04 March 2014

ECON: Slovenia - Country briefing on the economic situation

This paper reports on recent developments in Slovenia, its economic situation, its banking and corporate sectors, public finance and the MIP, investment, the labour market and the pension system.

Last elections took place in December 2011 with the centre right government of PM Janez Janša inaugurated in February 2012, but a year later dismissed by the Parliament in favour of a new centre left coalition of 4 political parties. The new government was inaugurated on 20 March 2013. It is led by "Positivna Slovenija", a new party on the political scene, with first female PM of Slovenia, Alenka Bratusek. "Pozitivna Slovenija" joined ALDE at the end of January this year, for the upcoming European elections.

According to the latest COM winter forecast of 25 February 2014, positive quarterly outturns in 2013 have reduced the pace of recession. A fragile recovery is expected to start in the second half of 2014 supported by improving market conditions. Lending to the private sector remains restrained by the ongoing deleveraging in both financial and non-financial corporations. With subdued private consumption, the external side is expected to be the key driver of the recovery.

According to the latest COM forecast (see the table above), public debt is projected to increase over the forecast horizon from 54.5% of GDP in 2012 to 71.9% of GDP in 2013 and to 78% in 2015. Government deficit is projected to increase from 6.3% of GDP in 2011 to 14.9% in 2013 due to one off measures for recapitalisation of banks and then to decline to 3.9% in 2014 and to 3.3% in the year of correction (i.e. 2015), thus foreseen to remain over the target. The support to banks provided in 2013 largely explains the temporary high general government deficit (14.9 %) for 2013. The structural balance however is foreseen to improve. Nevertheless, the COM issued a recommendation to Slovenia on 5 March 2014, urging towards efforts to ensure full compliance with the Council´s EDP decision of June 2013, taking the necessary steps to ensure that the structural effort recommended by the Council is met. In its in-depth review (see the next chapter), COM recommended for Slovenia to put its government debt on downward path with sustained primary surpluses and expenditure consolidation, the latter rather through reorganisation than linear cuts.

Macroeconomic imbalances (procedure) (MIP)

In April 2013, the COM concluded that Slovenia was experiencing excessive macroeconomic imbalances, particularly involving risks to financial stability stemming from fragile corporate balance sheets, compounded by rigidities in labour and capital markets and high state ownership. However, the corrective arm of MIP was not triggered given the ambition of the Slovenian national reform and stability programmes. The COM monitoring in 2013 (see AMR 2014) shows, there has been crucial progress achieved in the area of the banking sector.

However, domestic demand remains weak, with falling investment, increase in private sector debt (especially of firms) as well as rapid rise of the government debt (exceed 60% of GDP by end-2013 (see the winter forecast above). The export market share has deteriorated strongly; the export dynamics is significantly worse and Slovenia is an outlier among "new member states". The unemployment indicator has also continued increasing, leading to rising social costs of the adjustment.

The IMF points out that despite an increase, public and household debts are still low. Unemployment remains below the euro area average. Parliament has approved important fiscal reforms. The current account has swung from a large pre-crisis deficit to a projected surplus of almost 6% of GDP this year (4.9% for 2013 by the COM winter forecast), thanks in part to improving competitiveness.

However, given the gravity of the situation, Slovenia was subject to COM 2014 in-depth review of 5 March 2014, which concluded that Slovenia is still experiencing excessive imbalances. In particular, the extent of state involvement in the economy remains too large, corporate sector deleveraging too slow, banking sector still in restructuring phase, country´s competitiveness too weak (i.e. substantial loss of export market share over past five years) and government debt in sharp increase over the past years.

Full report

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