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17 January 2014

IMF executive board concludes 2013 article IV consultation with the Republic of Slovenia


With the economy still in recession, comprehensive bank and corporate restructuring is essential to achieve financial stability, fiscal and debt sustainability and durable growth. The Slovenian authorities are called upon to step up the current reform effort.

After a brief stabilisation in 2010, the recession resumed in 2011 and the economy now has contracted for eight consecutive quarters. While a sharp contraction in investment was the main driver of the downturn in the early stages, consumption—until then buffered by healthy household balance sheets—also started to decline from 2012, weighed down by deep fiscal cuts, stagnant wages, and growing uncertainty. The current account has moved into a substantial surplus. While competitiveness is on the mend, the bulk of the external adjustment has come from import compression. In all, through mid-2013, real GDP has fallen by 11 per cent from its pre-crisis peak, the largest output loss among the euro area members after Greece.

The combination of an overly indebted corporate sector and weak banks has led to a vicious circle of deepening recession, mounting bankruptcies, rising nonperforming loans (NPLs), and further deleveraging. At the same time, Slovenian corporates have one of the highest leverage ratios in the euro area, mainly because of a lack of equity. The average interest bill to earnings ratio has reached 90 per cent, pushing into the red companies that might be viable with lower debt.

On 12 December 2013, the Slovenian authorities announced the results of the comprehensive bank asset quality review and stress test exercise carried out by independent consultants. The exercise found that the banking system would need €4.8 billion in additional capital to withstand a severe adverse macroeconomic scenario. The authorities have since proceeded to address these capital needs by recapitalising the three state-owned banks from budgetary resources, with the remaining five banks expected to raise private capital in the first half of 2014.

Public debt has been increasing rapidly. The prolonged recession and the burden of supporting the state-owned banks have put public finances under considerable strain. Public debt has more than doubled since 2008, reaching 55 percent of GDP by end-2012, and is set to increase sharply after bank restructuring.

Executive Board Assessment

Executive Directors noted that, with the economy still in recession, comprehensive bank and corporate restructuring is essential to achieve financial stability, fiscal and debt sustainability, and durable growth, and called on the Slovenian authorities to step up the current reform effort. Directors welcomed as key milestones the completion of the bank asset quality review and stress tests, recent bank recapitalisation, ongoing transference of banks’ problem loans to the Bank Asset Management Company (BAMC), and the adoption of new insolvency legislation.

Directors supported the authorities’ 2014 fiscal deficit target, but raised concerns about the quality of the fiscal measures underpinning the budget. They advised more ambitious public employment reduction, better targeting of social transfers, and specific cuts in transfers and subsidies. Directors underscored that durable financial stability hinges on reducing banks’ vulnerabilities through improved bank governance, risk management, and profitability. In this regard, reducing the role of the state, including through privatisation, is particularly important. Directors also recommended strengthening financial sector supervision and addressing shortcomings in the bank resolution framework.

Directors welcomed the reduction in unit labour costs and labour market rigidities that have enhanced Slovenia’s external competitiveness. They called for further regulatory and product market reforms to strengthen the business climate and better attract foreign direct investment.

Full press release

Full staff report for the 2013 Article IV Consultation



© International Monetary Fund


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