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02 October 2012

Slovenia 2012 Article IV consultation—concluding statement of the IMF mission


The Slovenian economy is suffering from negative feedback loops of recession, bank deleveraging and corporate distress against a background of pre-existing structural weaknesses.

Urgent policy actions, including bank and corporate restructuring and privatisation, pension and labour market reforms, and structural fiscal consolidation, are needed to break these negative loops and to address the structural weaknesses. The government has kick-started fiscal consolidation and has announced an ambitious and comprehensive set of policy actions. Success depends ultimately on the proper and timely implementation of these measures.

Slovenia is in the midst of a double-dip recession. The economy is now suffering from the negative feedback loops of recession, bank deleveraging, and corporate distress against the background of pre-existing structural weaknesses. The mission expects the economy to contract by 2.2 per cent in 2012 and by some 1 per cent in 2013 on the back of continued deleveraging, sluggish external demand and fiscal tightening. As a result of weak economic activity, core inflation is low and the current account continues to improve with a moderate surplus expected for this year.

Financial conditions have worsened. Amid stress in a number of countries in the euro area, markets have been re-evaluating Slovenia’s riskiness. Repeated rating downgrades towards the lower end of investment grade range highlighted long-standing issues and concerns on the status of publicly-controlled banks. The failure to implement pension and labour market reforms in mid-2011 and political uncertainties have contributed to markets’ concerns.

Strong and prompt policy actions are necessary to address the structural weaknesses and to restore confidence. The government has announced an ambitious and comprehensive set of reforms, which includes a plan to deal with bank non-performing loans (NPLs), management of public assets, further fiscal consolidation, and pension and labour market reforms. Swift implementation of these reforms is essential to resolve the current crisis and to realise the economy’s potential.

The mission welcomes the creation of the Bank Asset Management Company (BAMC) and stresses that proper operating rules will be key to success. The BAMC is an important first step to address the build-up of NPLs and the Law to Strengthen the Stability of Banks will help to address the financial distress faced by many large non-financial corporations. The BAMC will buy NPLs from banks by issuing publicly-guaranteed bonds. The BAMC should be independent and free of political pressures, appropriately funded, able to hire the best talent, fully accountable for its actions, transparent, and subject to external professional auditing. The BAMC should have undisputed legal rights to restructure or liquidate NPLs swiftly, with a view to minimising fiscal cost. In this connection, the mission would welcome strengthening the bankruptcy procedure.

The mission urges the government to proceed with the privatisation of publicly-controlled banks and corporates. Political interference should be removed from their management. To this end, the government should move decisively to privatise banks and corporations (to below a blocking minority share, which would deter strategic investors) in order to change their governance and commercial culture.

The mission welcomes the front-loaded, expenditure-based consolidation towards structural balance by 2015. The structural adjustment in 2012 is already significant and the headline deficit is projected to decrease from 4.3 per cent of GDP to around 3½ per cent of GDP (on a cash basis, excluding bank restructuring costs.) This deficit is slightly higher than planned, mainly due to weaker revenues. In light of financial sector restructuring costs, an ageing population and contingent liabilities, further consolidation is necessary. The government should focus on the structural balance rather than on headline targets. Also, the mission welcomes the government’s effort to increase EU fund absorption to contain the negative effects of fiscal adjustment on growth. Without bank restructuring cost and other contingencies, achieving structural balance from 2015 onwards would keep debt below 60 per cent of GDP and put it on a downward trajectory for the second half of the decade.

The mission stresses that fiscal governance and the quality of adjustment should be strengthened. The proposed cut in the wage bill is very ambitious and the mission welcomes efforts to avoid excessive wage compression. Staff recommend a careful reassessment of the effects of the legislated reductions in the corporate income tax rate and the generous allowances for investment. A constitutional structural balance rule with a debt brake, complemented by enhanced medium-term fiscal planning, would anchor fiscal consolidation in the medium run.

Pension reform is essential for long-term fiscal sustainability in light of adverse demographic dynamics. Current reform proposals focus on the retirement age and are an important step in the right direction. However, they will leave Slovenia still among the euro area countries with the highest pension expenditure, and a more decisive reform will be necessary to ensure debt sustainability in the longer term.

Press release



© International Monetary Fund


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