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IMF Executive Board Concludes Article IV Consultation with the Republic of Slovenia

Author(s):
International Monetary Fund. European Dept.
Published Date:
February 2019
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On February 14, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Republic of Slovenia and considered and endorsed the staff appraisal without a meeting.2

A broad-based recovery continued in Slovenia in 2018, lowering unemployment, swinging the headline fiscal balance into surplus, and reducing the public debt ratio. Inflation has been subdued, while the external position has continued to strengthen, reflecting strong exports and continued deleveraging. Financial sector stability has improved as banks are well capitalized and liquid, and overall asset quality improved. Progress was made in resolving non-performing loans (NPL), although Small and Medium Enterprises’ NPLs remain elevated. The authorities implemented macro-prudential policies, and the privatization of the largest bank also advanced.

Near-term growth prospects are positive, but the medium-term outlook is less favorable. In 2019, growth is projected to slow to 3.4 percent, as export demand eases and capacity constraints becomes more severe. A projected fiscal expansion will support domestic demand in 2019. Inflation is projected to reach 2.2 percent, driven by still strong economic activity and wage pressures. The current account surplus is projected to decline as domestic demand outpaces exports. The medium-term outlook is less favorable as the rapidly aging population will reduce potential growth. Risks are titled to the downside. Major risks include trade protectionism, uncertainty in Europe, and weaker-than-expected global demand.

The authorities’ reform agenda is geared toward rebuilding macroeconomic buffers and promoting long-term growth through structural reforms. Progress has been made in reforming the tax-benefit system, strengthening training and the labor market, improving the pension system, and streamlining spatial planning and construction regulation.

Executive Board Assessment

In concluding the 2018 Article IV Consultation with Republic of Slovenia, Executive Directors endorsed staff’s appraisal as follows:

As Slovenia continues its post-crisis recovery, growth remains well above the euro area average, helped by sound policies. Growth is expected to remain robust in the near term, although the medium-term prospects would be constrained by adverse demographic outlook. Therefore, going forward the authorities should take advantage of the positive economic cycle to deepen fiscal and structural reforms, rebuild fiscal buffers, and increase productivity growth.

The gains from past fiscal consolidation should be preserved, and a procyclical fiscal expansion should be avoided. The authorities’ MTO of structural fiscal balance is an appropriate anchor, and it will help bring down the high public debt gradually towards 60 percent of GDP and build fiscal buffers. This target was estimated to be met in 2018, but the amended DBP for 2019 envisages higher spending that will result in a sizable structural deterioration. Considering the strong current economic performance and positive output gap, higher spending should be accommodated through fiscal savings as part of structural reforms.

There is scope for fiscal reforms that generates permanent savings while modernizing government operations. These reforms would help mitigate the medium-term fiscal impact of the unfavorable demographic outlook. They should focus on pensions, health, education, and the wage bill. They should be complemented by a growth-enhancing tax rebalancing away from social security contributions towards property taxes and by rationalizing tax expenditures.

Slovenia’s external position in 2018 is assessed as substantially stronger than suggested by fundamentals and desirable policies, but the current account is expected to revert toward its norm in the medium term. As the NIIP is still relatively large and negative, the large current account surplus is helping reduce external vulnerabilities and reflects needed deleveraging by the private sector. Slovenia’s current account surplus is expected to moderate as consumption and investment fully recover from the crisis and the NIIP improves. In this regard, policies to address legacy problems and product and service-market reforms could accelerate the recovery of investment.

Financial stability has improved, thanks to the decisive restructuring of ailing banks and prudent macroeconomic policies. Bank of Slovenia’s (BOS) NPL guideline and supervisory dialogue, as well as the measures introduced by the European Central Bank for the three directly supervised institutions, helped banks make progress in resolving NPLs. Large banks have adopted a proactive management of their NPLs, and supervisory authorities should continue to encourage and support these efforts.

Emerging risks in the housing market need enhanced vigilance. Although the relatively low price-income ratio does not point to any overheating yet, the recent double-digit increases in housing prices warranted close monitoring. In this regard, BoS’s proactive decision to build the macroprudential toolkit is welcome.

Continued structural reforms are key to ensure long-term prosperity, while strengthening the economy’s resilience to shocks. Effective implementation of the recently enacted reforms of vocational training, apprenticeship, and adult education would help address skill shortages, support employment of younger and older people, and boost productivity growth. There is still scope to further increase labor market flexibility and reform the tax-benefit system to make work pay. Similarly, the administrative and regulatory burden needs to be reduced further to support investment and firm growth. Accelerating the privatization program would inject capital and technological know-how that would benefit the broader economy.

Slovenia: Selected Economic Indicators, 2015–20(Annual percentage change, unless indicated otherwise)
201520162017201820192020
Projections
Nominal GDP (EUR millions)38,86640,35743,00045,93748,51050,935
GDP per Capita (EUR)18,84119,55120,81422,21823,44224,594
Real economy
Real GDP2.33.14.94.53.42.8
Domestic demand1.92.93.94.84.13.8
Private consumption2.33.91.93.42.82.6
Public consumption2.42.70.53.73.82.9
Gross capital formation0.10.013.29.98.07.5
Net exports (contribution to growth)0.60.51.30.0-0.4-0.7
Exports of goods and services5.06.410.77.16.35.5
Imports of goods and services4.76.610.37.97.56.9
Potential output growth1.71.82.52.72.82.8
Output gap (in percent of potential GDP)-3.9-2.7-0.51.21.81.9
Prices
Consumer prices (national definition, period average)-0.5-0.11.41.92.22.2
Employment and wages
Unemployment rate (in percent, ILO definition)9.08.06.65.14.84.9
Employment (domestic concept, period average)1.21.92.82.81.41.0
Nominal wages (all sectors)0.71.82.73.95.45.1
Real wages (all sectors)1.21.91.22.03.53.1
Public finance (percent of GDP)
General government balance-3.3-1.7-0.80.40.0-0.1
Structural balance 1/-0.9-0.20.50.0-0.7-0.8
Structural primary balance 1/1.92.52.82.01.00.8
General government debt 2/82.678.774.168.866.164.0
Monetary and financial indicators
Credit to the private sector-5.5-2.73.34.65.75.8
Lending rates 3/2.92.22.3
Deposit rates 4/0.40.20.1
Balance of payments (percent of GDP)
Trade balance (goods and services)8.89.410.09.78.47.3
Current account balance4.55.57.26.45.24.3
Gross external debt (percent of GDP, end-period)120.0111.0100.394.389.985.9
Nominal effective exchange rate (2010=100)100.3101.3101.8
Real effective exchange rate (2010=100, CPI-based)97.297.597.6
Sources: Data provided by the Slovenian authorities; and IMF staff calculations and projections.

Reflected national account data update by the authorities as of November 30, 2018.

The stock includes debt issuances of the Bank Asset Management Company (BAMC) in 2013–14.

Floating or up-to-one-year fixed rate for new loans to non-financial corporations over 1 million euros.

For household time deposits with maturity up to one year.

Sources: Data provided by the Slovenian authorities; and IMF staff calculations and projections.

Reflected national account data update by the authorities as of November 30, 2018.

The stock includes debt issuances of the Bank Asset Management Company (BAMC) in 2013–14.

Floating or up-to-one-year fixed rate for new loans to non-financial corporations over 1 million euros.

For household time deposits with maturity up to one year.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

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