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International Monetary Fund. European Dept.
This Selected Issues paper argues that revenue-neutral tax rebalancing would help Slovenia address long-term fiscal and growth challenges. The present tax-benefit system is supportive of distributional fairness in Slovenia; however, it is argued that tax reform can help bring stronger employment and productivity growth and enhanced resilience to the challenges of population ageing. The paper lays out the case for tax reform in view of long-run fiscal and growth challenges and it also reviews the current tax system and its weaknesses in comparison with international best practices. The paper also sets out tax reform options and uses a model simulation to illustrate the medium- to long-term fiscal and growth impact. The analysis on the tax rebalancing impact suggests that it can permanently and significantly increase potential output in Slovenia. The simulations indicate that a revenue-neutral tax rebalancing has positive fiscal and growth benefits over time.
International Monetary Fund. European Dept.
This Article IV Consultation highlights that the 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. Macro-financial legacy issues remain in bank and corporate balance sheets, including small and medium enterprises’ nonperforming loans. Structural challenges persist with low productivity growth, skills shortages, high tax wedge, heavy regulatory system, and extensive presence of state-owned enterprises. Policies should focus on fiscal and structural reforms to rebuild fiscal buffers and increase productivity. Slovenia’s external position in 2018 is assessed as substantially stronger than suggested by fundamentals and desirable policies; however the current account is expected to revert toward its norm in the medium term. 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.
Mr. Eugenio M Cerutti and Mr. Gee Hee Hong
Superficial examination of aggregate gross cross-border capital inflow data suggests that there was no substitution between portfolio inflows and bank loans in recent years. However, our novel analysis of disaggregate inflows (both by types of instrument and borrower) shows interesting heterogeneity. There has been substitution of bank loans for portfolio debt securities not only in the case of corporate and sovereign borrowers in advanced countries, but also sovereign borrowers in emerging countries. In the case of corporate borrowers in emerging markets, the relationship corresponds to complementarity across types of gross capital inflows, especially during periods of positive capital gross inflows after the global financial crisis. A large part of these patterns does not seem to be driven by a common phenomenon across countries associated with the global financial cycle, but rather by country-specific factors.
Uwe Böwer
State-owned enterprises (SOEs) play an important role in Emerging Europe’s economies, notably in the energy and transport sectors. Based on a new firm-level dataset, this paper reviews the SOE landscape, assesses SOE performance across countries and vis-à-vis private firms, and evaluates recent SOE governance reform experience in 11 Emerging European countries, as well as Sweden as a benchmark. Profitability and efficiency of resource allocation of SOEs lag those of private firms in most sectors, with substantial cross-country variation. Poor SOE performance raises three main risks: large and risky contingent liabilities could stretch public finances; sizeable state ownership of banks coupled with poor governance could threaten financial stability; and negative productivity spillovers could affect the economy at large. SOE governance frameworks are partly weak and should be strengthened along three lines: fleshing out a consistent ownership policy; giving teeth to financial oversight; and making SOE boards more professional.
Mr. Johannes Wiegand
When the euro was introduced in 1998, one objective was to create an alternative global reserve currency that would grant benefits to euro area countries similar to the U.S. dollar’s “exorbitant privliege”: i.e., a boost to the perceived quality of euro denominated assets that would increase demand for such assets and reduce euro area members’ funding costs. This paper uses risk perceptions as revelaed in investor surveys to extract a measure of privilege asscociated with euro membership, and traces its evolution over time. It finds that in the 2000s, euro area assets benefited indeed from a significant perceptions premium. While this premium disappeared in the wake of the euro crisis, it has recently returned, although at a reduced size. The paper also produces time-varying estimates of the weights that investors place on macro-economic fundmentals in their assessments of country risk. It finds that the weights of public debt, the current account and real growth increased considerably during the euro crisis, and that these shifts have remained in place even after the immediate financial stress subsided.
International Monetary Fund. European Dept.
This 2017 Article IV Consultation highlights Slovenia’s fourth year of steady economic recovery, following decisive measures to address a looming banking crisis in 2013. Output and employment have risen considerably. The external position has strengthened, reflecting robust exports and strong tourism. The financial system has substantially improved in the past few years. Rising domestic demand and continuing strong exports will support projected growth of about 3 percent in 2017. Over the medium term, economic growth will converge to the estimated potential GDP growth rate of 1.75 to 2.00 percent. Higher growth is possible if policies increase investment, reduce labor skills mismatches, and boost total factor productivity growth.
International Monetary Fund. European Dept.
This Selected Issues paper takes the case of Slovenia to analyze credit growth and economic recovery in Europe. The findings reveal that following the global financial crisis recovery in Slovenia significantly lags typical postrecession recoveries for both typical and financial-crisis-driven recessions. Credit dynamics have also been much more subdued. Controlling for Slovenia’s double-dip recession and the slowdown in global growth after the global financial crisis reveals that Slovenia’s recovery is not atypical. The cross-country study also finds that bank-specific factors are the key determinants of bank lending. Bank credit to the private sector also has a positive but modest impact on economic activity, mainly through the investment channel.