfolio
theory rests on the assumption that investors choose between portfolios on the basis of their
expected return, on the one hand, and the variance of their return, on the other. The investor
should choose a portfolio that maximizes expected re- turn for any given variance, or
alternatively, minimizes variance for any given expected return. The portfolio choice is
determined by the investors preferred trade-off between expected return and risk. Hence, in
his seminal paper, Markowitz (1952) implicitly provided a mathematical definition of risk,
that is, the variance of returns. In this way, risk is thought in terms of how spread-out the
distribution of returns is.
Later on, the Capital Asset Pricing Model (CAPM) emerged through the contributions of
Sharpe (1964) and Lintner (1965a, 1965b). Accord- ing to the CAPM, the relevant risk
measure in holding a given asset is the systematic risk, since all other risks can be diversified
away through port- folio diversification. The systematic risk, measured by the beta
coefficient, is a widely used measure of risk. In statistical terms, it is assumed that the
variability in each stocks return is a linear function of the return on some larger market with
the beta reflecting the responsiveness of an asset to movements in the market portfolio. For
instance, in the context of interna- tional portfolio diversification, the country risk is defined
as the sensitivity of the country return to a world stock return. Traditionally, it is assumed that
beta is constant through time. However, empirical research has found evidence that betas are
time varying (see, for example, the pioneer work of Blume (1971, 1975)). Such a finding led
to a surge in contributions to the literature (see, for example, Fabozzi and Francis (1977,
1978), Sunder (1980), Alexander and Benson (1982), Collins et al. (1987), Harvey (1989,
1991), Ferson and Harvey (1991, 1993) and Ghysels (1998) among others). One natural
implication of such a result is that risk measurement must be able to account for this timevarying feature.

Besides the time-variation, risk management should also take into ac- count the distinction
between the short and long-term investor (see, for ex- ample, Candelon et al. (2008)). In fact,
the first kind of investor is naturally more interested in risk assessment at higher frequencies,
that is, short-term fluctuations, whereas the latter focuses on risk at lower frequencies, that is,
long-term fluctuations. Analysis at the frequency level provides a valuable source of
information, considering that different financial decisions occur at different frequencies.
Hence, one has to resort to the frequency domain analysis to obtain insights into risk at the
frequency level.
In this paper, we re-examine risk measurement through a novel approach, wavelet analysis.
Wavelet analysis constitutes a very promising tool as it represents a refinement in terms of
analysis in the sense that both time and frequency domains are taken into account. In
particular, one can resort to wavelet analysis to provide a unified framework to measure risk
in the time- frequency space. As both time and frequency domains are encompassed, one is
able to capture the time-varying feature of risk while disentangling its behavior at the
frequency level. In this way, one can simultaneously mea- sure the evolving risk exposure
and distinguish the risk faced by short and long-term investors. Although wavelets have been
more popular in fields such as signal and image processing, meteorology, and physics, among
oth- ers, such analysis can also shed fruitful light on several economic phenomena (see, for
example, the pioneering work of Ramsey and Zhang (1996, 1997) and Ramsey and Lampart
(1998a, 1998b)). Recent work using wavelets in- cludes that of, for example, Kim and In
(2003, 2005), who investigate the relationship between financial variables and industrial
production and be- tween stock returns and inflation, Gencay et al. (2003, 2005) and
Fernandez (2005, 2006), who study the CAPM at different frequency scales, Connor and
Rossiter (2005) focus on commodity prices, In and Kim (2006) examine the relationship
between the stock and futures markets, Gallegati and Gal- legati (2007) provide a wavelet
variance analysis of output in G-7 countries, Gallegati et al. (2008) and Yogo (2008) resort to
wavelets for business cycle analysis, Rua (2011) focuses on forecasting GDP growth in the
major euro area countries, and others (see Crowley (2007) for a survey). However, up to now,
most of the work drawing on wavelets has been based on the dis- crete wavelet transform. In
this paper we focus on the continuous wavelet transform to assess market risk (see also, for
example, Raihan et al. (2005), Crowley and Mayes (2008), Rua and Nunes (2009), Rua
(2010, 2012), Tonn et al. (2010), and Aguiar-Conraria and Soares (2011a, 2011b, 2011c)).

We provide an illustration by considering the emerging markets case. The new equity markets
that have emerged around the world have received considerable attention in the last two
decades, leading to extensive recent literature on this topic (see, for example, Harvey (1995),
Bekaert and Harvey (1995, 1997, 2000, 2002, 2003), Garcia and Ghysels (1998), Estrada
(2000), De Jong and De Roon (2005), Chambet and Gibson (2008), Dimitrakopou- los et al.
(2010), among others). The fact that the volatility of stock prices changes over time has long
been known (see, for example, Fama (1965)), and such features have also been documented
for the emerging markets. The time variation of risk comes even more naturally in these
countries due to the changing economic environment resulting from capital market liberalizations or the increasing integration with world markets and the evolution of political risks.
In fact, several papers have acknowledged time varying volatility and betas for the emerging
markets (see, for example, Bekaert and Harvey (1997, 2000, 2002, 2003), Santis and
Imrohoroglu (1997), and Estrada (2000)). Moreover, the process of market integration is a
grad- ual one, as emphasized by Bekaert and Harvey (2002). Therefore, methods that allow
for gradual transitions at changing speeds, such as wavelets, are preferable to segmenting the
analysis into various subperiods. Hence, the emerging markets case makes an interesting
example for measuring risk with the continuous wavelet transform.
The Portuguese economy registered a lower decline in economic activity during 2013 (1.4%), in comparison to 2012 (-3.3%). The positive performance of exports and a smaller
contraction in domestic demand and of investment were determining factors in this
recuperation.
In the 3rd quarter of 2014, INE estimated an increase of 1.1% in GDP in comparison to 2013.
This was due to a more positive performance in domestic demand, mainly reflected in the
increase of private consumption, meanwhile net external demand had a negative contribution,
due to the acceleration of the imports of goods and services. We note, however, that exports
of goods and services in volume terms showed an annual growth of 2.9% in the 3rd quarter of
2014.
The projections from the Banco de Portugal (BP) point to a real increase in the Portuguese
economy of 0.9% in 2014, supported by the increase of consumption and private investment,
as well as by exports (+2.6%). The combined current and capital balance should be positive
in 2014, 2.6% of GDP. For 2015-2016 GDP is forecast to grow 1.5% and 1.6%, respectively,
being above the projected for the Euro Zone by the European Central Bank (1% and 1.5%

respectively). The BP considers that this development is because of an acceleration of GFCF

as well as a strong increase in exports (+4.2% in 2015 and +5% in 2016), favouring the
continuing surpluses of the current and capital balance, thus enabling an improvement in the
international investment position.
At the end of last April, in the Medium-Term Budget Strategy (Documento de
EstrategiaOrcamental de MedioPrazo - DEO), the Government set out guidelines for public
finances for the 2014-2018 period, wherein it advocates the continuation of the process of
adjustments in external imbalances and an effort in budgetary consolidation.
In May 2014, the Government announced the end of the Economic and Financial Assistance
Programme - PAEF, (agreed with the EU and the IMF in May 2011), without resorting to
additional external financial assistance thus gaining access to international debt markets.
After three years of the Programme, the Portuguese economy has made significant progresses
in the correction of a number of macroeconomic imbalances, having implemented measures
of a structural character in several areas. According to the Banco de Portugal, the PAEF
objectives were globally met in certain aspects of the Portuguese economy, such as the net
financing capacity in relation to the exterior that was registered in 2012; the structural
primary budget surplus in 2013, ongoing budget consolidation, as well as the transfer of
resources from the non-tradable sector to tradable were several of the favourable elements
that contributed to the process for sustainable growth.
International trade
According to data released by the Banco de Portugal, in the last five years exports and
imports of goods and services registered annual average growth rates of 9.6% and 2.3%,
respectively. In 2013, exports of goods and services showed an increase of 6.8%, in
comparison to the previous year, and imports showed a slight increase of 1.5%. The trade
balance of goods and services was positive in 2013, inverting the negative tendency
registered in the last decade.
In the period January-September 2014, year on year, the increase of exports of goods and
services were 2.2%, while imports were more significant, 4.1%, while the rate of coverage
was around 104%.
With regards to exports of goods, these increased in 2013, year on year, 4.5%, according to
INE data, while imports decreased 0.9%. The trade balance of goods continues to show a

deficit in 2013, although this has happened for the third consecutive year (-13.6% in relation
to 2012 and -51% between 2009 and 2013).
According to the same source, in the period January-September 2014 exports and imports of
goods registered an increase of 1.0% and of 3.5% respectively, year on year (the rate of
coverage was 82% in this period). The trade balance of goods remained negative in this
period of 2014.
In the first nine months of 2014, machinery and tools continue to be the most exported
products (14.5% of the total), followed by vehicles and other transport material (11.1%),
mineral fuels (8.3%), base metals (8.0%) and plastics and rubber (7.4%). These five main
product groups represent about 49% of the total exported by Portugal during this period
(against 51% in the previous year).
The principal destination for exports of goods is the EU28 (71.5% of the total in the JanuarySeptember 2014 period), PALOP (7.6%) and NAFTA (5.3%), being that the EU28 and
NAFTA increased their quotas in relation to the same period in 2013. Portugals main clients
Spain, Germany, France, Angola and United Kingdom together represent around 60% of
total exports in this period. The main clients remain almost identical in relation to 2013, with
the exception of China (10th client) that gained importance in relation to Morocco that
dropped out of the TOP 10.
In relation to the imports of goods, mineral fuels, machinery and tools, agricultural products,
vehicles and other transport material and chemical products lead the ranking of purchases
made during the January-September 2014 period, representing 64% of the total. The EU28
was the origin of most of the products imported during this period with 74.2% of the total
(against 70.7% in the same period of 2013), being Spain, Germany, France, Italy, the
Netherlands the main suppliers, that together represented 62% of imports. A special mention
is made to the arrival of Brazil in the Top 10 of suppliers, to the detriment of Russia, and the
increase in the positions of Italy, United Kingdom and China and the decrease in the position
of Angola.
SPAIN
Introduction
Decreased new foreign investment flows, together with the falling value of past investments
as a result of the crisis, is undermining Spains external asset position, limiting the

improvement in the international investment position, and constraining capital revenue

received from the rest of the world.
Since the birth of the euro, Spains economy has been boosted by a substantial increase in
foreign asset purchases, mainly through foreign direct investment (FDI). As a result of the
internationalization process, the value of Spains financial assets abroad rose from 350 billion
euros at the end of the nineties to above 1.3 trillion euros in 2007. The recent financial crisis
substantially slowed down Spain s investment flows abroad during two clearly distinct
phases: i) the first from 2009-2010; and, ii) the second, which began in early 2013 and
continues at present, where divestment, coupled with the negative valuation effect, resulted in
the largest downturn of the external investment position in the last two decades. Since 2012,
FDI flows have begun to slow down, but the reduction of short term bank financing, affected
by financial sector deleveraging, has led the decline. Capital revenues from external
investments have also decreased, posing a risk to Spain s external surplus through a
deteriorating income balance. Going forward, the need to rationalize investment decisions in
the post-crisis environment will constrain the recovery of Spain s investment flows abroad.
Nonetheless, Spanish corporates should take the lead in reviving external investment, as the
domestic market now offers fewer growth opportunities.
The Internalization Of The Process Before The Onset Of The Crisis
As in most economies, the first phase of Spains internationalization first manifested itself
through a substantial opening up to trade upon the countrys accession to the EU in 1986. The
total volume of imports and exports of goods and services represented 36% of GDP in that
year, but had climbed to 60% by the start of the 21st century.
The birth of the euro, with the resulting gains in the credibility of monetary policy, the
convergence of nominal interest rates of member countries of the euro area and the
disappearance of exchange rate.Between 2000 and 2007, Spain purchased financial assets in
the rest of the world amounting to an average of 134 billion euros a year.
risk in transactions between euro area countries, were the drivers for the financial
internationalization of the Spanish economy.The fact that the euro area was founded in the
midst of intensifying financial globalization at a worldwide level characterized by the
deregulation of financial transactions and an increase in cross- border capital flows was a
further incentive for export firms or firms with a competitive edge domestically to either

stake out or expand their positions in the international market.12They did so mainly through
different forms of foreign direct investment.The net flows of asset acquisitions of Spain
abroad reflect this process. According to data in the Financial Balance Sheet of the Bank of
Spain, between the years 2000 and 2007, the Spanish economy purchased an average of 134
billion euros in financial assets a year in the rest of the world (i.e., about 16% of GDP), and
these transactions show notable stability throughout the period. As a result of the
internationalization process, thevalueofSpainsfinancialassetsabroadrose from 350 billion
euros at the end of the nineties to above 1.3 trillion euros in 2007, where changes FDI
decisions carried out mainly by non-financial companies, through the total or partial (yet
targeted at gaining control) acquisition of foreign companies.Portfolio investments also
accounted for a good deal of Spains foreign investment flows in the expansion years, with
some of these amounting to more than 60% of the total. Even where the financial sector has
carried a larger relative weight than FDI in such investment decisions, the corporate sector
again generated the bulk of portfolio investments through the purchase of minority
shareholdings or stakes (the minority nature of these acquisitions explains why they are not
considered an FDI decision).13Short-term bank financing granted to foreign counterparties in
the form of either loans or deposits classified as other investment show a more volatile
profile, but these became emblematic in the years immediately prior to the 2008 financial
crisis. Such financing arose from the expansion of interbank lending that went along with the
growth of private borrowing.Investments valuations had a minimal impact. This valuation
effect is revealed when comparing the net acquisitions of financial assets of the economy as a
whole, according to the Financial Accounts, with the year-on-year change in the value of
external assets, according to the International Investment Position.Taking into account the
high current account deficit in the decade of 2000 (nearly 10% of GDP), the external
borrowing raised by Spain was allocated not only to financing domestic investment spending
not covered by national savings, but also a sizable portion of the purchases of financial assets
in the rest of the world.Aside from the reliance on borrowing that often enabled the purchase
of equity stakes abroad, in the context of abundant liquidity, easy access to credit and good
business expectations, the increasing financial internationalization had the following
consequences: (i) an expansion in the stock of FDI abroad; and (ii) capital revenue from these
investments that fed the revenue side of the income balance.With regard to the former, the
12"Portfolio Flows Tracker FAQ".Institute of International Finance.
13http://www.investopedia.com/terms/f/foreign-portfolio-investment-fpi.asp

value of Spains FDI amounted to nearly 400 billion euros in 2007 (37% of GDP) when it had
been barely 52 billion euros in 1998, or less than 10% of GDP. Spains stock of FDI in
proportion to the size of its economy is similar to that of Germany, and larger than that of
countries like the US or Italy.Hence, it is useful to take note of the nature of the FDI flows
from Spain in this period. In the first phase of Spanish companies international expansion
from the late nineties until 2001- 2002 the majority of FDI was destined towards Latin
America and, in particular, to the energy and telecommunications sectors (as in the
acquisition of the Argentinean firm YPF by Repsol in 1999). Issues of shares and equity
holdings, along with the contracting of bank loans, served as the funding basis of FDI in
those years.In the second phase between 2002 and 2007, the European Union replaced Latin
America as the main destination of Spanish FDI, accounting for 64% of the total stock issued
by Spain in 2007.The sector change was significant: industry and construction gained in
relative weight, even though energy and telecommunications continued to account for a
significant percentage of total investment.Telefnicas purchase of O2 and Iberdrolas
acquisition of Scottish Power took place in those years. Reliance on borrowing, in the form of
bond issues or the contracting of loans from the host banking sector, took the place of equity
as the main funding source of FDI. The reason for the persistent deficit in the income balance
lies in the sizable amountspaid for the external borrowing undertaken, which nearly doubled
the amount of such revenue in some years.
Impact Of The Crisis On Spains External Investment Decisions
The financial crisis that emerged in 2008 substantially altered the decision-making process of
Spanish companies with regard to investments abroad. The systemic nature of the crisis and
the fact that two of the crisis main symptoms were the closure of wholesale funding markets
and the collapse of interbank liquidity channels explains the sharp slowdown in Spains
investment flows.14As in the expansion period, most economies were affected by this
dynamic, but it was much more acute in economies that relied more heavily on bank
financing, carried a high current account deficit and that sustained more significant private
borrowing levels, as was the case of Spain.
In Spain, the process of declining investment abroad underwent two clearly distinct phases:
the first was in 2009-2010, when the cumulative volume of divestments over the two year
period amounted to 64.5 billion euros; and, the second which began in early 2013, and is on14International Monetary Fund, World Economic Outlook, October 2008, p. 79

going. One of the key differences between them is that, in the first, the rising valuation of
assets abroad offset a good deal of the impact of divestment in the total asset position;
whereas, in the second, net asset sales have combined with a fall in assets value (negative
valuation effect). Indeed, Spains external investment position registered the largest
downturn in the last two decades 102 billion euros , thus accounting for the 60% loss in
value in the correction. Another difference between the phases relates to the nature of the
divestment flows. In 2009-2010, these mainly took the form of portfolio investment. With
regard to the returns received by Spain on its foreign investments, the increase in capital
revenues in parallel with the increase in net investment in financial assets is noteworthy.
Given that wage income is minimal, the 42 billion euro. 15With regard to FDI, the negative
valuation effect 49 is determining the value of Spanish such assets: following the 2012
downturn, new flows mainly non-share ownership interests and withheld profits have
managed to recover, although they remain far below the volumes of 2006-2008. FDI
investment will be constrained by delays in decisions on international expansion owing to the
duration of the recent crisis and the loss of momentum in some emerging economies
receiving Spanish financial flows. Income from capital revenue is suffering from the
slowdown in external investments. The counterpart to this dynamic is the slowdown in capital
revenue received by Spain from its external investments that, at the same time, is affected by
the downturn in returns in the bulk of fixed income assets. As against an average of 45 billion
euros a year between 2009 and 2012, revenue amounted to 36.8 billion euros in 2013, a trend
that is becoming stronger at the start of decisions. Since 2012, FDI flows have begun to slow
down, although positions in derivatives and short-term bank financing (other investment)
have led the retreat.Since 2012, FDI flows have begun to slow down, although positions in
derivatives and short-term bank financing have led the way in Spains divestment abroad.
Again, we must distinguish between the causes of the downturn in Spains investments in
recent quarters. As shown in the exhibits below, the deepening process of deleveraging of the
banking sector explains the unwinding of short-term financing positions reflected in other
investment and that, in the final analysis, are related to deposit or repo operations. Sales of
foreign debt portfolios (public or private) by financial institutions also account for a portion
of Spains net divestment abroad.
euros, which is one billion less than in the same period of 2013. Taking into account that
revenue payments abroad are not declining at the same pace, the deficit in the income balance
15Department of State: 2014 Investment Climate Statement (June 2014).

has been increasing since late 2013, and it now stands at about 17 billion euros (1.7% of
GDP).
A good performance of the income balance is a key factor in achieving sustainable
improvements in Spains external surplus. The reversal of the current account balance from
negative to positive from mid-2013 was the result of strict containment of the trade deficit
and an increase in the services surplus brought about by a strong recovery in foreign tourism
and the momentum of non-tourist service exports business, financial and transport services,
etc., but it may be hurt by the worsening income balance.
A breakdown of the current account balance into its structural and cyclical components
reveals that a good deal of the relative improvement seen during the crisis was structural, or
long- term in nature; that is, it was driven by an ongoing convergence of the investment rate
in fixed assets and the bank credit-to-GDP ratio at more sustainable levels. However, the
severity of the economic recession also gives the cyclical component a key role in altering
Spains external position. As the upturn in activity that began in late 2013 further
consolidates, the trade deficit will tend to deteriorate from current levels owing to the high
degree of sensitivity still shown by goods exports to the stabilization of domestic demand and
to the growth of exports. The margin for further increases in the services surplus is also
limited. Consequently, a steeper downturn in income would tend to undermine the
consolidation of the Spanish external surplus.
The need to streamline new investment decisions, in some cases, and in many others - to
reduce the size of the balance sheet, will continue to constrain the recovery in Spains
financial investment flows to the rest of the world, particularly in investments
that entail a permanent presence in the destination country. At the same time, the reorientation
of banking business strategies at a European-wide level and especially in Spain more
towards traditional financing and with a lower relative weight of wholesale funding, will
continue to determine the performance of investments in the near term. It is foreseeable,
moving forward, that the bulk of net acquisitions of financial assets in the rest of the world
will rely on the generation of domestic savings, and make less use of external financing as a
source of funding for international expansion. In any event, companies in sectors whose
presence abroad has already been consolidated and that present a positive business outlook
should end up taking the lead in reviving external investment, given that the domestic market
will offer fewer growth opportunities than in the recent past.

SLOVAKIA
Introduction
Slovakia is a sovereign state in Central Europe. 16 The official language is Slovak, a member
of the Slavic language family. The financial market is the market with financial means that is
the one, in which some people are offering them and some are buying. 17 The market is a place
where the sale and purchase of different products are realized. The product is any object
which is able to satisfy the needs or wishes of customers and can be offered in the market 18.
The greater the products ability to meet wishes of buyers, the higher is their success. There
exist the real estate market, automobile market, grain market, labour market, stock market,
insurance market and many others.
Economy:The Slovak economy is considered an advanced economy. Slovakia transformed
from a centrally planned economy to a market-driven economy. Major privatizations are
nearly complete, the banking sector is almost completely in private hands, and foreign
investment has risen. Slovakia adopted the Euro currency on 1 January 2009 as the 16th
member of the Eurozone.19Capital flows liberalization is one of the main determinants that
formed the development of the external financial openness of the Slovak economy in the
beginning of the transition process. The crucial changes in the external economic relations of
the country toward the western European economies forced country to the well expected
position of the net foreign borrower, as a result of the massive capital inflows. The process of
the internal capital base reproduction emphasized disequilibrium between the internal
financial resources and real demand for the capital investments in the first half of the 1990s. 20
The transition process is typically heavy dependent on the availability of sufficient stock of
capital that together with the high potential of a future economic growth stimulated the
16 Slovak Foreign Ministry", 3 June 2013, "UNHCR regional classification". UNHCR.
17Chovancov, B. & et al. (2006). Financial Market-instruments, transactions and institutions, Bratislava:IURA
Edition.

18Jlek, J. (2008). Financial Markets and Investment. Praha: Grada

19 BUSSIRE, M. FRATZSCHER, M. MULLER, G. J.: Current Account Dynamics in
OECD and EU Acceding Countries - An Intertemporal Approach, 2004. In: ECB Working
Paper No. 311 (Frankfurt: European Central Bank).

inflows of the foreign capital.21 Among the other determinants that attracts the foreign
investors to allocate their capital in the transition countries we can also mention skilled labor
force and the institutional guarantee of the further European Union accession of those
countries.22 While the overall economic performance in the beginning of the transition period
was still significantly affected by the initial economic shock, the real economic growth rates
in the selected transition economies were surprisingly high and still persist.23
Slovakia began to outperform its EU neighbors economically after the government adopted
comprehensive structural reforms in 2000-2005. These reforms included a 19% flat income
tax, which led the World Bank to name the country the worlds top reformer in improving its
investment climate in its "Doing Business in 2005" report. Slovakias relatively low-cost yet
skilled labor force, low taxes, a liberal labor code and favorable geographic location within
the European Union (EU) helped Slovakia become a favorite investment destination.24
Openness To, and Restrictions Upon, Foreign Investment
Attitude toward FPI: The flow of FPI into Slovakia has declined since 2007 due to changes
in the governments investment policies and a less attractive business environment in general.
The inward flow of FPI to Slovakia was only 60.3 million USD in 2012 and cumulative FPI
inflow stands at about 50 billion USD (National Bank of Slovakia estimates). An informal
survey by the U.S. Embassy showed U.S. investments in Slovakia at about 4.5 billion USD
for current and future commitments, making the U.S. the third largest source of FPI in
20 BERTAUT, C. KOLE, L.: What Makes Investors Overweight or Underweight?
Explaining International Appetites for Foreign Equities, 2004. In: Federal Reserve Board
Bulletin, No. 90, No. 1 (winter), pp. 19 31.
21 FERENKOV, S. DUD, T.: Foreign direct investments inflows impact on the
economic growth in the new European Union countries from the Central and Eastern Europe.
In: Journal of Economics, vol. 53, no. 3, 2005, s. 261 272. ISSN 0013-3035.
222014 Investment Climate Statement, BUREAU OF ECONOMIC AND BUSINESS
AFFAIRS, Report June 2014< http://www.state.gov/e/eb/rls/othr/ics/2014/228396.htm>
23RajmundMirdala, Faculty of Economics, Technical University of Koice, Slovakia,
24 FERENKOV, S. DUD, T.: Foreign direct investments inflows impact on the
economic growth in the new European Union countries from the Central and Eastern Europe.
In: Journal of Economics, vol. 53, no. 3, 2005, s. 261 272. ISSN 0013-3035

Slovakia.25 Official Government of Slovakia (GOS) statistics differ, as many U.S.

investments are credited to third countries based on investors corporate structures. For
example, U.S. Steel Kosice, and the Slovak-based operations of Cisco Systems, Dell, and
IBM are registered as a Dutch entities. According to the National Bank of Slovakia, 2012
data, the largest foreign investors in Slovakia in order of size were: the Netherlands, Austria,
Germany,

Italy,

the

Czech

Republic

and

Hungary.26

Foreign Portfolio Investment Statistics: Slovakia imports more than 90% of its oil and gas
from Russia, and its export markets are primarily OECD and EU countries, although both
Russia and China are growing in importance. More than 80% of Slovakias trade is with EU
members. Germany is Slovakia's largest trading partner, purchasing 21% of Slovakia's
exports in 2013. Other major markets include the Czech Republic (13.6%), Poland (8.3%),
Hungary (6.2%), Austria (6.1%), France (5.0%), and Great Britain (4.6%). Russia is the 9th
25 GONDA, V.: European monetary union in the process of globalization of the world
economy. In: Journal of Economics, vol. 54, no. 4, 2006, p. 352367. ISSN 0013-3035.
26 OBSTFELD, O.: The Global Capital Market: Benefactor or Menace. Journal of Economic
Perspectives, no. 12, 1998, p. 9 30. 1
27 Portfolio investment - excluding LCFAR (BoP - US dollar) in Slovakia, January 1996 to
January 2015 <http://www.tradingeconomics.com/slovakia/portfolio-investment-excludinglcfar-bop-us-dollar-wb-data.html>

largest trading partner (4.5%), followed by China with 4%. Slovakias primary import
partners are Germany (15.5%), Czech Republic (10.4%), Russia (10.2%), China (7.2%),
Poland (4.7%), Hungary (4.4%), and Italy (3.1.%). Slovakia's exports to the United States
made up 1.8% of its overall exports in 2013 ($1.2 billion), while imports from the U.S.
accounted for 0.9% of its total purchases abroad ($531 million), according to the Ministry of
Economy (September 2013 data).28

There are over 130 U.S. companies in Slovakia. In 2013, AT&T Slovakia and IBM Slovakia
expanded their existing business in Slovakia via opening regional centers in Kosice City.
IBM Slovakia created 150 new jobs and the Government of Slovakia approved EUR 1.58m
of investment stimuli.29 In December 2011, the U.S. company Honeywell announced a 50.2
million USD investment in Slovakia, creating 446 new jobs in Eastern Slovakia. The
Government of Slovakia approved 25 million USD in state aid for the new Honeywell
investment, including 15.2 million USD in direct financial subsidies, 600,000 USD in tax
breaks and 9.2 million USD in contributions for jobs created. In 2011, Amazon and Google
opened offices in Slovakia. In 2000, U.S. Steel Kosice (USSK) acquired East Slovakian
Steelworks to become the largest U.S. investor in Slovakia, with an investment of 1.2 billion
28 Slovak National bank Report, 2014
29 IA, J.: Five years of the European monetary union. In: Journal of Economics, vol. 53, no.
5, 2005, p. 559-575 ISSN 0013-3035.

USD and over 11,000 employees directly. Johnson Controls has over 6,000 employees in
Slovakia; IBM has roughly 4,600 employees in Bratislava, followed by HP with
approximately 2000 employees. Whirlpool has over 900 employees and produces two million
washing machines annually, making its local unit the largest appliance producer in Europe. 30
Several other American companies have substantial investments in Slovakia, including
Emerson Electric, Tower Automotive, Crown Bevcan, Citibank, TRW, Visteon, AT&T, HP,
Microsoft, CISCO, Johnson Controls, and Dell. Other major foreign corporations in Slovakia
include Volkswagen, Hyundai Motors, Peugeot-Citroen, Samsung, Getrag Ford, Deutsche
Telecom, EON Ruhrgas, Intesa BCI, UniCredito, Raiffeisen Group, Enel and Siemens. Other
significant foreign investments included 171.6 million USD expansion plans of GermanSlovak Continental Matador Rubber, and a 27.7 million USD investment of German Secop
(former Danfoss Compressors).31
Portfolio investment excluding LCFAR in Slovakia: Portfolio investment; excluding
LCFAR (BoP; US dollar) in Slovakia was last measured at -1527420076.72 in 2010,
according to the World Bank.32 Portfolio investment excluding liabilities constituting foreign
authorities' reserves covers transactions in equity securities and debt securities. 33Data are in
current U.S. dollars.This page has the latest values, historical data, forecasts, charts, statistics,
an economic calendar and news for Portfolio investment - excluding LCFAR (BoP - US
dollar) in Slovakia.34Slovakias economy continued to slow in 2013, primarily due to weak
demand from its main export markets of Germany and the Czech Republic and slow
30 IA, J. LIS, J.: Money in the economic theory. Bratislava: Publisher - Economist,
University of Economics in Bratislava, 2004 ISBN 80-225-1785-2
31 IA, J.: Potential risks of European monetary union. In: Journal of Economics, vol. 53, no.
6, 2005, p. 499-510 ISSN 0013-3035
32 KOMAI, J.: The great transformation of Central and Eastern Europe: Success and
disappointment. In: Political economics, 2006, no. 4, ISSN 0032-3233.
33 BERTAUT, C. KOLE, L.: What Makes Investors Overweight or Underweight?
Explaining International Appetites for Foreign Equities, 2004. In: Federal Reserve Board
Bulletin, No. 90, No. 1 (winter), pp. 19 31.
34 Portfolio investment - excluding LCFAR (BoP - US dollar) in Slovakia, available at
<http://www.tradingeconomics.com/slovakia/portfolio-investment-excluding-lcfar-bop-usdollar-wb-data.html>

economic conditions in the Eurozone in general. The Slovak economy grew 0.9% in real
GDP terms in 2013 (est.), with modest growth in exports and slight decreases in the
household consumption and investment.35 Unemployment remains high at 14.2%, the sixth
highest in the EU28, and exceeds 20% in some areas of eastern and southern Slovakia.36 Long
term unemployment and youth unemployment remain stubborn problems for the economy
despite GDP growth which has generally outpaced the EU28 as a whole since 2009. 37
Slovakias fiscal deficit as confirmed by EUROSTAT stood at 2.8% of GDP at year-end 2013,
bettering the target of 3% established at the start of the year. Public debt has increased from
52.2% to more than 55% of GDP in 2013, but remains relatively modest in comparison with
many of its European Union neighbors. Standard and Poors rates Slovakia an A with a
stable outlook. Slovakia remains committed to meeting EU-mandated fiscal targets as
evidenced by its performance in reducing its fiscal deficit to less than 3% of GDP in the past
year. In order to increase revenues to meet the 3% mandate, effective January 1, 2013,
Slovakia scrapped its flat income tax of 19%, raised the corporate tax rate to 23 percent, and
established a progressive tax for individuals, targeting high earners. 38

35 LANE, P.R. MILESI-FERRETTI, G.M.: International financial integration. IMFs Third

Annual Research Conference, November 7-8, 2002. Washington.
36 MISHKIN, F.: Financial Policies and the Prevention of Financial Crises in Emerging
Market Countries. [NBER Working Paper, No. 8087.] Cambridge, MA: National Bureau of
Economic Research. 2001
37 BRADA, J. C.: Foreign investments and perceptions of vulnerability to foreign exchange
crises: Evidence from transition economies. In: Political economics 2004, . 3, ISSN 00323233.
38 LIS, J. MUCHOV, E.: Formation and functionality of the European monetary union
as the challenge for the economic theory. In: Journal of Economics, vol. 52, no. 4, 2004, p.
429 448. ISSN 0013-3035.

Slovakia Net Portfolio Investment Position is at a current level of -6.482B, down from
-4.015B last quarter and down from -546.00M one year ago. This is a change of 61.44% from
last quarter and 1087% from one year ago.40

39Financial Account: Net Portfolio Investment for the Slovak Republic, 2014:Q2:
-500,920,454.28800 US Dollars, US Dollars, Sum Over Component Sub-periods, Not
Seasonally Adjusted (BPFAPI10SKQ637N), Sum Over Component Sub-periods Quarterly,
Not Seasonally Adjusted, BPFAPI10SKQ637N, Updated: 2015-01-05 1:22 PM CST, The
above table was taken from the site for research on euro portfolio. Available at
<https://research.stlouisfed.org/fred2/series/BPFAPI10SKQ637N>

Slovakia Net Portfolio Investment Position Summary42

Last Value: -6.482B
Latest Period: Mar 2014
Updated: Oct 30, 2014, 6:08 PM EDT
Next Release: Jul 9, 2015, 5:00 AM EDT
Frequency: Quarterly
Unit: EUR
Adjustment: N/A
Value Previously: -4.015B
Change From Previous: 61.44%
Value One Year Ago: -546.00M
Change From One Year Ago: 1087%
40
Slovakia
Net
Portfolio
Investment
<http://ycharts.com/indicators/slovakia_net_portfolio_investment_position>

Position,

41 Portfolio investment - excluding LCFAR (BoP - US dollar) in Slovakia <

http://www.tradingeconomics.com/slovakia/portfolio-investment-excluding-lcfar-bop-usdollar-wb-data.html >
42Slovakia
Net
Portfolio
Investment
Position,
<http://ycharts.com/indicators/slovakia_net_portfolio_investment_position_yearly>

First Period: Dec 2003

First Value: 1.945B
Risks
Main limitation factors and stimulus mechanisms for making decisions about foreign direct
investments are:
1

Trading barriers: Government policies often produce numerous imperfections on the

international markets of goods and services. Governments can introduce tariffs,
quotas and other restrictions on export and import of goods and services, which can
disable their free flow over the national borders. Sometimes, governments can place a
ban on international trade of some products. The aim of introducing trading barriers is
income increase, protection of domestic economy etc. However, facing barriers on the
export of goods to the foreign markets can influence multinational companies to move
their production in order to avoid them.

Labor market: Among all other markets, labor market has the most imperfections.
Labor market imperfections can lead to constant difference between labor cost in
different countries and significant undervaluation of the labor cost regarding labor
productivity.

Internalizing intangible assets transactions: Multinational companies often decide to

invest abroad in despite of the fact that local firms have certain benefits. That means
that multinational companies should have significant benefits over local firms because
of the intangible asset they own. However, it is very hard to wrap up and sell
intangible asset to foreigners. Besides that, it is difficult to keep and protect the rights
on this asset in the development countries where the jurisdiction is incomplete.
Because of that, companies assume that it is more profitable to establish business
units abroad and gain profit from internalizing transactions of these assets.

Vertical integration: In order to provide necessary inputs at stable prices,

multinational companies can invest in those countries where inputs are available. So,
multinational companies from processing industry want to possess mines and forests.
They often consider it profitable to place production capacities near natural resources,
because they can save money on transportation costs.

Product life cycle: The demand for the new product in the first phase of its life cycle
is intangible on the price and the company can charge a relatively high price for its
product. At the same time, the company continuously develops its product according
to the feed-back from the market in the home country. As the demand for the product
occurs abroad, companies from the USA first begin to export to these countries. With
continuous demand growth, companies from the USA are induced to begin production
abroad. Product standardization and achieving phase of maturity in the product life
cycle cause cutting expenses in order to keep competitiveness. Foreign producers,
who operate in the developing countries with low production costs, start to export
their products to the USA market. This problem with production costs can induce
companies from the USA to build production capacities in the developing countries
and export their products to the USA. In other words, foreign direct investment is very
important in this case.

Shareholder diversification services: If investors cannot efficiently diversify their

portfolio because of barriers in international capital flows, companies can provide
their shareholders with indirect diversification services throughout foreign direct
investments. When a company has assets in different countries, its cash flow is
internationally diversified, which benefits shareholders of that company although they
do not hold foreign shares.

Conclusion
Rising levels of portfolio investment, above and beyond headline foreign direct investment
(FDI), suggest increased liquidity flows from institutional investorsin the first half of 2014
portfolio investment inflows were more than four times the size of FPI inflows. This, in
addition to a higher uptake of syndicated loans, should offset expected cuts in government
investment spending. FPI has problems too. The NBS monitors portfolio investments through
reports obtained from commercial banks and the corporate sector. Reports are not yet
available from exchange brokers, since the problem of double reporting (in combination with
data from the corporate sector) has not yet been addressed. At present the reporting
requirement is still not clearly dened and consequently the required data are not reported
consistently to the NBS for this reason the occurrence of double reporting has not yet been
conrmed. In the case of short-term capital market products, it is not possible to record their
movements with an appropriate degree of precision and to exclude the possibility of double

reporting.Alter consultation with stock exchange brokers data on PI in the corporate sector
may also be reported to the NBS from two sources. This may happen on account of double
reporting, i.e. from the companies concerned and from custodian banks that handle their
securities. For the needs of the balance of payments portfolio investments are monitored in
market prices which reect the ow of money. In this case if re prices of securities undergo
marked changes during the period under review there will be no information on the actual
volumes of securities. The rst half of 1998 for example saw a 51% fall in the price of some
securities, which may at market prices give the impression that the volume of shares declined.
For that reason, PI data should also be given at constant prices especially for organizations
that monitor the volumes of securities.Slovakia is on the crest of a fresh wave of public
tenders, following an approved amendment to the existing law on public procurement in early
December 2014, which aims to increase transparency and competition in the tender process.
SLOVENIA
Financial Framework For Foreign Portfolio Investments in Slovenia
A. General Overview of Foreign Investments in Slovenia:
Slovenia is a potentially attractive location for foreign investment, but presents challenges to
foreign investors. A European Union (EU) member since May 1, 2004 and a Eurozone
member since January 1, 2007, with a fully modernized infrastructure, a major port on the
Adriatic Sea, and a highly educated, professional work force, Slovenia is an promising base
for both accessing the Central and South-eastern European markets and serving as a relatively
less expensive gateway into EU markets.43
Slovenia generally welcomes Greenfield foreign investment, but other types of foreign
investment often face hurdles that stand in the way of success.44 There are no formal sectoral
or geographic restrictions to foreign investment. In some economically depressed and
underdeveloped regions, such as the Prekmurje region near the border with Hungary,
Slovenia offers special facilities and services as well as financial/tax incentives to foreign
investors and firms undertaking projects.45 Slovenia has particularly welcomed high-tech
sector investments that create jobs and are linked to research and development (R&D)
43 2012 Investment Climate Statement, BUREAU OF ECONOMIC AND BUSINESS
AFFAIRS, June 2012, available at http://www.state.gov/e/eb/rls/othr/ics/2012/191235.htm
44 Id

activities, for which special tax incentives are available. Although Slovenia has among the
highest taxes in Europe, the government introduced tax cuts significantly reducing business
costs, eliminated payroll taxes in 2009, and the corporate tax rate was lowered to 20% in
2010.46
There are, however, a number of informal barriers including ambivalence toward FPI and
the clubby nature of the Slovenian elite that present challenges for non-Greenfield
foreign investors.47 Additionally, foreign companies and the local American Chamber of
Commerce have cited several areas for improvement to strengthen the investment climate,
including:48
1. Slovenian Government (GoS) lack of strategy to promote FPI,
2. judicial backlog,
3. difficulties in obtaining building permits,
4. a high level of labour market rigidity,
5. high social contributions,
6. personal income taxes coupled with excessive administrative tax burdens,
7. a lack of transparency in public procurement,
8. unnecessarily complex/time-consuming bureaucracy, and

45
OECD
Economic
Surveys
Slovenia,
April
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf

2013,

available

at

46 OECD Investment Policy Reviews OECD Investment Policy Reviews: Slovenia 2002,
available
at
https://books.google.co.in/books?
id=0YTYAgAAQBAJ&pg=PA53&lpg=PA53&dq=foreign+portfolio+investment+in+sloveni
a&source=bl&ots=diGinIXYOK&sig=zdPdgCh_QVDRsie4mZdwr5yVMe4&hl=en&sa=X&
ei=1cMwVfn1A8iA8QWh34DYAQ&ved=0CEAQ6AEwBQ#v=onepage&q=foreign
%20portfolio%20investment%20in%20slovenia&f=false
47 Republic of Slovenia: Financial System Stability Assessment - Update (IMF Country
Report
No.
04/137),
Washington,
May
2004
http://www.imf.org/external/pubs/ft/scr/2004/cr04137.pdf
48 Id

9. confusion over lead responsibility or jurisdiction regarding foreign investment among

government agencies.
Till 2011-12, Slovenia held steady in its World Bank Doing Business ranking, but slipped
further on World Economic Forum's (WEF) Global Competitiveness Index for the second
year in a row, this time by 12 places to number 57. The WEF index is particularly critical of
Slovenias rules regarding foreign ownership and other regulations that have an impact on
FDI & FPI:
Slovenias Global Rankings on Business & Economic Indices 49
Measure

Year

Ranking

TI Corruption Index

2011

35

Heritage Economic Freedom

2011

66

World Bank Doing Business

2012

37

IMD World Competitiveness Scoreboard

2011

51

KOFs Globalization Index

2011

26

WEFs Global Competitiveness Index

2011-2012

57

Capital Markets in Slovenia:

The Slovenian financial sector remains relatively underdeveloped for a country with
Slovenia's level of prosperity. Enterprises rarely raise capital through the stock market and
instead must rely solely on the traditional banking system to meet their needs for capital. The
shallowness of the sector hinders economies of scale and now that the banks have severely
limited their lending, it is limiting the growth of the real economy. Despite shortcomings in
the banking sector, capital is cheaper to acquire through banks than through more direct
equity or debt sales.50
In Slovenia there is currently one organised securities market, The Ljubljana Stock Exchange
(LJSE). The LJSE is a subsidiary (after the takeover in 2008) of the Vienna Stock Exchange
49 2012 Investment Climate Statement, BUREAU OF ECONOMIC AND BUSINESS
AFFAIRS, June 2012, available at http://www.state.gov/e/eb/rls/othr/ics/2012/191235.htm
50 Id

(VSE). Due to legal uncertainty in connection with a new takeover law coming into effect
during the takeover process, a court ruling has for the moment capped the VSEs voting rights
at 50 percent (although the VSE held over 80 percent of the shares as of mid February
2009).51 At issue is whether the VSE will have to offer the same price to those shareholders
that did not accept the initial offer. It is expected that this legal issue will be resolved during
the course of 2009. A new management board member was appointed in February 2009.52
Regarding equities, the exchange operates three market segments: A prime market (7 stocks),
a standard market (18 stocks), and an entry market (61 stocks). KrKA accounts for over 41
percent of turnover, and the five largest stocks account for 75 percent of stock exchange
turnover.53 The entry market contains very low liquidity stocks. In addition to stocks, the
exchange also has listings for bonds, collective investment schemes, and structured products,
with only T-bills actually being traded. Trading volume has been very low recently, with only
about EUR 1 million of equities turnover per day. Besides the recent crisis, factors that have
been cited as reasons for low turnover are the low share of foreign portfolio investors of only
7 percent of stock market capitalisation, lack of sophisticated products and services, and high
direct and indirect state ownership in Slovenian companies. Big trades are almost always
done OTC.54
The main stock exchange index in Slovenia is the SBI20. The composition of the index is
described below. The SBI20 declined by almost 68 percent in 2008, and overall equity market
capitalisation fell below EUR 8.5 billion at the end of 2008.55

51 Slovenia - Ljubljana Stock Exchange - Market capitalisation of listed companies

(domestic equities and exclusive foreign listings) - Equity excluding investment fund shares
Euro, European Central Bank, available at http://sdw.ecb.europa.eu/quickview.do?
SERIES_KEY=181.SEE.A.SI.JSE0.MKP.W.E
52 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of
Slovenia (IMF Working Paper WP/07/229), Washington, September 2007
http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf
53 Bems, Rudolf, and Piritta Sorsa, Efficiency of the Slovenian Banking Sector, IMF and
OECD, October 2008
54 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of
Slovenia (IMF Working Paper WP/07/229), Washington, September 2007
http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf

Performance of Stock Markets:

Notwithstanding Slovenias efforts to bring its securities market legal infrastructure in line
with EU directives, capital markets in Slovenia are not well developed by OECD standards.
Slovenias capital markets are extremely limited in both depth and liquidity, and perhaps as a
consequence, have a narrow, largely domestically focussed investor base.56 For example, total
market capitalisation of the LJSE remains small in absolute terms, standing at 8.5 billion (as
at 31 December 2014), which represented 25.2 per cent of GDP and a sharp drop from the
57.1 percent share recorded the previous year, when market capitalisation was just under 20
billion. There were over 200 issuers listed on the Ljubljana Stock Exchange at the time of the
mass privatisations, but this number has steadily diminished over time. Owing in part to some
buyouts but also to the delisting of many smaller companies, there are now only about 90 or
so issuers in the listed equity markets (7 companies comprise the prime segment, 18 are in the
standard segment, and 61 are in the entry segment).57
Performance of Debt Markets:
Slovenian companies mostly prefer bank loans as a source of funds, because it is relatively
cheap, so the bond market is largely undeveloped. While a handful of companies draw upon
fixed-income instruments, many of the largest companies are funded directly by loans from
foreign banks, via domestic subsidiaries, foreign branches, or directly from abroad. 58 While
bank-issued and government bonds cover 95% of the bond market, corporate bonds form a
miniscule 5% share.59 The debt market was badly hit and led into a double dip recession
55 Id.
56
OECD
Economic
Surveys
Slovenia,
April
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf

2013,

available

at

57 Id.
58 International Monetary Fund, Republic of Slovenia: Financial System Stability Assessment
(IMF
Country
Report
No.
01/161),
Washington,
September
2001
http://www.imf.org/external/pubs/ft/scr/2001/cr01161.pdf
59 Slovenia - Ljubljana Stock Exchange - Market capitalisation of listed companies
(domestic equities and exclusive foreign listings) - Equity excluding investment fund shares
Euro, European Central Bank, available at http://sdw.ecb.europa.eu/quickview.do?
SERIES_KEY=181.SEE.A.SI.JSE0.MKP.W.E

between 2008-2013 as a housing credit bubble emerged in Slovenia. This was worsened by
the Euro crisis in 2011 and the state-ownership in Slovenian banks with NPAs equalling 20%
of its GDP.
B. Performance of Foreign Investments in Slovenia:
A big portion of the Slovenian economy remains in state hands and foreign direct investment
(FDI) in Slovenia is one of the lowest in the EU per capita. Even so, Slovenia has a history of
liberalising only FDI and having relatively more restrictions in terms of FPI. Since February
1999, any investment holding more than 10% of a companys shares is defined as FDI and is
therefore less restricted than FPI.60 As a result, due to easier laws and regulations for FDI than
FPI, foreign investments in Slovenia largely comprise of FDI, and not FPI. Below, the
performance of both FDI and FPI in Slovenia has been discussed & analysed:
I.

FDI Performance

Slovenia has one of the smallest shares in inward FDI among EU member countries. In the
past years FDI in the small former Yugoslavian country only grew slightly. At the end of 2007
the percentage of FDI to GDP stood at 28.2 percent and only increased to 33.2 percent of
GDP at the end of last year, according to the statistical office. Slovenia is fourth last in the
ranking of EU member countries in regard to inward FDI. In the past six years the share of
outward FDI remained almost unaffected.61
The countries with the highest share in FDI in Slovenia are Switzerland and other EU
member countries. Slovenian investors, on the other hand, provide FDI to other former
Yugoslavian countries, as reported by the statistical office 62. However, according to the
report, Slovenia is significantly integrated with the international business environment
through exports and focuses on the European market in particular as 69 percent of exports
60 Slovenia: Main report, OECD, 2011, available at https://books.google.co.in/books?
id=_x0k1PNP7MsC&pg=PA74&lpg=PA74&dq=foreign+portfolio+investment+in+slovenia
&source=bl&ots=0gnIv6PvoC&sig=tZ9yrZZHBipG7MSUxlykVhYLUpo&hl=en&sa=X&ei
=1cMwVfn1A8iA8QWh34DYAQ&ved=0CDAQ6AEwAQ#v=onepage&q=foreign
%20portfolio%20investment%20in%20slovenia&f=false
61 Slovenia: FDI to Remain Low in 2014, January 2, 2014,
http://www.friedlnews.com/article/slovenia-fdi-to-remain-low-in-2014

available

at

62 Slovenia at Bottom of EU Rankings in Terms of Inward FDI, 31 December 2013, available

at http://www.sloveniatimes.com/slovenia-at-bottom-of-eu-rankings-in-terms-of-inward-fdi

were targeted to EU member countries and 67 percent of imports. 63 In 2007 the country was
on 9th place in terms of relative size of exports and imports to GDP while in 2012 it ranked
only 12th.64
In the period from 2007 and 2011 only four percent of enterprises operating in Slovenia were
foreign-owned. However, as pointed out by the statistical offices report, they had a great
influence in the domestic economy as the total share of employment came at 14 percent. 65
Around 1,500 to 1,800 Slovenian companies with around 55,000 employees were active
abroad in the same period. About 70 percent of Slovenian companies operated in former
Yugoslavian countries.66
"From the presented data we can see that Slovenia is among less globalized countries. The
data on international trade and particularly foreign direct investment show that Slovenia's
globalization is governed by traditional international trade and regional integration," the
report reads.67
According to the World Bank in 2014, Slovenias GDP will fall by 1.0 percent next year.
Compared to the previous forecast, this is again a substantial deterioration. In June 2014, the
World Bank has anticipated a GDP contraction of 0.1 percent. As a result, Slovenia will be
the only CESEE country which is expected to stay in recession next year. The underlying
reason behind Sloveniass long-term recession is the oversized banking sector. The World
Bank underlined that the costs will slow down Slovenias growth potential in the next years.68
63 Id
64 Id
65 International Monetary Fund, Republic of Slovenia: Financial System Stability Assessment
(IMF
Country
Report
No.
01/161),
Washington,
September
2001
http://www.imf.org/external/pubs/ft/scr/2001/cr01161.pdf
66 Slovenia - Ljubljana Stock Exchange - Market capitalisation of listed companies
(domestic equities and exclusive foreign listings) - Equity excluding investment fund shares
Euro, European Central Bank, available at http://sdw.ecb.europa.eu/quickview.do?
SERIES_KEY=181.SEE.A.SI.JSE0.MKP.W.E
67 Id
68
Economic
Surveys
Slovenia,
April
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf

2013,

available

at

Despite its high-quality workforce and location close to main EU markets, Slovenia's inward
FDI stock stood at only 31% when the crisis hit in 2009, compared to 78% in Hungary and
58% in Slovakia. Slovenia scores "below expectations" on the basis of comparison of the FDI
Attraction Index with the FDI Potential Index. 69 This confirms it is among the catching-up
economies that have received less FDI than would be expected based on economic
determinants. Significantly increased FDI would be beneficial, for growth and external
sustainability. FDI in productive activities could provide much-needed equity to the real
sector and bring fresh capital and improved risk management to banks, thereby allowing
credit growth to resume in the future. FDI could also reinforce corporate.
In the years before 2007, Slovenias growth model has proven unsustainable. The boom was
mainly built on domestic consumption, tourism and the construction sector. In the course of
the economic boom, the lending policy of Slovenian banks was too generous. Slovenia needs
operational development strategy, clearly defined strategic priorities, we are also still waiting
for reform programme. Top managers from 50 Slovenian companies and leading economists,
focused on business expectations which were clearly defined on FDI Summit in October
201470: clear communication about government priorities, better implementation of strategies,
promises, further, transparent privatisation, user friendly public administration, less
bureaucracy, functioning banking sector, better infrastructure, lower tax burdens, lower
labour costs, especially for highly educated workforce and better, coordinated, focused
promotion of the country, brand Slovenia.
FDI Inflows and Outflows in Slovenia from 2006-201271

69 European Economy, Macroeconomic Imbalances Slovenia 2013, Occasional Papers 142 |

April
2013,
available
at
http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp142_en.pdf
70 FDI Summit Conclusion Paper Event: Govt Progressing But More Action, Clear Strategy
Needed, available at http://www.fdi.si/fdi-summit-conclusion-paper-event-govt-progressingbut-more-action-clear-strategy-needed/
71
Economic
Surveys
Slovenia,
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf

April

2013,

available

at

The graph verifies the assertion made above, that FDI flows in Slovenia are at an all time
low and both FDI inflows and outflows are extremely low.
Reasons for low FDI in Slovenia:
1. Public ownership is large: The 10 largest listed companies are state owned.
Competition in the product market is not vibrant enough notably as state ownership
is large and the Competition Authority has been lacking resources to facilitate
economic adjustment.72
2. Banking Crisis: Slovenia is facing a severe banking crisis, driven by excessive risk
taking, weak corporate governance of state-owned banks and insufficiently effective
supervision tools. Major stateowned banks have been recapitalised several times.
Additional capital needs are expected but their amount remains uncertain as the main
results of earlier stress tests and due-diligence analysis have not been disclosed and
their assumptions are most likely outdated. The creation of the Bank Asset

72
OECD
Economic
Surveys
Slovenia,
April
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf

2013,

available

at

Management Company to ring-fence impaired assets is welcome, but lack of

transparency and potential political interference pose risks.73
3. Limited Protection of Minority Shareholders: The scope of the stock market to
finance the economy is limited by the high degree of state ownership in the ten largest
listed companies and weak protection of minority shareholders. Privatisation
supported by the definition of a clear asset management strategy, better disclosure of
related-party transactions to enhance investor protection and further strengthening of
operational and financial independence of the Securities Market Agency would all
bolster financial deepening and improve overall market discipline.74
4. Ineffective Supervision by the Securities Market Agency (SMA): A large share of
NPLs is attributed to LBOs. However, there are large-scale circumventions of rules in
this regard and many disclosures are not made.75
5. Poor Corporate Governance Norms: Another risk is related to weak corporate
governance in the context of extensive public ownership, notably in the banking
sector (about 40% of banking loans are issued by stateowned banks and more banks
are state-controlled). A weak framework for the governance of state-owned banks
(SOBs) in Slovenia is likely to have contributed to poor credit standards, excessive
risk taking by banks and misallocation of credit. Excessively favourable credit
conditions have underpinned unsustainable mergers and acquisitions, management
buy-outs or buy-outs of public shares at high market values. Moreover, preliminary
findings of the Slovenian Corruption Prevention Commission have recently pointed to
widespread credit misallocation, likely related to corrupt behaviour. The dominance of
state ownership appears to have undermined the quality of banking supervision by the
Bank of Slovenia, which did not take sufficient steps to prevent large and connected
exposures.76 Anecdotal evidence also indicates mismanagement of the SOBs. As an
example of credit misallocation, the two largest SOBs Nova Ljubljanska Banka
73 OECD (2012a), OECD Reviews of Innovation Policy: Slovenia 2012, OECD Publishing,
http://dx.doi.org/10.1787/9789264167407- en.
74
OECD
Economic
Surveys
Slovenia,
April
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf
75 Id

2013,

available

at

(NLB) and Nova Kreditna Banka Maribor (NKBM) extended loans amounting to,
respectively, 20% and 15% of their capital to Zvon Ena, a financial holding company,
which is currently under bankruptcy procedures. These two banks have also been
heavily exposed to major construction companies. They appear to be among the least
efficient in Slovenia, particularly on a profit basis. There have been frequent changes
in the composition of management and supervisory boards of these banks and several
chief executive officers have cited political interference as one of the reasons for their
decision to resign.77
II.

FPI Performance

FPI in Slovenia includes transactions and positions involving debt or equity securities, other
than those included in direct investment or reserve assets. Portfolio investment
includes equity securities, investment fund shares and debt securities, unless they are
categorised either as direct investment or as reserve assets. Equity securities consist
of listed and unlisted shares. Transactions and positions in debt securities are divided by
original maturity into short-term and long-term. Short-term debt securities are payable on
demand or issued with an initial maturity of one year or less. Long-term debt securities are
issued with an initial maturity of more than one year. Since 2007, this item includes also
assets of debt portfolio instruments held by Bank of Slovenia, which are no longer considered
as international reserves, but as claims to EMU member states and claims in EUR currency to
all other non-residents.78 Since early 1997, the Bank of Slovenia introduced measures to curb
increasing capital inflows.
Owing to the fact that investments beyond 10% are automatically FDI in Slovenia, FPI
investments are very low. These are much lesser than FDI investments which itself is a low

76 Republic of Slovenia: Financial System Stability Assessment - Update (IMF Country

Report
No.
04/137),
Washington,
May
2004
http://www.imf.org/external/pubs/ft/scr/2004/cr04137.pdf
77
OECD
Economic
Surveys
Slovenia,
April
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf

2013,

78 Slovenia- Balance of Payments and External

https://www.bsi.si/en/financial-data-r.asp?MapaId=918

Position,

available

available

at

at

figure. Certain restrictions have traditionally existed on FPI investments in Slovenia. These
are791. Foreign investors to hold Slovenian shares for 7 years lock-in period (which was
reduced to 4 years in 1999.
2. FPI holders must hold obligatory custody accounts (later they were allowed to hold
obligatory interest free Tolar deposits as well).
3. Non-residents were obliged to conduct their portfolio investments in the secondary
market-traded securities and derivatives through custody accounts established with
licensed domestic banks as per the Law on Securities Market (Official Gazette of the
Republic of Slovenia, No. 6/94.80
4. All share trading must be conducted through LISE members based in Slovenia and
through a custodian account opened at the authorized bank.
5. Foreign portfolio investors who sold shares bought in the Slovenian capital market to
the local market participants within 1 year (reduced from 7 years from Sep. 1, 1999)
would incur excessive 8-12% annual custody charges.
6. Foreign investors can acquire 25% or higher share in the equity capital of the
companies.
7. No change for dividend tax. As of Jan. 1997, foreign individual investors were subject
to a capital gain tax, which was not applicable if a security is held in a portfolio for
more than 3 years.
8. 25% corporate income tax, while the foreign legal entities did not pay the capital
gains tax on share transactions in Slovenia.

79 2012 Investment Climate Statement, BUREAU OF ECONOMIC AND BUSINESS

AFFAIRS, June 2012, available at http://www.state.gov/e/eb/rls/othr/ics/2012/191235.htm
80 OECD Investment Policy Reviews OECD Investment Policy Reviews: Slovenia 2002,
available
at
https://books.google.co.in/books?
id=0YTYAgAAQBAJ&pg=PA53&lpg=PA53&dq=foreign+portfolio+investment+in+sloveni
a&source=bl&ots=diGinIXYOK&sig=zdPdgCh_QVDRsie4mZdwr5yVMe4&hl=en&sa=X&
ei=1cMwVfn1A8iA8QWh34DYAQ&ved=0CEAQ6AEwBQ#v=onepage&q=foreign
%20portfolio%20investment%20in%20slovenia&f=false

9. In case a non-resident authorises another subject participating in the securities market

(proxy) to buy and sell securities or perform any other kind of operations, they must
hand over to the bank a written authorization.81
10. As per the decision of the Bank of Slovenia, banks were obliged to sell any foreign
exchange from abroad for the purpose of buying securities and purchase a right to
buy foreign exchange fir the total balance on custody accounts.82
Relevant Data and Analysis:
The structure of FPI has changed over the past two years, with a shift from wholesale funding
to ECB lending.83 The relatively benign level of the net international investment position
(NIIP) hides underlying weaknesses. Historical NIIP data have been revised, leaving Slovenia
slightly above the 35% of GDP NIIP threshold in the AMR scoreboard still the lowest
reading for a new Member State. As this is primarily due to the very low FDI stock, it is in
fact a consequence of features of Slovenias business environment and history of stateownership.84 Consequently, the structure of Slovenias external debt, comprising essentially
portfolio and other investment, makes this position more vulnerable to abrupt changes in
investor confidence than the headline indicators would suggest. The need for rapid repayment
of wholesale borrowing by domestic banks, which has contributed to deleveraging,
exemplifies this vulnerability. The 2012 IDR analysis in this respect remains valid. More
success in attracting FPI to finance Slovenias catching-up process would initially imply
current account deficits and in the longer run a more negative but more sustainable NIIP.
During 1994-1997, market movements were very volatile and influenced by changes in
demand due to sporadic activities of FPI investors. Their activities however, were
substantially affected by the imposition of custody accounts for all FPIs in early 1997. As a
result, net FPIs were negligible and volatile and this trend has continued ever since. FPI
81Slovenia Business Law Handbook: Strategic Information and Laws, p. 134, (International
Business Publications, USA, 2011).
82 Id
83 European Economy, Macroeconomic Imbalances Slovenia 2013, Occasional Papers 142 |
April
2013,
available
at
http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp142_en.pdf
84 Id

hence was negative largely, except for positive net capital flows from FPIs owing to
government placements, which raised capital in the international market for general
budgetary purposes.85
According to OECD in its Country Report on Slovenia in 2011, 86 FPI investors are reluctant
to invest in Slovenia due to:
1. The restrictions in place (discussed above)
2. The prospects for this segment of demand for securities to expand are poor until
regulations on custody account will be abandoned.
FPI performance in Slovenia can be assessed based on the following graph:87

85 Slovenia - Ljubljana Stock Exchange - Market capitalisation of listed companies

(domestic equities and exclusive foreign listings) - Equity excluding investment fund shares
Euro, European Central Bank, available at http://sdw.ecb.europa.eu/quickview.do?
SERIES_KEY=181.SEE.A.SI.JSE0.MKP.W.E
86 Slovenia: Main report, OECD, 2011, available at https://books.google.co.in/books?
id=_x0k1PNP7MsC&pg=PA74&lpg=PA74&dq=foreign+portfolio+investment+in+slovenia
&source=bl&ots=0gnIv6PvoC&sig=tZ9yrZZHBipG7MSUxlykVhYLUpo&hl=en&sa=X&ei
=1cMwVfn1A8iA8QWh34DYAQ&ved=0CDAQ6AEwAQ#v=onepage&q=foreign
%20portfolio%20investment%20in%20slovenia&f=false\
87 European Economy, Macroeconomic Imbalances Slovenia 2013, Occasional Papers 142 |
April
2013,
available
at
http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp142_en.pdf

Based on this, we make the following observations about FPI in Slovenia:

Till 2004, i.e. when Slovenia joined the EU, FPI was a negative % of its GDP.

From 2005, FPI was made, with small numbers in 2005 & 2006, and a sudden spike
in 2007 and 2008.

The 2007-08 increase was owing to Slovenias adoption of the Euro in 2007, owing to
which it drew a lot of foreign investment via both debt and equity instruments.

The period from 2009-2012 again witnessed a dip because of the financial crisis and
Slovenias double dip recession from 2009-2013. As a result, no FPI investments
existed in 2010 and 2011. This became marginally better in 2012 with establishment
of Sloevnias Bad Bank which eased the debt burden of its banks.

Conclusion:
As a result of the foregoing analysis, it can be concluded that FPI forms a very small portion
of foreign investments in Slovenia. Investors prefer FDI investments as they are easier to
make. Hence, creating a good investment climate, including for FDI in productive sectors,
would reduce external vulnerabilities by promoting a beneficial shift towards equity and less
volatile debt in Slovenia's overall financing.

LEGAL

AND

REGULATORY FRAMEWORK

PERTAINING

TO

FOREIGN

PORTFOLIO

INVESTMENT

ROMANIA
The Romanian legal framework encourages a solid competition market for business and
ensures equal investments opportunities both for domestic and foreign investors. Generally,
the incentives offered are in line with the Government's economic philosophy, and are revised
regularly to accommodate new areas of emphasis. Some of the most important general
incentives offered to foreign investors are the right for repatriation of capital, profits and
dividends obtained in Romania, the double taxation treaties entered into by Romania with
various countries, offering fiscal benefits by tax reductions, labor related incentives and other
incentives for the purpose of attracting investments. With respect to tax incentives, for
example, the Romanian Fiscal Code sets forth that the annual loss, as established by the tax
returns, will be recovered from the taxable profits obtained during the following five
consecutive years.88

88
Investing
in
Romania,
http://www.voicufilipescu.ro/businessguide/3_Investment.pdf.

Business

Guide,

Source for the table: Analyses of foreign portfolio investment at Bucharest Stock Exchange in
Global Financial Crisis, IBIMA Business Review, Volume 2 (2009).
DIRECT INVESTMENT WITH A SIGNIFICANT IMPACT ON THE ECONOMY
Direct investments with a significant impact on the economy are defined by the law as being
such investments which value exceeds the equivalent of USD 1 million and which contribute
to the development and modernizing of Romanias economic infrastructure, thus resulting in
a positive effect on the economy and the creation of new jobs. Only direct, new investments
made by liquid capital in RON or exchangeable currency, performed within a maximum of 30
months following the date of statistical registration with the Ministry of Development and
Prognosis (today the Ministry of Economy) shall benefit from the provisions of Law no.
332/2001. Such investments may be made in any field of activity, except for the financial,
banking, insurance-reinsurance fields, as well as the fields regulated under special laws.
According to the Fiscal Code, for direct investments with economically significant impact
made by December 31, 2006, taxpayers may deduct an additional ratio of 20% of such
investments. The deduction shall be calculated for the month of the investment. For already
made investments, except for investments in buildings, an accelerated amortization can be
calculated. Starting with the fiscal year 2008, the local council may grant an exemption from
the payment of building and land tax due by legal persons conditional upon the drawing-up of
a state aid scheme purported for the regional development, to the extent that the conditions
set by the national procedures in the state aid field are met. In July 2007, the Law no.
241/2007 removed the incentives granted under Law no. 332/2001 consisting of exemption
from payment of customs fees for imported installations, equipments, measurement and
control apparatus and software products imported for investment purposes.89

PORTUGAL
The Regulatory Framework
The regulatory framework of Portuguese corporation is composed by a complex system of
sources, ranging from private law to public law: the main piece of this system is undoubtedly
statutory law namely, the Code of Commercial Companies , although also self-regulation
is becoming an increasingly important element.
89 Id.

The Code of Commercial Companies of 1986

The most relevant legal text is the Code of Commercial Companies of 1986 (Cdigo das
SociedadesComerciais)90 By regrouping dispersed and ancient legislation, this Code aimes
to provide a global and systematic regulation on commercial companies: divided into eight
chapters, it contains a set of legal provisions which are applicable to all types of companies
(Part I, arts. 1o to 175o), a regulation for each one of these different types (Part II to Part V)
with a particular emphasis on stock corporations (Part IV, arts. 271o to 464o) , and a specific
regulation concerning affiliate companies (Part VI, arts. 481o to 508o-E). Although adopting
a few original solutions in a comparative law perspective, it has been profoundly inspired by
some foreign legal orders (mainly, the German and French company laws) and took already
into account a good deal of the Community Directives on company law (including some
among them which have not finally been approved, as the proposal for a 9th Directive on
Groups of Companies).

From this perspective, Portugal may well be considered as an example of transplant

country, that is, a legal order largely inspired or even based upon foreign legal models3, as
well as suffering from the petrification syndrome which is currently noticed in several EU
members in consequence of the binding subordination of their legal orders to a system of
harmonisation through the use of Directives.91
The Code of Securities Market of 1999
Complementary to this, one should mention the Code of the Securities Market of
1999.92hisCode, as well as the extensive secondary legislation enacted on its execution 93,
constitutes an integrant and important part of the regulatory framework for public or open
90Enacted by the Decree-Law no 282/86, of 2.10.1986 (hereinafter quoted as CSC)
91On this petrification problem, see Report of the High Level Group of Company Law Experts on a Modern
regulatory Framework for Company Law in Europe, 31, Brussels, 2002.

92nacted by the Decree-Law no 486/99, of 13.11.1999 (hereinafter quoted as CVM).

93 The main instrument are the Regulations (Regulamentos) approved by the authority of supervision of the
securities market on Portugal, the Comisso do Mercado de ValoresMobilirios (abbreviated CVMV). See
ALMEIDA, Carlos Ferreira, O Cdigo de ValoresMobilirios e o SistemaJurdico, in: 7 Cadernos do Mercado
de ValoresMobilirios (2000)

corporations (sociedadesabertas), that is, of those corporations which stock is dispersed by

the public, namely, whose shares are admitted to trading in a regulated market. Apart from
several other individual norms, the Code contains a special regulation concerning the
disclosure of stock ownership on public corporations mainly, on qualified shareholdings
(participacesqualificadas:

arts.

16o

to

19o)

and

on

shareholders

agreements

(acordosparassociais: art. 19o) , concerning the adoption of general meeting resolutions

including rules on voting by mail (art. 22o), by proxies (art. 23o) and on suspension and
annulment of resolutions (art. 24o and 26o) , concerning the protection of investors
including the consecration of a distinction between institutional and non institutional
investors (art. 30o), of the principle of equal treatment of shareholders (art. 15o), of the
mandatory bid in situations of corporate control (art. 187o and ff.), and of the freeze-out
mechanisms (art. 194o and ff) , as well as on the conditions for acquisition and loss of the
legal status of public corporation (art. 27o to 29o).
Self- Regulation: Codes of Best Practices
One of the major fashions of modern Company Law seems to be the aim to reach higher
flexibility, by designing self-regulatory alternatives to primary legislation by government and
parliament, namely through the so-called codes of best practices, a sort of non-binding set
of principes and standards set by market participants through which best practices can be
developed and applied, in particular in relation to corporate governance issues (corporate
governance codex, codice di autodisciplina).
After several similar codes or reports have flourished throughout Europe94. Also Portugal has
adhered to such fashion, with the enactment in 1999 by the supervisory authority of the
securities market (CMVM) of a code of best practices on corporate governance matters,
entitled Recommendations on the Governance of Listed Corporations 95 On its original
version, this code included 17 recommendations, divided into five main chapters concerning
the disclosure of information, the exercise of voting and proxy rights, the internal corporate
organization, the structure and functioning of the board of directors and the institutional
investors. After a period where the impact of the underlying model comply or explain as
94EISENBERG, Melvin, An Overview of the Principles of Corporate Governance, in: 48 Business Lawyer
(1993), 1271ff

95Although this is by far the most important example of self-regulatory endeavour in the area of Portuguese
corporation law, there are also other initiatives: see, for instance, the Recommendations on Absentee Voting by
Mail in Public Companies, enacted by the CMVM in 2001 (www.cmvm.pt)

proved to be practically inconsistent an important step has been done with the enactment of
the Regulation CMVM no 7/200196, which imposed a mandatory duty of information on this
regard: every corporation issuing shares admitted for trading on a regulated market is now
required to publish a report on corporate governance disclosing the degree of its own
compliance to the above-mentioned Recommendations97 According to a recent survey
aiming to assess the impact of the compliance of Portuguese public listed companies with
these recommendations on their economic performance, no conclusive general result has been
possible to establish (since contradictory effects have actually been prodeuces according to
the different sets of recommendations at stake), although a clear positive correlation has been
found between the compliance with rules on the structure and functioning of the board of
directors (in particularly, its executive commission) and the expected annual returns of the
corporation.
The Formation and Maintenance of Capital
The approach of Portuguese corporate law to issues of capital formation and maintenance
stays in line with the traditional mandatory approach of Continental legal systems. 98
Concerning the formation of the capital, contributions of shareholders may only consist either
in cash or in kind99 in the latter case, contributions must consist in pledged assets (art. 20o, a)
CSC) and their value must be set out by an independent expert (art. 28o CSC). 100 This
requirement is intended to safeguard the legal capital from the danger of dilution, which is
96Regulation CMVM no 7/2001 (published in the Official Journal, IIaserie, of 28.12.2001). This regulation has
been later on revised and republished by the Regulation CMVM no 11/2003 (published in the Official Journal,
IIaserie, 2.12.2003).
97This report, which may be presented either as a chapter of annual management report of the corporation in
question or as an appendix to the said report, has also to mention expressly apart from the form and level of
observance of the recommendations during the financial year at stake a broad set of issues, such as the
organisation charts relating to the internal structure of the corporation, the number and remuneration of the
members of its Board of Directors (namely, distinguishing between executive and non-executive administrators,
as well as between single or multicorporate administrators), the evolution of the price of its shares (indicating
the relevant events related to the same, v.g., the issuing of shares or other securities conferring rights of
subscription or acquisition of shares, announcements related to results and the payment of dividends), or the
policy adopted for the distribution of dividends and for plans of allotment of stock options during the financial
year.

98CASTRO, Carlos, AlgunsApontamentosobre a Realizaco e Conservaco do Capital Social das

SociedadesAnnimas e por Quotas, in: XII Direito e Justica, 292-321

99The law expressly prohibits contributions in the form of work or supply services (art. 277o, no 1 CSC).

deemed to be brought about by contributions in services or by the overvaluation of

contributions in kind. However, one may wonder as to whether this system is not
unnecessarily rigid and burdensome: as a matter of fact, apart from being expensive,
valuations of contributions in kind seem to overshoot from the point of view of the
underlying rationale of the law (namely, where contribution consists in assets for which there
is a market price, v.g., securities traded in the stock exchange); likewise, the absolute refusal
of contributions in services may prevent corporations whose business consists precisely of
non-material assets to recognise value of research and innovation services (namely, start-up
corporations, high-tech business corporations).101
Once that the aggregate amount of assets corresponding to the legal capital has been
identified and formed, the law provided several legal mechanisms aiming to preserve it from
distributions to shareholders, such as rules on distributions of dividends. 102on repurchase of
corporations own shares, and the like. At present, a particularly important mechanism is the
one imposing a sort of mandatory minimum ratio between the value of net assets of the
corporation and the nominal value of its share capital: in case that the former value goes
under 50% of the latter value, the management organs of the corporation are obliged call for a
general meeting of shareholders in order to decide alternatively the dissolution of the
company, the reduction of the capital or the realization of new contributions which restore the
corporate net assets at least to an amount corresponding to 2/3 of the nominal capital (art. 35o
CSC). Although similar protective devices are provided for in the majority of other European
laws.103its importance in the national context steams from the paradoxical fact that only
recently this legal provision of the Code of 1986 has actuallybecome into force, precisely at a
100The real value of the contribution (in cash or kind) of each member should be at least equal to the nominal
value of the subscribed stock: therefore, shares without par value or under par value are prohibited

101In contrast to non-cash contributions, the national legislator provided a rather flexible system of payment
for contributions in cash: firstly, contributions may be deferred up to an amount of 70% of the nominal value of
the shares and for up to five years following the date of the deed of incorporation (arts. 277o, no 2, 285o, no 1
CSC); secondly, the payment of the issued shares must be deposited into a banking account opened in the name
of the company, prior to incorporation, but the law allows that such deposit may be replaced validly by a mere
personal declaration of shareholders (arts. 277o, no 3 CSC); and thirdly, it is permitted to the corporation to
withdraw the amounts deposited, after the registry of the company or even the deed of incorporation (art. 277o,
no 4 CSC).

102These rules establish a strict prohibition to return paid up contributions and to distributed non-retained or
hidden earnings (arts. 31o to 34oCSC)

103 See art. 2447 CodiceCivile in Italy, 92 Aktiengesetz in Germany,

moment where the number of insolvent and bankrupt companies is presently the highest in
the last decades.104
1. The Increase and Reduction of Capital
A capital increase (aumento de capital), requiring the specification in the articles of
association and thus its amendment, is approved by an express resolution of the General
Meeting of shareholders with a qualified or supermajority (corresponding to at least 2/3 of the
votes expressed), but the articles may delegate that decision to the Board of Directors (art.
456o CSC)105The exercise of this power, however, is subordinated to certain conditions,
which are applicable both to listed and unlisted corporations: thus, the power of directors to
increase the share capital at their discretion is confined to a maximum nominal amount
prescribed by the articles, is only valid for a certain, although generous, period (not
exceeding five years), and requires the elaboration by directors of a proposal of issue of the
new shares which is submitted to the auditing board (art. 456o, n2 and 3 CSC) 106The doctrine
is divided as to the question whether this power of directors includes or not the right to decide
to introduce limitations or even exclusion on pre-emptive rights of shareholders 107 On the
other hand, in order to protect existing shareholders, the law consecrates in their favour a preemptive right to subscribe the new shares issued (direito de preferncia: art. 458o CSC).
This pre-emptive right may is mandatory (art. 460o, no 1 CSC)and may be only waived in
two exceptional cases: either in situations where the interests of the corporation requires
shareholders subscription rights to be forfeited or restricted or when the new shares are to be
paid up by non-cash contributions (art. 460o, no 2 CSC)

104CORDEIRO, Antnio, Da Perda de Metade do Capital Social das SociedadesComerciais, in: 56 Revista da
Ordem dos Advogados (1996), 157-178.

105Since the power to decide upon an increase of capital may be delegated to the managers or directors of the
corporation by an express provision of the articles or a subsequent modification thereof, one may wonder if this
actually amounts to a recognition on Portuguese law of the concept of authorized capital (in opposition to the
issued capital): in fact, the authorized capital is traditionally defined as the limit up to which subscriptions of the
share capital can be received, without the need for any statutes amendment.

106There is no limit regarding the number of increases operated under this permission nor (contrary to what
happens in German law) to the nominal amount of the authorized capital: the law simply states an obligation of
the articles to stipulate expressly the maximum amount of each increase and the classes of rights attributed to
the shares issued.

107Problemas do Direito das Sociedades, 235-255, Almedina, Coimbra, 2002

Whatever may be the case, and irrespectively of being a listed or unlisted corporation, the law
requires the elaboration of a written proposal containing the justification for the waiving of
pre-emptive rights of shareholders and the issuing price of new shares and its underlying
criteria.108
An alteration of the legal capital by way of a capital reduction which is also subjected to
similar formalities (General Meeting approval by qualified majority, public instrument,
commercial register) is possible for two main purposes (art. 94o CSC) 109to eliminate
excessive amount of share capital (reducoporexcesso de capital,riduzione di
capitaleesuberante, reduccin con devolucin de aportaciones, reduction-distribution) or
to cover losses (riduzione del capitale per perdite, reduccinporefecto de perdidas,
reduction-assainissement)
In general, the legal system seems to be balanced insofar as the protection of creditors is
being achieved through different ways: while in the former case, the position of corporate
creditors is directly ensured by the mandatory requirement of a previous judicial
authorization (which may not be granted if the net assets of the corporation do not exceed
20% of the new nominal share capital: art. 95o, nos1 and 2 CSC), in the latter case creditors
may still obtain satisfaction by asking the court to prevent any future distribution of dividends
to shareholders unless the corporate debtor provide them with an appropriate security for
their claims (art. 95o, no 4, a) CSC).110
2. Loan Capital

108the Portuguese law provides no express guidelines whatsoever in relation to the determination of the issuing
price of the new shares: this omission may jeopardise the protection of minority shareholders since the issuing
price shall be fixed ultimately according to the discretional understanding of controlling shareholders and
directors.
109According to its technical methods, a capital reduction may be carried out alternatively through the
diminution of the nominal value of the issued shares, the diminution of the number of existing shares, or by the
extinction of corporations own shares (art. 94o, no 1, a) CSC). The latter technique, which is provided for by
art. 463o CSC, is particularly important since it may be use as a swift legal instrument for operations of share
buy-back by corporations.

110From a theoretical point of view, when the capital is reduced because of corporate losses, no assets are
directly transferred to shareholders and the operation is usually intended to adjust the nominal value of capital of
the corporation to the real value of its present net assets

A good deal of Portuguese corporations find it necessary to raise funds, not only in the form
of internal equities (share capital subscribed by shareholders), but also by looking at external
forms of financing, that is, debt or loan capital provided by lenders.111
3. Bonds
The most relevant instrument of debt capital is undoubtedly the issuing of bonds
(obrigaces)112, which is characteristic of stock corporations (arts. 348o to 372o-B CSC).113
Under Portuguese law, the requirements for the issuing are the following: firstly, the capacity
to issue bonds is only granted to corporations which were incorporated at two or more years
and which share capital has been entirely paid-up by shareholders (art. 348o, nos2 and 3
CSC)114secondly, the value of bonds issued may not exceed the amount of the net worth of
paid-up capital as shown by the most recent balance sheet approved by the general meeting
(art. 349o, no 1 CSC)115
unless the articles of association entrusts expressly the Board of Management or Directors to
decide so, bond issuing must be approved by the shareholders by simple majority of the votes
cast (art. 350o CSC)116. Since there is no legal numerusclausus regarding the categories
orclasses of bonds (art. 360o C), there is a wide variety of bonds and bondholders in the
111Although there is a considerable controversy amongst financial economists and lawyers about the
comparative advantage of equity and debt on financing the corporation, some writers claimed that the leverage
actually increases the quality of business decisions, since directors of publicly-held corporations are often more
likely to retain and waste corporate earnings instead of having to pay an optimal level of dividends

112Technically, every document attesting indebtedness by a corporation is called a debenture (obrigaco)

from a civil and commercial point of view, v.g., a loan raised to a bank or to an individual by means of bill of
exchange or any other negotiable instrument: bonds are debenture stock in the strict sense that they evidence a
borrowed capital consolidated into one mass of lenders.

113But which is also admissible to the limited liability company: see Decree-Law no 160/87, of 3.4. On the
topic

114This limit is not applicable to corporations which are controlled (or to issuing that is guaranteed) by the
State or a public entity (art. 348o, no 2 CSC) or which fall under the supervision of the Bank of Portugal, such
as banks, investment companies, leasing companies, factoring companies, and so on

115However, this quantitative ceiling which is designed to prevent a disproportion between the net assets of
the corporation and its level of indebtedness may be overcome by a joint authorization given by the Ministries
of Justice and of Finance in certain exceptional cases, namely, for particular reasons justified by the national
interest, whenever the financial situation of the corporation allows it, or in the specific situation of bonds with
variable or supplementary interest indexed to corporate profits (art. 349o, no 3 CSC)

market, ranging from ordinary bonds (granting a right to a fixed rate of interest and to
reimbursement of its nominal value on maturity) to indexed bonds (with a variable or
supplementary interest defined according to the corporate profits), bonds issued at a premium
(granting the holder with a right to a bonus at the date of bond issuing or extinction),
convertible bonds and bonds with warrant (granting the holder with a right to conversion into,
or to subscription of, one or more shares), self-bonds (acquired by the corporation itself),
uncertificate bonds (electronically recorded), banking bonds (issued by banks and investment
companies), and so on.
SPAIN
Legal Framework For Foreign Portfolio Investments in Spain
Openness to Foreign Investment
There have been no significant changes in Spain's regulations for investment and foreign
exchange under either the Socialist Party (PSOE) government that took office in March 2004
and was re-elected in March 2008. Spanish law permits foreign investment of up to 100
percent of equity, and capital movements are completely liberalized. During the first nine
months of 2008, gross foreign direct investment in Spain was 33.2 billion euros, a 250
percent increase over the first nine months of 2007 (9.21 billion euros). 117The UK was
responsible for 40 percent of the investment, Germany 24 percent, the Netherlands 14.3
percent and the U.S. only 0.75 percent. The autonomous community of Madrid received 84.2
percent of the investment and the region of Catalonia 6.8 percent. Companies invested
especially in production and distribution of electricity, real estate, financial services,
construction, manufacturing and chemicals. American companies are relatively more
important portfolio investors in 2007 about 6.4 percent of Spanish negotiable instruments
held by foreigners were held by Americans. Spain no longer has a big wage competitiveness
advantage over other major EU economies. The country will therefore have to embark on
116The question of the competent organ to decide the bond issuing is somewhat controversial in Portuguese
doctrine. As far as the issuing of bonds in general is concerned, the law attributes a primary competence to
shareholders meeting unless otherwise expressly provided for by the corporate statutes: according to some
authors, however, in the silence of the articles of association, shareholders are allowed to delegate to directors
the power to decide about the if and how of issuing of certain classes of bonds, such as bonds with a fixed
interest

1172012 Investment Climate Statement, BUREAU OF ECONOMIC AND BUSINESS

AFFAIRS, June 2012, available at http://www.state.gov/e/eb/rls/othr/ics/2012/191235.htm

additional structural reform if it wants to maintain previous years high levels of foreign
investment.
In April 1999, the adoption of royal decree 664/1999 eliminated the need for government
authorization of any investments save those in activities "directly related to national defense,"
such as arms production.The decree abolished previous authorization requirements on
investments in other sectors deemed of strategic interest, such as communications and
transportation. It also removed all forms of portfolio authorization and established free
movement of capital into Spain as well as Spanish capital out of the country. As a result,
Spanish law now conforms to the multi-disciplinary EU Directive 88/361, part of which
prohibits all restrictions of capital movements between member states as well as between
such states and other countries, and which classifies investors according to residence rather
than nationality.118
Registration requirements are simple and straightforward, and apply to foreign and domestic
investments equally. They aim to verify the purpose of the investment, and do not block any
investment.
Spain's privatization process is slowing down because the government has already sold off
most of the leading state-owned companies. From 1996 to 2007, the government sold its
stakes in 59 companies. U.S. companies have successfully participated in several purchases.
In 2004 the government began the privatization of the railroad system. Effective January 1,
2005, the GOS dissolved the National Rail Network (RENFE) and formed two new
companies, ADIF and RENFE-Operadora, both of which remain under state control. From
1996 to 2007, the GOS restructured the shipbuilding company Izar, separating the civil (still
called Izar) and military sectors (Navantia). The chairman of the state-owned Industrial
Holding Company has recently stated that the Spanish government has no plans to sell its 5.2
percent stake in Iberia until at least 2010. Another deferred privatization is that of the 10
percent government stake in the Spanish electricity grid, Red Electrica Espanola, which is
expected to take place in 2009.119
The Spanish government has liberalized the energy, electricity, and telecommunications
markets to varying degrees. These efforts have opened Spain's economy to new investment,
including by U.S. companies. However, many observers feel these changes have not been
118OECD (2012), OECD Reviews of Investment Policy: Spain 2012, OECD Publishing,
http://dx.doi.org/10.1787/9789264167407- en.

broad enough to fully stimulate the economy. For example, in the telecommunications sector,
many analysts believe that Telefonica's dominant position undermines competition and
innovation. It is frequently difficult for new entrants to gain traction in sectors dominated by
former state-run monopolies such as Telefonica. Moreover, in the energy sector, the
government clearly adheres to the national champion concept, for instance in its successful
effort to ensure that control of electricity giant Endesa remained in Spanish hands, at least
partially

Conversion and Transfer Policies

There are no controls on capital flows. In February 1992, royal decree 1816/1991 provided
complete freedom of action in financial transactions between residents and non-residents of
Spain. Previous requirements for prior clearance of technology transfer and technical
assistance agreements were eliminated.120The liberal provisions of this law apply to
payments, receipts, and transfers generated by foreign investments in Spain. Capital controls
on the transfer of funds outside of the country were abolished in 1991. Remittances of profits,
debt service, capital gains and royalties from intellectual property can all be effected at
market rates using commercial banks.
Expropriation and Compensation
Spanish legislation sets up a series of safeguards that virtually prohibit the nationalization or
expropriation of foreign investment. No expropriation or nationalization of foreign
investment has taken place in recent years. There are no outstanding investment disputes
between the United States and Spain. However, property owners in the autonomous
community (region) of Valencia complained in 2007 that regional authorities unfairly took
land or paid inadequate compensation in eminent domain cases for commercial development.
Dispute Settlement
119Michael Schrder, The New Capital Markets in Central and Eastern Europe, available at
https://books.google.co.in/books?
id=DeSty2XOWW8C&pg=PA299&lpg=PA299&dq=slovenia+FPI&source=bl&ots=SvR7Q
N61jK&sig=K2dqP2sYWbV4LlUn4fhu-nIQVKk&hl=en&sa=X =slovenia%20FPI&f=false
120OECD
Economic
Surveys
Spain,
April
http://www.oecd.org/eco/surveys/Overview_Spain.pdf

2013,

available

at

Legislation establishes mechanisms to solve disputes if they arise. The judicial system is open
and usually transparent, although slow-moving at times. The Spanish judicial system is
independent of the executive; therefore, the government is obliged to follow court rulings.
Judges are in charge of prosecution and criminal investigation, which permits greater
independence. The Spanish prosecution system allows for successive appeals to a higher
Court of Justice. The European Court of Justice can hear the final appeal. In addition, the
Government of Spain abides by rulings of the International Court of Justice at The Hague.
Spain is a member of both the International Center for the Settlement of Investment Disputes
(ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of
Foreign Arbitral Awards.
Contractual disputes between American individuals/companies and Spanish entities are
normally handled appropriately.121There is no U.S.-Spain agreement on the mutual
recognition of judgments, so U.S. citizens seeking to execute American court judgments in
Spain must follow Spanish law, in this instance a complicated procedure known as the
exequator process. In light of the Embassys past experience in attempting to assist
American citizen claimants with the process, the Embassy recommends that Americans who
conclude contracts with Spanish entities specifying the U.S. as the venue for adjudicating
disputes also come to an agreement regarding how a possible U.S. judgment will be executed
in Spain.
Spain has a fair and transparent bankruptcy regime. In June 2003, the Spanish Parliament
approved a new, modern bankruptcy law that entered into force on September 1, 2004.

Performance Requirements and Incentives

Performance requirements are not used to determine the eligibility or level of incentives
granted to investors. A range of investment incentives exist in Spain, and they are provided
according to the authorities granting incentives and the type and purpose of the
incentives.Authorities that provide incentives in Spain:
1. The European Union:

121OECD
Economic
Surveys
Spain,
April
http://www.oecd.org/eco/surveys/Overview_Spain.pdf

2013,

available

at

The European Union provides incentives in the form of subsidies in general development
programs such as FEDER and F.S.E. FEOGA Guarantee. They also provide programs to
target specific sectors under the EU Sixth Framework Programme. The Government of Spain
manages these incentives locally. However, many benefits from EU-sponsored programs are
limited to companies located in the European Union. These incentives will become less
financially significant over the coming years as Spain's increasing wealth and EU
enlargement will lead to a smaller share for Spain of the EU's general development
programs.122
2. The Central Government:
a. The central government grants incentives out of its annual budget. Usually, these incentives
match EU financing. Central government incentive programs are easily available for direct
investment plans. The Ministry of Economy and Finance and Ministry of Industry, Tourism
and Commerce play active roles in granting the incentives.
b. The Foreign Investment Department, under the Ministry of Industry, Tourism and Trade,
counsels new market investors in the application for government incentives. The Ministry of
Industry's sector-related departments negotiate directly with the old market investors to
inform them of incentives available for new investments.
3. The Regional Governments:
The 17 regional governments, called Autonomous Communities, also maintain specific
programs to attract investment, which are often designed to complement central government
incentives.
4. Municipalities:
a. Municipal corporations offer incentives to direct investment by facilitating infrastructure
needs, granting licenses, and allowing for the operation and transaction of permits. Usually
they are designed to help ease the initial operations of direct investment.
b. Generally, the regional governments are responsible for the management of each type of
investment. This provides a benefit to investors as each autonomous community has a
specific interest in attracting investment that enhances its economy.
1222012 Investment Climate Statement, BUREAU OF ECONOMIC AND BUSINESS
AFFAIRS, June 2012, available at http://www.state.gov/e/eb/rls/othr/ics/2012/191235.htm

c. Types of incentives available:

Financial subsidies

Exemption from certain taxes

Preferential access to official credit

Reduction of burdens, with social security discounts to companies

Bonuses for acquisition of certain material

Customs exemption for certain imported goods

Real estate grants, and gratuitous or favorable land grants

Guarantees granted in credit operations

Loans with low interest, long maturities, and grace periods

Guarantee of dividends

Professional training and qualification

Indirect aid by means of supplying infrastructure facilities (accesses, services,

communications, etc.)

d. Incentives from national, regional or municipal governments and the EU are granted to
Spanish and foreign companies alike without discrimination.
e. Spain is in compliance with its WTO TRIMS [Trade-Related Investment Measures]
obligation.

Right to Private Ownership and Establishment

The Constitution protects private ownership. Spanish law establishes clear rights to private
ownership, and foreign firms receive the same legal treatment as Spanish companies.There is
no discrimination against public or private firms with respect to local access to markets,
credit, licenses and supplies. American construction companies note, however, that they have
not been able to win public sector construction contracts. They have, however, won private
sector construction contracts.

Protection of Property Rights:

Spanish law protects property rights, with enforcement carried out at the administrative and
judicial levels. Any decision by the Administration pertaining to property rights can be
appealed first at the administrative level and then at the judicial level, which has three levels
of court appeals. Property protection is effective in Spain, although the system is slow. The
Spanish legal system fully recognizes property rights and facilitates their acquisition and
disposition. Mortgages are common in Spain.
Spanish patent, copyright, and trademark laws all approximate or exceed EU levels of
intellectual property protection. Spain is a party to the Paris Convention, Bern Convention,
the Madrid Accord on Trademarks, and the Universal Copyright Conventions. Spain has
ratified the World Intellectual Property Organization's (WIPO) Copyright Treaty (WCT) and
the WIPO Phonograms and Performances Treaty (WPPT), the so-called Internet treaties. In
2006, Spain passed legislation implementing the EU Copyright Directive, thereby also
making the Internet treaties part of Spanish law. The GOS unveiled an anti-piracy action plan
in April, 2005. However, while law enforcement agencies have effectively combated street
piracy, internet piracy has becoming a rapidly growing concern for copyright-based
businesses. Rights-holders organizations are concerned about whether the GOS will allow
their members to use technological protection measures for consumer products like DVDs
and CDs. Internet Service Provider (ISP) and rights-holder groups, with the governments
support and encouragement, continue to attempt to negotiate an agreement on what
administrative procedures should exist to curb and punish illegal peer-to-peer downloads of
copyrighted material. Content providers are currently required to present difficult-to-obtain
judicial orders to ISPs in order to get the ISPs to suspend service to illegal downloaders.
Moreover, a 2006 circular issued by the Prosecutor Generals Office for judges and
prosecutors stated that peer-to-peer downloading of protected material should not be
prosecuted as a criminal offense unless a commercial profit motive can be established. A
number of legal obstacles also impede copyright holders from obtaining redress via civil
litigation. The Internet presents the most problematic area in terms of respect for intellectual
property rights in Spain.Public and private sector enforcement actions (especially private
sector initiatives) using Spain's patent, copyright and trademark legal framework have
increased. Industry groups praise police enforcement actions; their enforcement concerns
have to do with the judiciary, not Spains police forces. Despite enforcement efforts, piracy
remains a significant problem. Industry sources estimate that illegal CDs constitute 30

percent of the Spanish market, with pirated versions of new releases approaching 50 percent.
Pirated software, videogames and DVDs are also sold widely.
a. Patents.
A non-renewable 20-year period for working patents is available if the patent is used within
the first three years. Spain permits both product and process patents.
Spain has ratified the 1973 Munich European Patent Convention allowing Spain to be
designated in a European patent application. European patents are administered by the
European Patent Office, based in Munich (Germany).

b. Copyrights.
The law extends copyright protection to all literary, artistic or scientific creations, including
computer software. Spain and the United States are members of the Universal Copyright
Convention.

c. Trademarks.
There are various procedures to register a trademark in Spain. The Spanish Office of Patents
and Trademarks oversees protection for national trademarks. Trademarks registered in the
Industrial Property Registry receive protection for a 10-year period from the date of
application, which may be renewed. Protection is not granted for generic names, geographic
names, those that violate Spanish customs or other inappropriate trademarks. Applicants must
designate the countries where they wish to obtain protection. The World International
Property Organization (WIPO, headquartered in Geneva) oversees an international system of
registration. However, this system only applies to U.S. firms with an establishment in a
country that is a party of the Agreement or the Protocol.
Transparency of Regulatory System
Spain modernized its commercial laws and regulations following its 1986 entry into the EU.
Its local regulatory framework compares favorably with other major European countries.
Bureaucratic procedures have been streamlined and much red tape has been eliminated,

though permitting and licensing processes can still suffer delays. Efficacy of regulation at the
regional level is uneven.
Quasi-independent regulatory bodies exist in several sectors; however, they are for the most
part still finding their role and fighting to assert their independence. Making the transition
from state-owned monopolies to promoting full and open competition has been a slow, but
steady, process.
The comment process for proposed rule-making changes is not as formal as in the United
States. Spain does not have an official comment procedure for government regulations
similar to what exists in the U.S. system. Most new laws and regulations are published as
drafts before they go into force, but by the time they are published, there are often limited
opportunities to change them. Government officials do seek out stakeholder comments before
finalizing significant regulations, but the comment system is geared towards collecting input
from officially recognized industry sector associations or consumer organizations. The
general public will not necessarily be aware of a regulation until it is finalized and published.
Efficient Capital Markets and Portfolio Investment
The convergence of monetary policy following the adoption of the euro has led to a
significant lowering of interest rates in recent years; however, the recent downgrade of
Spanish sovereign debt may impact on public financing costs. Foreign investors do not face
discrimination when seeking local financing for projects. There is a large range of credit
instruments available through Spanish and international financial institutions. Many large
Spanish companies rely on cross-holding arrangements and ownership stakes by banks rather
than pure loans. However, these arrangements do not act to restrict foreign ownership.
Several of the largest Spanish companies that engage in this practice are also traded publicly
in the U.S. There is a significant amount of portfolio, investment in Spain, including by
American entities. Accumulated foreign investment in Spanish negotiable securities at the
end of 2007 amounted to USD 1,077.3 billion, an 18.4 percent increase over the previous
year. 60.2 percent of this amount was in fixed rate securities, 39.3 percent in listed shares and
0.5 percent in shares of investment funds. Investors were mostly from EU countries (86
percent) and the United States (11 percent.)
Corporate scandals in the U.S. and Europe, further integration of European capital markets,
and efforts to make Spain a more attractive destination for foreign investment have led to
several new initiatives to improve the transparency of capital markets and corporate

governance. Spanish business organizations and private economic think tanks are pro-active
on corporate governance issues. In 2003 and 2004, Spanish business leaders created a
progressive code of business practices and ethics. In 2004, Spanish regulatory agencies and
lawmakers codified the business codes and required Spain's listed companies to follow a
rigorous set of corporate governance and transparency rules. Spain's government views
corporate governance rules as a means of ameliorating the effects of concentrated economic
power and preventing a major corporate scandal along the lines of Enron or Parmalat.
Due to extensive cross-ownership within a small universe of dominant companies, Spanish
corporations have traditionally not had truly independent board members. This situation is
slowly changing, with several leading Spanish companies introducing independent members
to their boards in an effort to improve transparency. Hostile takeover rules and the threat of a
government "Golden Share" veto have been used to prevent takeovers of companies. While
surfacing on occasion in purely Spanish transactions, these defenses are most often used
when the acquiring company is partially or fully owned by other governments, with the
Spanish government and securities regulators acting to prevent what they interpret as another
government taking over a privatized Spanish company. A European court of Justice decision
has ruled such practices illegal. In 2006, parliament passed legislation abolishing the Golden
Share whereby the government had to approve the sale of more than 10 percent of the shares
in strategically important companies such as Telefonica,.
The domestic Spanish banking system is regarded as healthy, with four institutions (banks
and savings banks) dominating the market. Spanish regulators have recently focused attention
on these banks' exposure to financial instruments based on U.S. sub-prime loans, and have
required provisions against this exposure. The Spanish financial systems exposure to such
instruments is relatively low. In 2007, new Spanish gross investment abroad was USD 148.5
billion, showing an 81 percent increase from the 2006 annual level. During the first nine
months of 2008, Spanish authorities recorded USD 50.6 billion in new foreign direct
investment, an increase of more than 300 percent compared with investment in the first nine
months of 2007. (Note: Detailed statistics on Spanish overseas investments and foreign
investments in Spain for 2008 will be available in March of 2009.) The increase in Spanish
overseas investment reflects more attractive opportunities for Spanish companies, especially
in the U.S. market in the renewable energy and the construction sectors.
Political Violence

The Government of Spain is involved in a long-running campaign against Basque Fatherland

and Liberty (ETA), a terrorist organization founded in 1959 and dedicated to promoting
Basque independence. ETA has traditionally targeted Spanish government officials, members
of the military and security forces, journalists, and members of the Popular Party and
Socialist Party for assassination. More broadly, symbolic targets include representatives of
the Spanish state, security forces, and prominent industrialists. U.S. citizens and U.S.
companies have not been ETA targets. ETAs main methods are car bombs and assassinations
with firearms. ETA has killed over 40 persons since January 2000 and about 850 persons
since its campaign began in 1968. It appears likely that ETA will continue to commit violent
acts. In December 2008, suspected ETA gunmen killed a Basque businessman whose
construction company is involved in the construction of a high-speed rail linking the Basque
cities of Bilbao, San Sebastian, and Vitoria to Madrid. ETA operatives extort "revolutionary
taxes" from businesspersons and professionals living in the Basque region, sometimes
bombing their property to intimidate them into paying extortion demands. ETA supporters
also engage in street violence and vandalism against government facilities, economic targets
(particularly banks), and the homes and property of persons opposed to ETA's cause. In
recent years, the Spanish government has secured greater security cooperation from French
authorities on the ETA threat. Joint Spanish-French operations in November and December
2008 resulted in the capture of the groups two military chiefs.
On March 11, 2004, Islamic terrorists killed 191 people on commuter trains headed for
Madrid's central Atocha train station. Several foreign nationals died in the attack, although
there were no American citizen casualties. Islamic extremists remain active in Spain and if
there are other attacks, U.S. citizens/property could be hurt/damaged, although, so far, U.S.
citizens and companies in Spain have not been direct Islamic terrorist targets.
Corruption
Giving or accepting a bribe is a criminal act. Under the Spanish civil code, section 1255,
corporations and individuals are prohibited from deducting bribes from domestic tax
computations.
Spain has a wide variety of laws, regulations, and penalties dealing with corruption. The legal
regime has both civil and criminal sanctions for corruption, bribery, financial malfeasance,
etc. The Spanish legal regime is hampered, however, by the fact that only natural persons
(i.e., individuals), as opposed to legal persons (i.e., companies), can be held criminally liable

for the actions of a company. Furthermore, civil and administrative proceedings cannot begin
until there is a finding of criminal liability against a natural person. Although the Ministry of
Justice has initiated an amendment process to provide for sanctions of legal persons, it has
not yet become law.
On November 29, 2006 parliament passed a tough law against tax evasion that is designed, in
part, to combat corruption. The government also issued two regulations imposing new
requirements on banks and financial institutions to fight money laundering. Banks and
financial institutions are also gearing up to meet stiff new EU regulations on money
laundering.
Spain is a signatory of the OECD Convention on Combating Bribery, and Spanish officials
attach importance to combating corruption. The government is working to amend domestic
law to make the Convention a more useful investigative and prosecutorial tool.
The General State Prosecutor is authorized to investigate and prosecute corruption cases
involving funds in excess of roughly USD $500,000. The Office of the Anti-Corruption
Prosecutor, a subordinate unit of the General State Prosecutor, has 15-20 prosecutors in
Madrid, Barcelona, and Valencia who are tasked with investigating and prosecuting domestic
and international bribery allegations. There is also the "AudienciaNacional," a corps of
magistrates whose attributes include broad discretion to investigate and prosecute alleged
instances of Spanish businesspeople bribing foreign officials.Spain enforces anti-corruption
laws on a generally uniform basis. Public officials are probably subjected to more scrutiny
than private individuals, but several wealthy and well-connected business executives have
been successfully prosecuted for corruption. There is no obvious bias for or against foreign
investors. U.S. firms have not identified corruption as an obstacle to investment in
Spain.Conversations with representatives of the Spanish legal community indicate that the
Convention is increasingly being taken into account in the drafting of contracts. Spanish
companies, both domestic and multinational, are insisting that clauses protecting them against
requests for bribes be inserted into business contracts. Tax evasion, particularly by those who
work in cash-based sectors has reportedly been heavy. During 2008, the AudienciaNacional
was investigating approximately 250 individuals and companies for alleged tax evasion via
Liechtenstein.

OPIC and Other Investment Insurance Programs

As Spain is a member of the European Union, OPIC insurance is not offered. Various EU
directives, as adopted into Spanish law, adequately protect the rights of foreign investors.
Spain is a member of the World Bank's Multilateral Investment Guarantee Agency (MIGA).
Labor
Employment estimates for 2008 show that there are about 23 million Spaniards in the work
force. This figure is expected to climb to 23.5 million for 2009. However, the economic crisis
is having a significant impact on unemployment, which increased from 8 percent in third
quarter of 2007 to 11.313 percent in the third quarter of 2008 and is expected to continue to
rise throughout 2009. Unemployment for women continues to be higher than the male
average, at 12.7 percent compared to 10.3 percent, although in recent quarters the disparity
has been gradually decreasing. Spain faces a shortage of high-tech workers for its IT sector
and of unskilled workers for its fishing and agricultural industries.
Labor market reforms in 1994 and 1997 eased Spain's well-known labor market rigidities but
did not fundamentally change the difficult labor situation. The government recognizes that
labor market reform is essential to increasing productivity, which Spain needs to do as it faces
competition from lower-wage new EU member countries. To encourage employers to move
people from short-term contracts to regular employment status, in June 2006 the government
approved a package of measures designed to provide incentives to employers to hire full-time
workers. The initial results of these measures show that the number of temporary contracts
decreased by 300,000 and more than a million new full-time contracts were signed, but one
third of all employed Spaniards are still classified as temporary hires. Collective bargaining
reform should be part of this effort, but so far this has not happened. In early 2005, the
Spanish government approved indexing the minimum wage to inflation. The unions
supported this position and employers accepted it, albeit unenthusiastically, with some
employer representatives questioning the decision.
Collective bargaining is widespread in both the private and public sectors. Sixty percent of
the working population is covered by collective bargaining agreements, although only a
minority (generally estimated to be about 10 percent) are actually union members. Under the
Spanish system, workers elect delegates to represent them before management every four
years. If a certain proportion of those delegates is union-affiliated, those unions form part of
the workers' committees. Large employers generally have individual collective agreements.

In industries characterized by smaller companies, collective agreements are often industrywide or regional.
The constitution guarantees the right to strike and it has been interpreted to include the right
to call general strikes to protest government policy.
Foreign-Trade Zones/Free Ports
Both on the mainland and islands there are numerous free trade zones (in most Spanish
airports and seaports) where manufacturing, processing, sorting, packaging, exhibiting,
sampling and other commercial operations may be undertaken free of any Spanish duties or
taxes. The largest free trade zones are in Barcelona, Cadiz and Vigo. Others vary in size from
a simple warehouse to several square kilometers. Spanish customs legislation allows for
companies to have their own free trade areas. Duties and taxes are payable only on those
items imported for use in Spain. These companies have to abide by Spanish labor laws.
SLOVAKIA
Introduction
Foreign capital movements take place mostly in the form of direct foreign investment,
portfolio investment, bank loans, and long-term credits. The most effective form of foreign
capital inow is direct foreign investment (DFI). This form of investment allows investors to
acquire stakes in the capital of specic business organizations in the host costmary. Unlike
portfolio investment, direct foreign investment allows direct participation in the production;
business or services sectors of the economy Concerned Direct foreign investment should
represent the key form of foreign capital inow into the Slovak economy. It should create a
basis for the modernization of production; transfer of new technology, know-how, effective
competition, and for the closer integration of the country's economy into the international
division of labor. In practice, the decit in the balance of payments current account can only
be nanced in the capital account, rst and foremost from net capital inows or foreign
exchange reserves. The most favorable source of long-term capital is direct foreign
investment. Such investment is usually made for the modernization and comprehensive
enhancement of tangible xed assets in the country, without increasing the level of national
debt, or the amount of interest payable. Direct foreign investment and its current trends in
Slovakia were analyzed in full detail on the pages of BIATEC. The least effective form of

foreign investment is the inow of capital in the form of foreign loans. 123 Foreign loans are
resources that must be repaid (together with interest) within a xed time limit and they
represent, unless they are correctly invested, e.g. in the promotion of industrial production, a
rather ineffective form of investment.
Laws/Regulations of FPI
In 2011, the center-right government approved a new Act on Investment Incentives - number
231/2011. The legislation regulates the conditions under which investment incentives are
made available to foreign and domestic investors and specifies a preference for tax breaks
and tax holidays over direct cash support to investors.

124

The period for potential tax benefits

increased from five to 10 years, and investments in specifics regions with high
unemployment or in higher value-added industries received priority. While many of these
provisions remain in effect, the government amended the investment incentives procedures in
2013 Act 70-2013. The new law has expanded the number of applicants, which might be
eligible for such an incentive by decreasing the value of obligatory investments. The law also
focuses on investment support with high added value. On the other hand, it provides stricter
rules when it comes to the creation and sustainability of new jobs and education requirements
towards employees.
Slovakia has no formal performance requirements for establishing, maintaining, or expanding
foreign investments. However, such requirements may be included as conditions of specific
negotiations for property involved in large-scale privatization by direct sale or public auction.
Foreign entities have no obstacles in participating in GOS-financed and/or subsidized
research and development programs and receive equal treatment to that of domestic
entities.125

There are no domestic ownership requirements for telecommunications and

broadcast licenses.
1232014 Investment Climate Statement, BUREAU OF ECONOMIC AND BUSINESS
AFFAIRS, Report June 2014< http://www.state.gov/e/eb/rls/othr/ics/2014/228396.htm>
124RajmundMirdala, Faculty of Economics, Technical University of Koice, Slovakia,

125FERENKOV, S. DUD, T.: Foreign direct investments inflows impact on the

economic growth in the new European Union countries from the Central and Eastern Europe.
In: Journal of Economics, vol. 53, no. 3, 2005, s. 261 272. ISSN 0013-3035

Transparency of the Regulatory System:

Investors have expressed frustration with a general lack of transparency and predictability in
Slovakia. Many have criticized the process for obtaining residency permits for expatriates to
work in Slovakia as difficult and time-consuming, stressing in particular that authorities are
not always consistent in their knowledge or application of regulations. These procedures,
however, do not differ significantly from those of other EU countries. Over time, the
government has eased some restrictions; notably, Slovak authorities no longer require an
apostil on FBI criminal background results. An updated law governing the stay of foreigners,
effective from January 2012, introduced some improvements while changing other
requirements; for instance, applicants must now submit all documents at once, which may
prevent applicants who have not prepared in advance from starting the process within a 90day visit to the Schengen area. Investors have long complained that purchasing land and
obtaining building permits are time-consuming and unpredictable processes.126 However,
improvements, including the web portal www.katasterportal.sk, which enables interested
parties to verify information about land ownership online, have started to ease the process.
The Commercial Code and the 1991 Economic Competition Act govern competition policy in
Slovakia. The Anti-Monopoly Office is responsible for preventing noncompetitive situations.
The Competition Act was amended at the end of 2013, and will provide more flexible rules
for mergers clearance and sets new rules for leniency programs.

127

Another new measure

implemented in 2013 is a financial benefit for private individuals who report cartel
agreements of up to 1% of the fine imposed upon the cartel. The Law on Public Procurement
was changed substantially in 2013. The new Public Procurement law harmonized all
provisions with relevant EU directives on the subject and introduced a more centralized
approach towards general government purchases which are now governed by the Ministry of
Interior. Although government officials believe the new Public Procurement law will result in
substantial savings in government purchases, business stakeholders and NGO activists claim
that the new law brings less transparency and could facilitate potential bid rigging

126 GONDA, V.: European monetary union in the process of globalization of the world
economy. In: Journal of Economics, vol. 54, no. 4, 2006, p. 352367. ISSN 0013-3035.
127KOMAI, J.: The great transformation of Central and Eastern Europe: Success and
disappointment. In: Political economics, 2006, no. 4, ISSN 0032-3233.

agreements.

128

An electronic tendering system, operated by the Public Procurement Office

and the Ministry of Finance that was adopted in 2007 to support the tendering cycle remains
in place. Nevertheless, the transparency and integrity of public tenders remain concerns
which have led to the dismissal of government ministers and to inquiries on the part of the
European Commission129. Lack of transparency in public tenders ranks among the areas of
most concern to foreign investors in Slovakia.
Foreign investors and foreign companies doing business in Slovakia have complained about
poor law enforcement and a lack of transparency in regulatory processes in several
industries.130 A number of regulatory bodies are considered by the business community as less
than fully independent (including the Telecommunication Office and the Authority for
Regulation of Network Industries). Political pressure on regulators in several offices has at
times resulted in changes of leadership to influence the outcome in specific regulatory
adjudications.
In 2011, the Telecommunications Regulatory Authority of the Slovak Republic awarded 10year license fees to the two major Slovak telecommunication operators French Orange and
German T-Com that should reach 63 million USD (T-Com) and 53.7 million USD
(Orange). The Supreme Court is reviewing this decision, due to allegedly inaccurate
calculations on the number of potential customers. The Authority for Regulation of Network
Industries, an independent regulatory body within the Ministry of Economy responsible for
approving prices of electricity, natural gas, and heat for households, has often come under
scrutiny for seemingly politically-biased decisions.
The government has occasionally used emergency legislative procedures in cases affecting
businesses. This practice drastically shortened the public comment period for some proposed
laws and regulations to practically nothing, a measure that various business groups
128 BERTAUT, C. KOLE, L.: What Makes Investors Overweight or Underweight? Explaining International
Appetites for Foreign Equities, 2004. In: Federal Reserve Board Bulletin, No. 90, No. 1 (winter), pp. 19 31.
Portfolio investment - excluding LCFAR (BoP - US dollar) in Slovakia, available at <
http://www.tradingeconomics.com/slovakia/portfolio-investment-excluding-lcfar-bop-us-dollar-wb-data.html>

129IA, J.: Potential risks of European monetary union. In: Journal of Economics, vol. 53,
no. 6, 2005, p. 499-510 ISSN 0013-3035
130LANE, P.R. MILESI-FERRETTI, G.M.: International financial integration. IMFs Third Annual Research
Conference, November 7-8, 2002. Washington.

vigorously protested. One law passed under this shortened legislative procedure was the
controversial strategic companies law introduced in 2009. The law brought about a major
change in bankruptcy and restructuring procedures, allowing the state the right of first refusal
in acquiring distressed companies in certain sectors. The law was drafted, introduced, and
passed in roughly a week, with no formal period for public comment.

131

The strategic

companies law expired at the end of 2010 and was not renewed by the current government.
Another example, from 2008, changed corporate governance rules for companies in regulated
network industries to allow the state to determine utility prices. Again, this highly
controversial legislation was brought to a vote in Parliament and signed into law with
virtually no public comment period.
Another recent example, from 2013, involves an additional amendment to the Public
Procurement Law, when a small amendment to the law was introduced and adopted in just 11
days even though the larger amendment was still under the discussion with relevant
stakeholders.
Right to Private Ownership and Establishment: Foreign and domestic private entities have
the right to establish and own business enterprises and engage in all forms of remunerative
activity in Slovakia. In theory, competitive equality is the standard by which private
enterprises compete with public entities. In addition, businesses are able to contract directly
with foreign entities. Private enterprises are free to establish, acquire, and dispose of business
interests, but all Slovak obligations of liquidated companies must be paid before any
remaining funds are transferred out of Slovakia. Non-residents from EU and OECD member
countries can acquire real estate for business premises. Since January 2004, there are no
restrictions for Slovak residents on the purchase, exchange, and sale of real estate abroad.
Efficient Capital Markets and Portfolio Investment: Money and Banking System, Hostile
Takeovers. Financial market supervision was integrated under the National Bank of Slovakia
in 2006. Under this reform, the Financial Market Authority was dissolved, and all its powers
and responsibilities, including coverage of banking, capital markets, insurance, and pension
supervision, were transferred to the National Bank of Slovakia. Financial Market Supervision
Act No. 747/2004 and the Act on the National Bank of Slovakia No. 566/1992 govern
financial market supervision. Slovakias financial sector felt the pinch of the Eurozone debt
131 MISHKIN, F.: Financial Policies and the Prevention of Financial Crises in Emerging Market Countries.
[NBER Working Paper, No. 8087.] Cambridge, MA: National Bureau of Economic Research. 2001

crisis during 2011; however, effects began to ameliorate during the first six months of 2012.
No Slovak bank reported any significant, direct, adverse effects on its profitability, capital, or
liquidity position as a result of the crisis. The banking sector in Slovakia enjoys robust
liquidity. While most banks operating in Slovakia are subsidiaries of foreign-owned
institutions, they report minimal dependence on their mother companies for financing. As of
2013, the National Bank of Slovakia estimated banking assets over EUR 60 billion. 132 Credit
demand was increasing, especially in the segment of retail banking increasing by 9.5
percent, which also positively influenced the profitability of banking sector. Another positive
trend recorded in the Slovak banking sector was the continuous increase of minimum capital
requirements to 17.5 percent. Increased lending activity, increased minimum capital
requirements, and the ability of banks to generate net interest income, the Slovak banking
sector was resistant to the negative external developments in financial markets and the
slowdown in the Slovak economy.
The Bratislava Stock Exchange (BSSE) is a joint-stock company whose activities are
governed primarily by the Stock Exchange Act No 429/2002. Only Stock Exchange members
and the National Bank of Slovakia are authorized to conclude stock exchange transactions
directly. The BSSE was admitted as an associate member of the Federation of European
Securities Exchanges (FESE) in 2002. BSSE became a full member of FESE on June 1, 2004.
Conclusion
The law for FPI was formed in very old times.
The major component of foreign capital which might affect the countrys balance ofpayments
is foreign portfolio investment. Although this form of investment does notrepresent a
signicant volume for the time being, this may change quickly after the situationon the
Slovak capital market calms down.Paradoxically the recovery of the Slovak capital market is
hardly possible without theparticipation of foreign portfolio investors. At present it is true to
say that the interest of suchinvestors in Slovakia is weakand shows a tendency to decrease
still further.Foreign investors are repelled mainly by- the low degree of political stability in
Slovakia;- low transparency of the market - inadequate access to important information;
setting market ofcial rates with a low information value; absence of legal regulations
132BRADA, J. C.: Foreign investments and perceptions of vulnerability to foreign exchange
crises: Evidence from transition economies. In: Political economics 2004, . 3, ISSN 00323233.

protecting the rights of investors especially those of minority; shareholders unreliable and
inadequately market regulation; extremely low level of liquidity with considerably restricted
possibilities for portfolio; investment; non-transparent privatisation with consequent
inaccuracy in market prices;With regard to the new political climate in Slovakia it is possible
to expect gradualrecovery.
Since 1998 the NBS has applied a new method for the collection of data in Slovakia, the
method applied by the NBS can be regarded as appropriate.In the future especially if the
situation on the local capital market changes signicantly it will be necessary to monitor
portfolio investments in Slovakia. It will be necessary to emphasis the need for discipline in
the area of reporting and toconsider the possibility of imposing penalties if the reporting
requirement is not met especially for the stand-up period reserved for the creation of a highquality system for thecollection and processing of PI in Slovakia for the needs of the balance
of payments. It will be necessary to check whether double reporting is made by some
respondents and tond solutions for its elimination.For the time being portfolio investment in
Slovakia is monitored not only by the NBS butby the Bratislava Stock Exchange as well.
With regard tothe fact that BC PB is likely to have a more complex database especially in the
area ofproperty securities and certain types of bonds it would be a real help if the NBS could
haveaccess to this database in the near future in the interest of accuracy.A signicant fact is
that there is an adequate staff for the statistical processing and analysis of PI data which is a
guarantee for the timely regulation of portfolio investment.
SLOVENIA
Legal Framework For Foreign Portfolio Investments in Slovenia
A. Current and Capital Account Convertibility in Slovenia:
Since September 1, 1995, Slovenia has adhered to Article VIII of the IMF Article of
Agreement, thus committing itself to full current account convertibility and full repatriation
of dividends. Capital outflow has to be approved by the authorities as formerly liberalised
capital inflow was restricted again in 1997.133
B. Slovenian Policy Outlook on FDI and FPI:
133 Michael Schrder, The New Capital Markets in Central and Eastern Europe, available at
https://books.google.co.in/books?
id=DeSty2XOWW8C&pg=PA299&lpg=PA299&dq=slovenia+FPI&source=bl&ots=SvR7Q
N61jK&sig=K2dqP2sYWbV4LlUn4fhu-nIQVKk&hl=en&sa=X =slovenia%20FPI&f=false

Slovenias strategic attitude towards FDI was first formulated in the Strategy of Economic
Development of Slovenia, 1995, and then again in Strategy of International Economic
Relations of Slovenia, 1996.134 The position in both strategies was basically the same and
called for: a) the necessity for an open, export-oriented development concept; b) the strategic
decision to integrate Europe (especially the EU); c) contemporary trends in international
economic co-operation between companies and liberalisation towards FDI; 0 development of
Slovenian national comparative advantage based on MNEs. Thus, Slovenia adopted an open
attitude towards FDI.135 Thus, in 1997, FDI was liberalised, but not without restrictions on
commercial credits, personal capital movements and financial loans and credits by laws.136
In Slovenia, FDI comprises equity, reinvested earnings and debt instruments between direct
and indirect affiliates and between fellow enterprises. Income from direct investments is also
disclosed, in the part relating to equity (profit distributions and reinvested earnings), and in
the part relating to debt instruments (interest).137 Contributions to equity may be in the form
of cash, non-cash contributions or reinvested earnings. The figures for investments in real
estate are included under equity. Payments of disproportionately high dividends or profit
distributions have since 2008 been treated as withdrawals of equity, and not as dividend
payments. Debt instruments comprise assets and liabilities between affiliates and fellow
enterprises, and include financial loans, trade credits, deposits, and other assets and liabilities.
FDI amounts do not include138:
1. the value of assets in respect of other successors in the territory of the former Socialist
Federal Republic of Yugoslavia that are still subject to succession negotiations, seized
134 OECD Investment Policy Reviews OECD Investment Policy Reviews: Slovenia 2002,
available
at
https://books.google.co.in/books?
id=0YTYAgAAQBAJ&pg=PA53&lpg=PA53&dq=foreign+portfolio+investment+in+sloveni
a&source=bl&ots=diGinIXYOK&sig=zdPdgCh_QVDRsie4mZdwr5yVMe4&hl=en&sa=X&
ei=1cMwVfn1A8iA8QWh34DYAQ&ved=0CEAQ6AEwBQ#v=onepage&q=foreign
%20portfolio%20investment%20in%20slovenia&f=false
135 Id
136 Id
137 Slovenia- Balance of Payments and External
https://www.bsi.si/en/financial-data-r.asp?MapaId=918
138 Id

Position,

available

at

assets in these territories, and other assets whose ownership was transferred from
legal entities to the state during the privatisation process,
2. the value of real estate in the rest of the world owned by households (primarily
investments in Croatia) before 2007, and
3. the value of real estate in Slovenia owned by foreign residents (before 2008).
Portfolio investment includes transactions and positions involving debt or equity securities,
other than those included in direct investment or reserve assets. Portfolio investment
includes equity securities, investment fund shares and debt securities, unless they are
categorised either as direct investment or as reserve assets. Equity securities consist
of listed and unlisted shares. Transactions and positions in debt securities are divided by
original maturity into short-term and long-term. Short-term debt securities are payable on
demand or issued with an initial maturity of one year or less. Long-term debt securities are
issued with an initial maturity of more than one year. Since 2007, this item includes also
assets of debt portfolio instruments held by Bank of Slovenia, which are no longer considered
as international reserves, but as claims to EMU member states and claims in EUR currency to
all other non-residents.139 Since early 1997, the Bank of Slovenia introduced measures to curb
increasing capital inflows. In October 1998, certain restrictions on FPI were introduced,
namely14011. Foreign investors to hold Slovenian shares for 7 years lock-in period (which was
reduced to 4 years in 1999.
12. FPI holders must hold obligatory custody accounts (later they were allowed to hold
obligatory interest free Tolar deposits as well).
13. Non-residents were obliged to conduct their portfolio investments in the secondary
market-traded securities and derivatives through custody accounts established with
licensed domestic banks as per the Law on Securities Market (Official Gazette of the
Republic of Slovenia, No. 6/94.141

139 Slovenia- Balance of Payments and External

https://www.bsi.si/en/financial-data-r.asp?MapaId=918

Position,

available

at

140 2012 Investment Climate Statement, BUREAU OF ECONOMIC AND BUSINESS

AFFAIRS, June 2012, available at http://www.state.gov/e/eb/rls/othr/ics/2012/191235.htm

This measure considerably increased costs of a transaction for FPIs. Since February 1999,
any investment holding more than 10% of a companys shares is defined as FDI and is
therefore less restricted than FPI.142 As per this new Foreign Exchange Law which became
valid in September, 1999, current payments and direct investments were further liberalised.
However, FDI is still limited in certain fields like Banks (wherein a qualified share of the
voting rights must be held by the Bank of Slovenia), Insurance, Auditing, etc.143
1999 was a key year for Foreign Investment Policy as in this year, the Europe Agreement,
which guarantees national treatment to EU companies was entered into force. 144 This led to a
new policy orientation towards attraction of FDI reflected in the Commercial Companies Act,
the Foreign Exchange Act and the Take-Overs Act of 1997.145 Additionally, this was
supplemented by low corporate taxes, export incentives and creation of customs zones as well
as administrative simplification.

141 OECD Investment Policy Reviews OECD Investment Policy Reviews: Slovenia 2002,
available
at
https://books.google.co.in/books?
id=0YTYAgAAQBAJ&pg=PA53&lpg=PA53&dq=foreign+portfolio+investment+in+sloveni
a&source=bl&ots=diGinIXYOK&sig=zdPdgCh_QVDRsie4mZdwr5yVMe4&hl=en&sa=X&
ei=1cMwVfn1A8iA8QWh34DYAQ&ved=0CEAQ6AEwBQ#v=onepage&q=foreign
%20portfolio%20investment%20in%20slovenia&f=false
142
OECD
Economic
Surveys
Slovenia,
April
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf

2013,

available

at

143 Slovenia: Main report, OECD, 2011, available at https://books.google.co.in/books?

id=_x0k1PNP7MsC&pg=PA74&lpg=PA74&dq=foreign+portfolio+investment+in+slovenia
&source=bl&ots=0gnIv6PvoC&sig=tZ9yrZZHBipG7MSUxlykVhYLUpo&hl=en&sa=X&ei
=1cMwVfn1A8iA8QWh34DYAQ&ved=0CDAQ6AEwAQ#v=onepage&q=foreign
%20portfolio%20investment%20in%20slovenia&f=false
144 , Jochen R., Capital Market Development in a Small Country: The Case of Slovenia (IMF
Working
Paper
WP/07/229),
Washington,
September
2007
http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf
145 Slovenia - Ljubljana Stock Exchange - Market capitalisation of listed companies
(domestic equities and exclusive foreign listings) - Equity excluding investment fund shares
Euro, European Central Bank, available at http://sdw.ecb.europa.eu/quickview.do?
SERIES_KEY=181.SEE.A.SI.JSE0.MKP.W.E

However, the same approach wasnt followed for FPIs and in 1999 itself, several additional
restrictions were imposed on Foreign Portfolio Investment, i.e.146
1. All share trading must be conducted through LISE members based in Slovenia and
through a custodian account opened at the authorized bank.
2. Foreign portfolio investors who sold shares bought in the Slovenian capital market to
the local market participants within 1 year (reduced from 7 years from Sep. 1, 1999)
would incur excessive 8-12% annual custody charges.
3. Foreign investors can acquire 25% or higher share in the equity capital of the
companies.
4. No change for dividend tax. As of Jan. 1997, foreign individual investors were subject
to a capital gain tax, which was not applicable if a security is held in a portfolio for
more than 3 years.
5. 25% corporate income tax, while the foreign legal entities did not pay the capital
gains tax on share transactions in Slovenia.
6. In case a non-resident authorises another subject participating in the securities market
(proxy) to buy and sell securities or perform any other kind of operations, they must
hand over to the bank a written authorization.147
7. As per the decision of the Bank of Slovenia, banks were obliged to sell any foreign
exchange from abroad for the purpose of buying securities and purchase a right to
buy foreign exchange fir the total balance on custody accounts.148
In 2001, the Slovenian government adopted a new strategic document in the EU, titled
Strategy for Economic Development in Slovenia, which stills holds the field and substantially
liberalised non-resident investment in domestic securities traded in capital markets. 149 As of

146 Geert Bekaert and Campbell R. Harvey, Chronology of Economic, Political and
Financial
Events
in
Emerging
MarketsSlovenia,
available
at
https://people.duke.edu/~charvey/Country_risk/chronology/slovenia.htm
147Slovenia Business Law Handbook: Strategic Information and Laws, p. 134, (International
Business Publications, USA, 2011).
148 Id

June 2001, all restrictions on portfolio investments by foreigners in Slovenia had been
abolished and the purchase of foreign equities by Slovenes fully liberalized.
C. Regulatory Bodies:
The Public Agency of the Republic of Slovenia for Entrepreneurship and Foreign
Investments (JAPTI) serves as Slovenias agency for foreign investment and promotion. Its
mission is to enhance Slovenias economic competitiveness through technical and financial
assistance to entrepreneurs, businesses and investors. Companies investing in Slovenia may
be eligible for financial assistance in the form of grants from JAPTI, in addition to other
incentives mentioned above.150
D. Slovenian Company Laws:
Slovenias laws on foreign investment are fully harmonized with EU legislation. As provided
for in the Law on Commercial Companies, all business activities within Slovenia are open to
domestic and foreign natural and legal persons who may establish wholly or partially owned
companies in any legal form provided by the Commercial Companies Act (Limited, General,
and Silent Partnerships; Joint Stock Companies, Limited Liability Companies, and
Partnerships Limited by Shares; and Economic Interest Groups). 151 Foreign investors may
freely invest in Slovene companies in most industries except in banking and insurance
industries, where a permit from the Bank of Slovenia or Insurance Supervision Agency is
needed.152 Furthermore, current regulations limit the foreign ownership stake in gaming
interests to 20%. Foreign investors are permitted to obtain concessions for the exploitation of
renewable and non-renewable natural and public goods. In addition, foreign and domestic
investors have the same reporting requirements to the Bank of Slovenia. 153 Some restrictions
149 OECD (2012), OECD Reviews of Investment Policy: Slovenia 2012, OECD Publishing,
http://dx.doi.org/10.1787/9789264167407- en.
150 2012 Investment Climate Statement, BUREAU OF ECONOMIC AND BUSINESS
AFFAIRS, June 2012, available at http://www.state.gov/e/eb/rls/othr/ics/2012/191235.htm
151 Id
152 OECD (2012), OECD Reviews of Investment Policy: Slovenia 2012, OECD Publishing,
http://dx.doi.org/10.1787/9789264167407- en.
153 Id

are also applied to foreign investment in the field of military supply. For example, direct
investments made by non-residents in companies or other entities that are engaged in the
production of, or trade in, weaponry and military equipment are allowed only if specifically
authorized by the Government of the Republic of Slovenia.154
Any company registered in Slovenia is granted the status of a Slovenian legal entity under
which they enjoy national treatment. Foreign investors are subject to the same legal treatment
as domestic companies and enjoy the same rights and obligations. The registration process is
rather simple and usually takes between three weeks and one month to complete. Registered
foreign-owned companies may also become members of the Ljubljana Stock Exchange.155
E. Slovenian Foreign Exchange Laws:
Foreign shareholders are entitled to free and unrestricted transfer of their profits abroad in
foreign currency, providing that they meet their tax obligations. The 20% corporate tax rate in
Slovenia applies to domestic and foreign companies and is among the lowest rates in
Europe.156 Credits and guarantees between residents and non-residents are regulated by the
Foreign Exchange Act. In practice, to repatriate profits, joint stock companies must provide
the following:157
1. evidence of the settlement of tax liabilities;
2. notarized evidence of distribution of profits to shareholders; and
3. proof of joint stock company membership (Article of Association).
All other companies need to provide evidence of the settlement of tax liabilities and the
company's act of establishment. For the repatriation of shares in a domestic company, the

154 Id
155 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of
Slovenia (IMF Working Paper WP/07/229), Washington, September 2007
http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf
156 Id
157 2012 Investment Climate Statement, BUREAU OF ECONOMIC AND BUSINESS
AFFAIRS, June 2012, available at http://www.state.gov/e/eb/rls/othr/ics/2012/191235.htm

company must submit its act of establishment, a contract on share withdrawal, and evidence
of the settlement of tax liabilities to the authorized bank.
F. Overview of Other Slovenian Laws Relevant for FPI:
1. Right to Private Ownership and Establishment:
Private enterprise and ownership are promoted and protected in Slovenia, both by statute and
the Constitution. The Slovenian privatisation concept is defined in the Ownership
Transformation Act of 1992, and is definitely one of the major reasons for relatively low FDI
and FPI investments, as it believes in mass internal buy-outs with free distribution to
residents.158 Foreign-owned companies are entitled to own property in Slovenia. All citizens
and enterprises of the European Union or the United States have the same purchase rights and
rights of use of land and natural resources as citizens and domestic enterprises. If a foreign
citizen or legal person from a third (i.e., non-EU) country decides to establish a company in
Slovenia, this company is considered a Slovenian legal person and as such can buy, own and
sell real estate. However, while the law provides for these rights, some foreign companies
have experienced unexplainable delays in obtaining land even after all the necessary
paperwork was in order.
2. Expropriation and Compensation
According to Article 69 of Slovenias Constitution, the right to possess real property can be
taken away or limited, with compensation in kind or financial compensation under conditions
determined by law on the basis of public interest. There are no current expropriation-related
investment disputes in Slovenia.159 National law gives adequate protection to all investments.
3. Banking Laws:
The 1999 Law on Banking allows foreign banks to establish branch offices in Slovenia. Since
1999, local borrowers have faced no restrictions with regards to borrowing from abroad,
which was strictly regulated before the new legislation. Once Slovenia joined the EU, its
banking regulation was entirely harmonized with the banking regulation of the EU.160

158 OECD (2012), OECD Reviews of Investment Policy: Slovenia 2012, OECD Publishing,
http://dx.doi.org/10.1787/9789264167407- en.
159 Id

There is no law, statute, or regulation that specifically deals with mortgage banking services
in Slovenia. Since there is not a specific mortgage instrument, borrowers take classic loans
with certain specifics related to real estate. The government also adopted a law which
increased consumer protection level for loans with real estate collateral. However, the
Government has committed itself to creating a mortgage banking system to include property
assessments and deeds that will replace the current Land Registry system. Currently there are
no special mortgage banks in Slovenia. Accordingly, only a few Slovenian banks offer
mortgage loans per se. Nevertheless, banks provide loans that are secured by mortgages.
They are frequently granted to corporate clients and entrepreneurs as well as to private
individuals.161
4. Protection of IPR162:
Slovenia has enacted highly advanced and comprehensive legislation for the protection of
intellectual property that fully reflects the most recent intellectual developments in the TRIPS
Agreement (Trade Related Aspects of Intellectual Property) and various EU directives.
Slovenia negotiated its TRIPS commitments as a developing country and implemented its
commitments as of January 1, 1996. Slovenia is a full member of the TRIPS Council of the
World Trade Organization (WTO) and the World Intellectual Property Organization (WIPO).
Slovenia has already ratified the WIPO Copyright Treaty and the Cyber Crime Convention.
Slovenias Intellectual Protection Office actively participates in the Intellectual Property
Working Party of the Council of Europe, the Trademark Committee and other EU working
bodies in formulation of new EU legislation. The Copyright and Related Rights Act amended
in 2001 and 2004 deals with all fields of modern copyright and related rights law, including
traditional works and their authors, computer programs, audiovisual works, as well as rental
and lending rights. The 1994 Law on Courts gives the District Court of Ljubljana exclusive
160 OECD Investment Policy Reviews OECD Investment Policy Reviews: Slovenia 2002,
available
at
https://books.google.co.in/books?
id=0YTYAgAAQBAJ&pg=PA53&lpg=PA53&dq=foreign+portfolio+investment+in+sloveni
a&source=bl&ots=diGinIXYOK&sig=zdPdgCh_QVDRsie4mZdwr5yVMe4&hl=en&sa=X&
ei=1cMwVfn1A8iA8QWh34DYAQ&ved=0CEAQ6AEwBQ#v=onepage&q=foreign
%20portfolio%20investment%20in%20slovenia&f=false
161 Id
162 2012 Investment Climate Statement, BUREAU OF ECONOMIC AND BUSINESS
AFFAIRS, June 2012, available at http://www.state.gov/e/eb/rls/othr/ics/2012/191235.htm

subject matter jurisdiction over intellectual property disputes. Concerning enforcement of the
TRIPS Agreement provision, Slovene law provides for a number of civil legal sanctions,
including injunctive relief and the removal of the infringement, the seizure and destruction of
illegal copies and devices, the publication of the judgment in the media, compensatory and
punitive damages, border (customs) measures, and the securing of evidence and other
provisional measures without the prior notification and hearing of the other party.
5. Slovenian Laws on Dispute Settlement:
Slovenia is a signatory to the 1958 New York Convention on Recognition of Foreign Arbitral
Awards and the 1961 European Convention on International Commercial Arbitration. There
have been no major investment disputes in the past five years. Investment disputes are
handled as all other business disputes as described below.163 The procedure before the
Permanent Court of Arbitration at the Chamber of Economy of Slovenia is governed by the
Regulations on the Procedure before the Permanent Court of Arbitration at the Chamber of
Economy of Slovenia. Arbitration rulings are final and subject to execution. Unless parties
have agreed to binding arbitration for disputes, the regional court specializing in economic
issues has jurisdiction over business disputes. However, the parties may agree in writing to
settle disputes in another court of jurisdiction.164
Slovenia has a well-developed, structured legal system. It is based on a five-tier (district,
regional, appeals, supreme, and administrative) court system. These courts deal with a vast
array of legal cases including criminal, domestic relations, land disputes, contracts, and other
business-related issues and probate.165 Similar to most European countries, Slovenia also has
a Constitutional Court that hears complaints alleging violations of human rights and personal
freedoms, expresses its opinions on the constitutionality of international agreements and state

163
OECD
Economic
Surveys
Slovenia,
April
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf

2013,

available

at

164 Id
165 2012 Investment Climate Statement, BUREAU OF ECONOMIC AND BUSINESS
AFFAIRS, June 2012, available at http://www.state.gov/e/eb/rls/othr/ics/2012/191235.htm

statutes, and deals with other high profile political issues. 166 Slovene law provides three
procedural methods for handling bankrupt debtors, i.e.
a. Compulsory settlements
b. Bankruptcy procedures
c. Bankruptcy as forced liquidation
6. Transparency of Regulatory System
Foreign companies conducting business in Slovenia have the same rights, obligations, and
responsibilities as domestic companies. The principles of commercial enterprise, free
operation, and national treatment apply to the operations of foreign companies as well. Their
basic rights are guaranteed by the Law on Commercial Companies and the Law on Foreign
Transactions.167 Generally, the bureaucratic procedures and practices are sufficiently
streamlined and transparent for the foreign investor wishing to start a business in Slovenia.
In Slovenia, highly concentrated market structures are not illegal per se; however, the abuse
of market power is. The Law on the Protection of Competition prohibits acts that restrict
competition in the market, conflict with good business practices relating to market access, or
involve prohibited speculation.168 The law, which is fully harmonized with EU legislation, is
applicable to corporate bodies and natural persons engaged in economic activities regardless
of their legal form, organization, or ownership. The law also applies to the actions of public
companies. Restriction of competition through cartel agreements, unfair competition (i.e.,
false advertising, promises/gifts in exchange for business, trade secrets, etc.), illicit

166 Slovenia Business Law Handbook: Strategic Information and Laws, p. 134, (International
Business Publications, USA, 2011).
167 2012 Investment Climate Statement, BUREAU OF ECONOMIC AND BUSINESS
AFFAIRS, June 2012, available at http://www.state.gov/e/eb/rls/othr/ics/2012/191235.htm
168 OECD Investment Policy Reviews OECD Investment Policy Reviews: Slovenia 2002,
available
at
https://books.google.co.in/books?
id=0YTYAgAAQBAJ&pg=PA53&lpg=PA53&dq=foreign+portfolio+investment+in+sloveni
a&source=bl&ots=diGinIXYOK&sig=zdPdgCh_QVDRsie4mZdwr5yVMe4&hl=en&sa=X&
ei=1cMwVfn1A8iA8QWh34DYAQ&ved=0CEAQ6AEwBQ#v=onepage&q=foreign
%20portfolio%20investment%20in%20slovenia&f=false

speculation during times of irregular market situations, and dumping and subsidized imports
are all prohibited.169

COMPARATIVE ANALYSIS
The table below, taken from IMFs Working Paper on The Role of Country Concentration
in the International Portfolio Investment Positions for the European Union Members
aptly compares the types of investment across all 5 nations as follows:

169
OECD
Economic
Surveys
Slovenia,
April
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf

2013,

available

at

Based on this, it can be concluded that:

Slovenia always has low investment concentration pre-crisis and post-crisis as well.

Slovakia had low investment concentration in 2007 but high investment concentration
from 2001-2004 and 2008-2010.

Portugal, Romania and Spain always had high investment concentration, both pre and
post crisis.

Romania climbed on the third position in the top of the most attractive markets for FDI in the
CEE region, gaining two percentage points in the investors preferences, according to the

2014 edition of the EY Study - European attractiveness survey. Following the attractiveness
decrease on markets such as Poland (31%, a decrease of 6% from 2013) and The Czech
Republic (11%, down with cu 4% from 2013), Romania (+2%) is now considered, alongside
Hungary (+3%) and Turkey (+4%), one of the most attractive destinations for investment in
Eastern Europe.
Due to a high exposure to European countries, a fragile banking sector and a heavy
dependence on consumer credit following the crisis, the number of FDI projects in Central
and Eastern Europe (CEE) declined by 12% compared with a 19% increase in Western
Europe between 2009-2013 compared to 2004-2008. The divergence is all the more apparent
in job creation, which fell by 30% in CEE, compared with a decline of 13% in Western
Europe.170

Source: EYs Attractiveness Survey, Europe 2014 An extract on emerging markets (2014).

170 Romania Remains Among the Most Attractive Destinations for Investments in Eastern
Europe, http://www.amcham.ro/index.html/articles?articleID=2112.

The authors believe that Romania among all the countries discussed herein is the most
attractive destination for foreign portfolio investment.