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Republic of Slovenia: Staff Report for the 2014 Article IV Consultation

Author(s):
International Monetary Fund. European Dept.
Published Date:
February 2015
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Context and Recent Developments

Slovenia is slowly emerging from a deep crisis.…

1. Slovenia experienced a deep crisis, which culminated in a bank bailout in late 2013. After being hit hard by the global crisis in 2009 through external trade and financing channels, the economy experienced a modest recovery in 2010–11, only to fall back into recession in 2012. Domestic imbalances were largely at play in the relapse, with mounting losses in the highly-leveraged corporate sector leading to rising non-performing loans (NPLs) and a sharp contraction in credit, further fuelling the renewed recession. This raised concerns about the magnitude of bank losses and the sovereign’s ability to address them. The state managed to maintain market access after providing substantial support to the banks in 2013 following a bank asset-quality review and transferring part of their NPLs to the state-owned asset-management company (BAMC).

Real GDP and Real Credit

(y-o-y percent change)

Source: Haver Analytics.

2. While growth has resumed, output remains below pre-crisis levels. Economic activity expanded by 2.6 percent (year-on-year) in the first three quarters of 2014, and high-frequency indicators point to continued improvement in the fourth quarter (Figure 1). The recovery has been driven largely by exports and EU-funded public investment. Private consumption is also showing signs of revival, as household balance sheets are relatively strong and confidence, employment, and real wages are gradually rebounding (Figure 2). Private investment, however, remains weak, given that many firms are burdened with high debt (Figure 3). In all, output remains some 8 percent below its pre-crisis peak—among the largest crisis-related losses in the region—and unemployment is still high, at 9½ percent (with youth unemployment at 16½ percent). Inflation fell sharply in 2014, driven by food and energy prices, averaging 0.2 percent.

Figure 1.Slovenia: Macroeconomic Developments

Sources: Bank of Slovenia; Eurostat; Ministry of Finance; Statistical Office of Slovenia; and IMF staff projections.

Figure 2.Slovenia: Labor Market

Sources: Bank of Slovenia; Eurostat; Haver Analytics.

Figure 3.Slovenia: Corporate Sector Developments

Sources: AJPES, and IMF and BoS staff calculations.

1/ EBIT stands for earnings before interest and taxes.

2/ EBITDA stands for earnings before interest, taxes, depreciation, and amortization.

Real GDP

(Index, 2008:Q2 = 100)

Sources: Haver Analytics and WEO.

3. The current account remains in surplus (Figure 4). The positive balance reached 5.6 percent of GDP in the first three quarters of 2014, slightly below its level over the same period in 2013. This reflects export growth of 6 percent over this period, on the back of improving cost competitiveness. Imports continued to increase, but at a slower pace than exports, leading to a widening of the trade surplus to 8.4 percent of GDP. The income balance, however, registered a deficit, due to higher interest payments on external public debt. In the financial account, large inflows associated with external government-bond issuances were more than offset by repayments of external liabilities by the banking sector. The net international position was negative 38 percent of GDP at end-June 2014, with external liabilities largely dominated by government and corporate debt.

Figure 4.Slovenia: External Sector Developments

Sources: Bank of Slovenia; Direction of Trade Statistics; European Central Bank; Haver Analytics; Statistical Office of Slovenia; and IMF staff estimates.

4. The cumulative general-government cash deficit reached 5.3 percent of GDP at end-September (Figure 5). Net of bank-related costs and extra-budgetary funds, the deficit was 3.7 percent of GDP, significantly lower than a year ago (4.9 percent), but still above the 2014 budget target (2.9 percent). The underperformance was due to both higher-than-planned spending on subsidies to some public enterprises and increased absorption of EU funds supporting public investment and to lower tax revenues—mainly as a result of the rejection by the Constitutional Court of the new real-estate tax—which were only partially compensated by one-off non–tax revenues (cellphone license sales, exceptional SOE dividends, and central bank profit transfers) and tighter spending on goods and services. Relative to 2013, revenues were 6 percent higher, but spending (net of bank costs) was also 4.6 percent higher. Taking advantage of falling yields (Figure 6), the government pre-financed part of 2015 fiscal needs. Public debt was 78.3 percent of GPD at end-June.

Figure 5.Slovenia: Fiscal Developments

Sources: Haver Analytics; Ministry of Finance; and IMF staff calculations.

1/ Excludes bank recapitalization.

2/ 2014 number is the sum of Q1 to Q3.

3/ Jan-Sept., y-o-y percentage change.

4/ VAT budget is adjusted for timing of rate increase.

Figure 6.Slovenia: Asset Prices

Source: Bloomberg; Statistical Office of Slovenia; and IMF staff calculations.

1/ SLOREP 4.625 09/09/24 used for Slovenia.

2/ Bloomberg 3-year generic bond yields.

5. The situation in the banking sector has improved over the last year (Figure 7). Its core tier 1 (CT1) capital ratio stands at 15.3 percent after the recapitalization of four banks in 2013—two of which are being wound down—a fifth partly in 2013 and partly in 2014, and a sixth in 2014 (at a total cost of about 10 percent of GDP for the state). The ECB’s recent comprehensive assessment (CA) identified only small additional capital needs for the two largest banks (€65.3 million), which will be covered by profits realized in 2014. After falling by about 6 percent in 2013, deposits increased by 10.8 percent in the first eleven months of 2014 (excluding intra-bank deposits), of which 4.2 and 11.4 percent for household and corporate deposits, respectively. Banks used liquidity, including from recapitalization and sales of assets to the BAMC, to repay debt on the wholesale markets and LTRO liabilities to the ECB and were able to maintain comfortable liquidity buffers through 2014.

Figure 7.Slovenia: Financial Sector Developments

Source: 2014 Financial Stability Report, Bank of Slovenia; Haver Analytics, IMF FSI.

6. Nevertheless, non-performing loans (NPLs) remain high, hampering credit. Systemwide NPLs stood at 13.2 percent of total loans at end-October (and reportedly at 17.5 percent if restructured loans are included), even after gross transfers to the BAMC (of about €5 billion). Corporate NPLs reached close to 20 percent, while household NPLs remained low, at 5.5 percent. Provisioning of NPLs stands at about 60 percent. Credit growth declined by close to 7 percent during December 2013-November 2014 (net of transfers to the BAMC). Corporate loans fell by around 10 percent, reflecting the sector’s focus on reducing existing debt, the ability of creditworthy firms to borrow from abroad, but also banks’ reluctance to lend, given still tight credit standards. Household loans fell by 1½ percent, although housing loans have recorded small positive growth.

7. A new government took office in September. The last three years have been marred by high political instability, with two early elections called and four governments sworn in. The previous government fell in April 2014 due to internal turmoil, but early elections took place only in September, contributing to delays in policy implementation. The current center-left governing coalition, comprised of the recently established party of Prime Minister Miro Cerar, the Social Democrats, and the Pensioners’ Party, has broadly endorsed the previous government’s reform agenda. It holds a narrow majority in Parliament, and its public support has been eroding recently.

Outlook and Risks

… and the growth outlook remains subdued and vulnerable to risks.

8. The recovery is projected to be gradual. It faces headwinds from necessary fiscal consolidation and the corporate sector’s need to restructure and reduce its debt. Growth is thus expected to moderate to just under 2 percent in 2015 after reaching an estimated 2½ percent in 2014. Lower oil and commodity prices and a weaker euro this year are expected to support exports and private consumption, while public investment should continue to expand. Private investment is projected to stay subdued, as financing conditions will take time to normalize. Inflation is projected to decline to slightly below zero in 2015, given lower expected energy and commodity prices. Unemployment is set to fall gradually over the medium term.

Selected Macroeconomic Indicators, 2014–2020
2014201520162017201820192020
est.projections
Real GDP (percent change)2.61.91.71.81.81.81.7
Unemployment rate (ILO, percent)9.79.08.47.87.06.56.0
Consumer price inflation0.2−0.20.81.51.51.51.5
Current account balance5.56.25.75.34.84.13.5
Sources: Slovenian authorities; and IMF staff calculations and projections.
Sources: Slovenian authorities; and IMF staff calculations and projections.

9. Potential growth remains weak. Staff estimates the output gap to have declined to 2.3 percent for 2014 and expects it to close by 2017. These estimates, however, are subject to high uncertainty, especially given the structural break experienced during the crisis. Potential growth is estimated to reach about 1¾ over the medium term, significantly lower than the pre-crisis average of 3¾ percent. This reflects low capital accumulation, as deleveraging continues and some of the stock was rendered obsolete by the crisis, high structural unemployment eroding human capital, and continued weak TFP trends. By 2020, investment as a share of GDP is projected to remain some 8 percent below its pre-crisis peak, and living standards would only just have returned to pre-crisis levels.

10. The general government deficit (in cash terms, and excluding extra-budgetary entities) is estimated at 6 percent of GDP in 2014. On the basis of end-October 2014 fiscal data, the deficit net of bank-support costs (two bank recapitalizations and repayment of ELA for the banks being wound down) is estimated at 3.7 percent of GDP in 2014. The authorities only implemented about a fifth of the original measures envisaged, relied on one-off measures, and increased public investment spending substantially. As a result, the structural primary balance is estimated to have deteriorated by ½ percent of GDP in 2014.

2014 Fiscal Consolidation Package
Proposed Measures (Stability Program)2014 Budget MeasuresImplemented Measures
Income tax increase1.000
Real estate tax0.70.70
VAT increase0.40.40.3
Wage cuts0.20.20.2
Public investment cut:0.20.2−0.7
Other one off000.6
Total2.51.50.4
Sources: Slovenian authorities and IMF staff estimates.
Sources: Slovenian authorities and IMF staff estimates.

11. Public debt sustainability remains highly vulnerable to shocks (Annex I). On the basis of current policies, the gross debt-to-GDP ratio is projected to continue to gradually increase to just under 90 percent by the end of the decade, raising sustainability concerns. Moreover, public debt dynamics are highly vulnerable to shocks. In particular, the materialization of half of outstanding government guarantees or a prolonged deflation shock could bring debt above 100 percent of GDP by 2019, while a combined growth-primary fiscal balance shock could increase it even further, to close to 115 percent of GDP. A macro-financial shock combining both a deep recession and a renewal of corporate and bank stress (with a fiscal cost similar to that of the recent crisis) would result in an explosive debt path, highlighting the importance of resolute policies to address remaining bank and corporate vulnerabilities.

Public Debt

(percent of GDP)

12. Slovenia’s external position is assessed as sustainable. With the current account expected to stay in surplus over the medium term, external debt is projected to decline to just under 95 percent of GDP by 2020, as private sector deleveraging more than offsets the increase in public sector debt. As a result, the international investment position is expected to reach balance from a deficit of about 38 percent of GDP in 2014. Still, external debt dynamics remain vulnerable to shocks, such as a sharp slowdown in growth or a deterioration in the current account (Annex II). Staff’s assessment does not point to competitiveness problems, suggesting that the current account and the real exchange rate are broadly consistent with medium-term fundamentals and desirable policies (Annex III).

13. Risks remain tilted to the downside (Annex IV). While immediate domestic risks have been mitigated by the recent bank recapitalization and the government’s pre-financing of 2015 external-amortization needs, this could reduce the perceived urgency of reforms, increasing risks of a re-emergence of financial stress in the medium term. Moreover, failure to credibly consolidate the public finances could lead to higher borrowing costs—which could also be affected by renewed stress elsewhere in the euro-area—jeopardizing debt sustainability. The real debt burdens of both the public and private sectors could be exacerbated if deflation persists. The ECB’s recent quantitative easing measures are welcome, although they are expected to have only a limited effect on credit growth, given weak demand; while exports could benefit from a weak euro and financing conditions for the government could ease, this may also diminish incentives for reform. On the external front, a more pronounced slowdown in the euro-area or an intensification of geopolitical tensions around Ukraine, could weigh on exports.

14. The authorities shared staff’s views on the outlook, but saw lower risks. The official growth forecast has been revised upward for 2014–16 on account of the stronger-than-anticipated momentum. In its December forecast update, the Institute for Macroeconomic Analysis and Development (IMAD) foresees growth at 2 percent in 2015 and 1.7 in 2016. The authorities estimated a somewhat lower fiscal deficit outturn for 2014 and the medium term, which was seen to enable stabilization of the debt level at a lower level than that projected by staff. They shared staff’s assessment of external stability. While they agreed that external risks to the outlook remain elevated, they considered that domestic risks are on the upside as a result of reform implementation.

Policy Discussions

Policies need to focus on reducing vulnerabilities and boosting potential growth.

15. The authorities took steps to address the crisis in 2013, but policy implementation slowed in 2014. The bank recapitalization (largely undertaken in 2013) and transfer of some NPLs to the BAMC during 2014 reduced uncertainty in the financial sector, but NPLs are still high. The reform of the insolvency regime in 2013 put in place conditions to facilitate corporate-debt restructuring; however, restructurings have just begun, and the sustainability of some restructured loans appears questionable. The authorities took measures to consolidate the public finances during 2013–14, including through steps to reform the pension system, but the quality of fiscal adjustment weakened considerably in 2014. Finally, although the authorities have announced plans for a substantial privatization effort, only three small privatizations have been completed to date. The slow pace of reform implementation reflects, partly, the high political uncertainty during 2014.

Policy Actions since the 2013 Article IV Consultation
Article IV RecommendationsPolicy Actions
Banking Sector
  • NPLs: Deal with banks’ impaired assets, including through additional transfers to BAMC.
  • Governance: Improve governance and risk management.
  • Consolidation and privatization: Merge entities and divest state-owned banks.
  • NPLs: The asset transfers to the BAMC envisaged in late 2013 have now been completed. No additional transfers were made.
  • Governance: N/A.
  • Consolidation and privatization: A merger of two banks is in process; no banks have been privatized.
Corporate Sector
  • Facilitate debt restructuring and equity injections.
  • Reduce state involvement and improve governance.
  • Restructuring have started, but they remain few, and largely focused on extension of maturities.
  • The new Slovenia Sovereign Holding Company was established to manage all state assets.
Fiscal Policy
  • 2014: Take additional structural measures of 1 percent of GDP relative to those in the approved 2014 Budget.
  • 2015: Improve the structural primary balance by ¾ percent of GDP in 2015.
  • Medium-term: Take measures of ¾ percent of GDP in 2016 to achieve a primary fiscal surplus of 3½ percent of GDP and reform the pension system.
  • 2014: Budget measures were further diluted, and replaced with one offs. No additional permanent measures were taken.
  • 2015: The revised budget (yet to be approved) includes structural measures estimated at 0.7 percent of GDP.
  • Medium-term: No measures contemplated; a new fiscal rule law—specifying the path toward the MTO—is yet to be implemented.
Structural Reforms
  • Labor marked: Further reduce employment protection in permanent contracts.
  • Business environment: Privatize and reduce red tape.
  • Labor marked: N/A.
  • Business environment: Three companies were privatized.

16. Reigniting the reform momentum is essential to mitigate still high risks and support sustainable growth. Despite the policy actions taken so far, the balance sheets of banks, corporations, and the state remain vulnerable and deeply interlinked. Without continued reforms to restructure the banks and the corporate sector, strengthen their governance, and significantly reduce the role of the state in the economy, more losses could materialize, risking renewed financial stress. These reforms and associated confidence effects could also help facilitate the transmission of monetary policy and alleviate deflation risks. In addition, maintaining fiscal sustainability requires a credible fiscal consolidation strategy underpinned by structural reforms, including of the pension system. Finally, further structural reforms of labor markets and the business environment are needed to support corporate-sector restructuring, and diversify the sources of growth to strengthen the economy’s resilience against external shocks.

A. Financial Sector

Better asset quality and governance are keys to strengthening the health of the banking sector

17. Banks’ weak asset quality and governance impede their ability to support the economy. The high level of NPLs—three to four times as high as pre-crisis levels system-wise, and even more at state-owned banks—is a drag on banks’ cash flow and profitability, limiting their capacity to generate credit. Indeed, close to half of new lending reportedly financed NPL restructurings, most of which represented an extension of maturities of large and connected clients, with a third of restructured loans already under renegotiation (Box 1). In addition, as the state now owns more than 60 percent of the banking sector, the risk of political interference in lending decisions remains substantial. Although the authorities have committed to privatize the state-owned banks, the process could be prolonged, given strong vested interests. Moreover, another bank is still in need of capital, while the merger of two banks and resolution another two are yet to be finalized.

Arrears of more than 90 days as a proportion of banks’ classified claims by bank group

(Percent)

Ownership Structure of the Banking Sector (in terms of equity)

(Percent)

Source: 2014 Financial Stability Report, Bank of Slovenia.

18. Banks need to address their NPLs decisively. A two-pronged strategy can help maximize effectiveness:

  • For large corporate NPLs—which are highly concentrated, with 50 corporates accounting for a third of total NPLs1—transferring all large exposures to the BAMC would help offload NPLs from banks’ balance sheets. In line with current restructuring plans, only about half of corporate NPLs were transferred to the BAMC, suggesting further room to do so. While more transfers will likely result in a higher public debt in the short run, BAMC’s centralization of the workout process and its longer time horizon can help maximize returns for the taxpayer and lead to a reduction in debt in the long run, while allowing banks to focus on new lending to the economy rather than on caretaking of existing exposures. Using the recent bank asset-quality reviews as a valuation basis for the transfers can help ensure banks’ capital neutrality, although approvals from the European Commission would still be required and may take time. If large corporate NPLs are maintained on banks’ books, all available legal tools should be used to achieve efficient and sustainable loan restructuring agreements with viable companies, including through debt-to-equity swaps. The Central Bank of Slovenia (BoS) should closely monitor banks’ operational capacity and progress toward reducing corporate NPLs against set targets, including through a framework assessing the sustainability of restructurings.
  • SME NPLs—which represent about 40 percent of corporate NPLs—need to be dealt with through the banks’ internal restructuring units, given the large number of clients involved. However, only a few SME restructurings have reportedly taken place to date. With SMEs playing a key role in the economy (representing 63 percent of value added and 73 percent of employment in the business sector),2 addressing the indebtedness of a critical mass of SMEs can help lay the foundation of a more robust and sustained recovery.3 To do so, the BoS will need to enhance its supervisory tools, such as by developing a framework for voluntary negotiations including simplified debt-restructuring options (differentiated based on a few criteria, such as size, indebtedness and ability to generate cash-flow), which could be used by banks readily, while remaining within provisioning margins. Care needs to be taken to minimize incentives for strategic default and to ensure that both creditors and debtors have adequate incentives to negotiate and to take advantage of potentially mutually beneficial outcomes, including by strengthening the implementation of the insolvency regime (see below). BoS should set ambitious SME restructuring targets and monitor progress against them.

19. Bank governance should be strengthened, and the state’s role in credit intermediation curtailed. Lax governance and pervasive connected lending were at the root of the recent banking crisis and resulted in large fiscal costs. To avoid further taxpayer costs, state-owned banks should be insulated from political pressures and/or interference. All state-owned banks should thus be privatized as soon as possible. In particular, the authorities need to make good on their commitment to privatize the second largest bank (NKBM) in 2015, and sell in full (rather than only in part) the largest bank (NLB); given that a partial privatization of the latter had already been tried in the past and proved inadequate to ensure either proper governance or capitalization, this should be avoided. The authorities need to add the other state-owned banks (after completing planned mergers) to the privatization list. In the meantime, a governance relationship framework between the banks and the relevant state agency (as the shareholder) should be put in place ensuring these banks’ independent management, including appropriate operational performance targets and transparent and strong accountability.4 Even after privatization, maintaining adequate bank governance is essential to safeguarding financial stability.

20. The bank recapitalization and restructuring process needs to be finalized. The authorities have granted a new extension (to mid-2015) to one of the banks identified as undercapitalized in late 2013, following remedial measures taken in the interim to minimize the identified shortfall. To safeguard financial stability, they will need to closely monitor the bank’s efforts to raise capital and stand ready to address any remaining shortfalls in a transparent manner, while minimizing fiscal costs. Moreover, the wind-down procedures for the two banks intervened in September 2013 need to be completed as soon as possible. Mergers of smaller nationalized banks can help attract strategic investors, but care should be taken to prevent concentration and enhance competition. Finally, banks should be encouraged to focus on core lending activities, including by continuing to divest non-core operations and selling corporate-equity stakes in due course.

21. The authorities need to continue to improve the monitoring and management of macro-financial risks. With the Single-Supervisory Mechanism (SSM) now in effect, supervision is expected to be strengthened as standards are brought in line with international best practice. In particular, resolution mechanisms need to be aligned with the new pan-European framework and the BoS’s operational capacity strengthened to enable it to intervene and resolve banks promptly. In addition, the authorities should speed up implementation of a centralized-credit registry, especially given the widespread practice of firms to borrow from multiple banks. The BoS should also develop a comprehensive system to monitor connected lending, which has been pervasive in the past. Finally, the authorities should review the various administrative and macro-prudential tools introduced during the crisis,5 whose usefulness appears limited. In particular, there seems to be scope to eliminate the deposit-rate cap and to simplify the complex loan-to-deposit growth instrument, as well as to consider introducing a cap on loan-to-value ratios on all assets, including those purchased through leveraged buy-outs, to prevent overleveraging in the future.

22. The authorities agreed that addressing NPLs and strengthening governance are key priorities. They saw that results from restructuring efforts are starting to materialize and expected NPLs to gradually decline as a result. They concurred with the need to monitor progress in this regard, and noted that proposed innovations in the supervisory toolkit may need to be discussed and agreed with the SSM. The authorities considered that additional transfers to BAMC are not needed, as BAMC was seen to hold a critical mass of exposures, and any other transfers could add to the short-run debt level and take substantial time due to the need to secure approvals from the European Commission. While they agreed that bank governance should be strengthened and reiterated their commitment to sell NKBM bank in 2015, they intend to maintain a blocking minority stake in NLB. The authorities aimed to complete remaining bank recapitalization and restructuring processes this year. They expressed a slight preference for maintaining existing administrative and macro-prudential tools.

B. Corporate Sector

Corporate restructuring and improved governance are needed to boost investment and growth

23. High corporate sector indebtedness and weak governance weigh on growth. Although the corporate debt-to-equity ratio has fallen in recent years, it remains higher than its pre-crisis average and the level of peers. Deleveraging will continue to hamper investment and employment, unless corporate restructuring effectively lowers debt and/or equity increases.6 But restructurings have been limited so far, and the sustainability of some bank-led multilateral restructuring agreements is questionable, reflecting strong vested interests and bottlenecks in the implementation of the new insolvency legal framework (Box 1). Moreover, prospects for increasing firm equity are dim, given a shallow equity market, limited domestic liquidity, and Slovenia’s poor record in attracting FDI. Weak corporate governance compounds the sector’s problems, with prevalent direct and indirect state control and complex corporate structures distorting decision-making and hampering efficiency.

Leverage in 2008 and investment decline, 2012-2004

Sources: ECB and Eurostat.

Public Ownership Index 1/

Sources: OECD.

1/ Index of state ownership in large companies, 6 highest, 0 lowest.

Box 1.Corporate Debt Restructuring

Corporate restructuring has begun, but is proceeding only slowly. Following the 2013 reform of the insolvency framework, creditors and debtors have more options to address corporate indebtedness. As a result, during 2013–14, about 30 compulsory settlements were completed per year. Simplified compulsory settlements also increased from 10 in 2013 to 90 in 2014. And in 2014, some 8 pre-insolvency restructuring proceedings were concluded for the first time in Slovenia. By comparison, corporate bankruptcy procedures remain widespread, amounting to close to 1000 per year in 2013–14, double their level in 2012.

Reorganization and Restructuring Procedures

(count)

Source: Ministry of Justice.

For large corporates, restructurings are occurring through two main channels:

BAMC: As of end-September 2014, it received 616 corporate NPLs, with a gross value of €3.5 billion, for which BAMC paid €1.5 billion in bonds (reflected in public debt). Of these, a sixth was assessed as potentially viable and is being restructured, while the rest is in recovery proceedings. Of the restructuring cases, fifteen cases (about €1 billion gross value) are reportedly completed or at an advanced stage. A third of these are being dealt with through compulsory settlement and a few through preventive restructuring. In other cases, orderly bankruptcy proceedings were required to separate viable from non-viable operations, with the viable part successfully leased to investors. The BAMC has also been working with the banks on voluntary MRAs (see below). It recovered €94 million from sales of non-viable NPLs received so far, most of which had already been in bankruptcy proceedings.

Bank-led Multilateral Restructuring Agreements (MRAs): These are based on agreed restructuring guidelines on the basis of key principles, including: (i) keeping the restructuring voluntary; (ii) applying to debtors with more than one financial creditor; (iii) assigning a lead bank to coordinate all creditors; and (iv) a commitment by creditors to allow for a standstill pending the restructuring negotiations. So far, 36 MRAs have been initiated, of which 30 were concluded. The 36 MRAs represent gross exposures of €2 billion, or about a fifth of excessive leverage in the economy.1 Of the total cases, 6 involve compulsory settlements and 4 are preventive restructurings under the new legal framework. Negotiations are often complex, involving multiple creditors (9 banks, on average, although in some cases, 15 or more banks were involved). The BAMC has been involved in 16 of the MRAs, of which 4 have included debt-to-equity swaps (representing 10 percent of all MRAs).

The sustainability of some corporate restructurings under MRAs is questionable. The vast majority (90 percent) of bank-led restructurings under MRAs involve a re-profiling of debt, rather than representing a reduction of corporates’ debt burden relative to their capacity to generate income. In fact, in a third of the signed agreements, additional financing or guarantees were provided by the banks. And a third of concluded agreements are being renegotiated.

1 Excessive leverage is debt in excess of debt-to-EBITDA ratios of 5. See Jože P. Damijan, “Corporate financial soundness and its impact on firm performance: Implications for corporate debt restructuring in Slovenia.”

24. The BAMC should play a leading role in corporate restructuring. International evidence suggests that asset-management companies (AMCs) can effectively centralize and coordinate the workout of distressed debt, as they can achieve economies of scale, unify workout practices, break corporate-bank links, and concentrate the ownership of collateral, thus enhancing leverage over debtors. Successful cases highlight the vital role of a strong legal framework, independence from political interference, and professional and highly skilled management and staff.7 Maintaining these conditions in place, in particular safeguarding BAMC’s independence from political interference, is essential to achieve sustainable debt-restructuring solutions and maximize taxpayer returns. Indeed, BAMC has started to show results (Box 1) and its efforts will need to accelerate.

25. The operational effectiveness of the insolvency framework should be increased. The recent reform of the framework has brought it closer in line with international best practice. Although some legal weaknesses remain, given frequent changes to the law in recent years, further modifications would be unwelcome at this point, as maintaining a stable and predictable framework is key to fostering debt-restructuring agreements The authorities should focus on strengthening the implementation of existing tools, which are hampered by capacity constraints and other operational bottlenecks (see Selected Issues Paper “Legal and Institutional Challenges in Corporate Insolvency”). The capacity of the judiciary and the professionalism of bankruptcy administrators should be enhanced, including through adequate appointment and remuneration systems and proper supervision and accountability. The corporate-insolvency framework should also be supported by a more efficient mortgage-enforcement regime, which would facilitate credit and help underpin debt-restructuring efforts. Finally, the authorities could consider tax measures to incentivize debt restructuring and, over the medium term, could consider simplifying and further strengthening the legal framework.

26. Corporate governance needs to be strengthened. To facilitate corporate restructuring and attract much needed equity, corporate governance standards should be brought in line with best practice by enhancing the accountability of directors, the protection of investor rights, and auditing and reporting standards and practices. The authorities should also ensure that the recently-established Slovenia Sovereign Holding Company (SSH) remains professional and independent and maintains an appropriate governance framework ensuring management of state assets on commercial criteria, with clear objectives and accountability.

27. The authorities should step up privatization efforts. Slovenia has been slow to privatize compared to its peers, which has contributed to governance problems and led to inefficiencies. Well-designed and implemented privatization can bring in fresh capital, including FDI, and related technological and managerial know-how, fostering competition and leading to better quality at lower prices. It can also help reduce public debt. The authorities should thus intensify efforts to divest the remaining twelve companies slated for sale, while avoiding fire sales. A few early and successful sales (such as of the telecom company and NKBM, expected this year) can send a strong signal to the markets about Slovenia’s commitment to privatization and openness to FDI. The strategy for remaining state assets should be finalized, with the aim to divest all non-strategic ones.

28. The authorities concurred that reducing corporate debt overhang is a priority. They agreed that the BAMC can play a key role, but noted that its independence also comes with obligations to maintain transparency and accountability. In this regard, they suggested that remuneration may need to be lowered and governance changed to achieve balance in its board (now majority foreign). The authorities saw positively the reformed insolvency framework, which is facilitating MRAs, but agreed that capacity bottlenecks need to be addressed. They reiterated their commitment to privatize companies slated for sale, formulate a strategy for other state-owned assets, and ensure an independent professional board of the SSH.

C. Fiscal Policy

Fiscal consolidation underpinned by structural reforms is key to ensuring debt sustainability

29. The authorities are planning additional measures this year. The authorities’ revised budget, to be adopted in February, includes additional measures aiming at reducing the overall deficit (ESA2010 terms) below the EDP target of 3 percent of GDP while protecting public investment. Staff has a somewhat more conservative estimate of potential savings from the measures, as some have been diluted since being proposed, while others do not appear well specified. On this basis, but also given the expiry of one-offs from 2014, staff projects a general government deficit (cash terms, not including broader public sector entities) of 4 percent of GDP in 2015. Depending on cash-accrual adjustments and developments in the broader public sector, there is a risk that the authorities’ EDP target (ESA2010 terms) may not be achieved, which could jeopardize policy credibility.

2015 Fiscal Measures(in percent of GDP)
Yield (authorities)Yield (staff)
Revenue measures0.40.2
Tax student work0.20.2
Tax fin. serv.0.10.1
Environmental tax0.10.0
Increased collection efficiency0.10.0
Spending measures1.41.0
Public sector wage cuts0.60.4
Cuts goods&serv spending0.50.2
Pension bonus and insurance0.10.1
Cuts in subsidies0.10.1
Cuts in capital spending0.10.1
Total measures1.91.2
o/w permanent0.7
Sources: MoF and staff estimates.
Sources: MoF and staff estimates.

30. Without further structural fiscal adjustment, both the medium-term objective of a balanced budget and debt sustainability would be jeopardized. On the basis of current policies, staff projects about 3¾ percent of GDP in further measures will be required to reach a balanced budget in the medium term, as committed to under the Stability and Growth Pact (SGP). Moreover, without further adjustment, debt is projected to increase to close to 90 percent of GDP by 2020, raising sustainability concerns. Vulnerabilities also arise from large maturities (some 12 percent of GDP) coming due in 2016 and sizeable government guarantees (18 percent of GDP), which are concentrated in a few public entities. Finally, population aging will boost pension costs beyond 2020; left unaddressed, they would lead to an explosive debt path.

Fiscal indicators(percent of GDP)
20132014201520162017201820192020
Baseline
General government balance-13.8-6.0-4.0-3.5-3.5-3.6-3.6-3.7
Net of bank restructuring-4.3-3.7-4.0-3.5-3.5-3.6-3.6-3.7
Overall structural balance-2.2-3.5-2.9-3.4-3.5-3.6-3.7-3.7
Primary balance-11.5-2.9-1.0-0.3-0.10.10.10.1
Structural primary balance0.1-0.40.1-0.2-0.2-0.10.00.0
Public debt70.083.280.582.984.486.087.689.3
Staff-recommended scenario
General government balance-13.8-6.0-4.0-2.6-1.8-1.00.00.0
Net of bank restructuring-4.3-3.7-4.0-2.6-1.8-1.00.00.0
Overall structural balance-2.2-3.5-2.3-2.0-1.4-0.60.00.0
Primary balance-11.5-2.9-1.00.71.62.53.63.6
Structural primary balance0.1-0.40.71.11.92.83.63.6
Public debt70.083.280.582.282.080.979.076.7
Sources: Slovenian authorities, and IMF staff estimates.
Sources: Slovenian authorities, and IMF staff estimates.

31. To enhance the durability of the adjustment, the authorities could target a somewhat more ambitious structural improvement in 2015. Structural measures of around 1.2 percent of GDP—corresponding to an improvement in the structural balance of about 1 percent of GDP—can help strike a balance between short-run cyclical and long-run sustainability concerns. This would imply replacing some ½ percent of GDP of proposed temporary measures with permanent ones. Measures could include better targeting of social transfers and subsidies to ensure that those most vulnerable are protected, while reducing abuse in the system. Indeed, the crisis has led to an increase in the risk of social exclusion relative to the pre-crisis period.8 The authorities could also consider reducing the tax preferential treatment for pensions and the pensioner-specific social benefits (while ensuring that low-income pensioners are adequately covered by the safety net), which would also help mitigate long-run population aging costs. Plans to protect public investment through absorption of EU funds should be maintained, as they are supportive of growth.

32. The deficit reduction needed to put debt on a sustained downward path should be undertaken gradually to help minimize risks to the recovery while ensuring policy credibility. An adjustment of ¾ percent of GDP per year over 2016–19 would be required to reach structural balance (and an overall primary surplus of around 3.3 percent of GDP) by 2019. This would bring debt down to around 77 percent of GDP by 2020, close to the 2013 level, but still more than three times its pre-crisis level.

  • On the revenue side: Redesigning and adopting a real-estate tax next year in line with the constitution would not only help boost revenues, but would also promote social and intergenerational equity by ensuring an adequate sharing of the tax burden based on wealth. Broader tax reforms could help to address the erosion in the tax base by revisiting income tax exemptions as the economy recovers and remove tax distortions favoring debt over equity financing.
  • On the spending side: The authorities should pursue further pension reforms, including the measures noted in ¶19, as well as moving to indexation of benefits to prices and reducing remaining incentives for early retirement (see Selected Issues Paper “Social Spending Reform and Fiscal Savings in Slovenia”). Early adoption can help to minimize costs. Furthermore, the planned health expenditure review is an opportunity to modernize the sector and achieve efficiency savings. More broadly, a public administration review and reform could help reduce inefficiencies and costs while maintaining the quality of public services. Putting in place a system of monitoring government guarantees that is integrated into the overall debt-management strategy can help reduce fiscal risks.

33. Fiscal credibility would also be enhanced by implementing a fiscal rule. The authorities have drafted legislation implementing the new EU fiscal framework by introducing expenditure ceilings consistent with the EU’s minimum recommended structural adjustment of ½ percent per year, while providing flexibility in exceptional circumstances, and setting up an independent Fiscal Council. As noted above, they should aim for a more ambitious medium-term structural adjustment to reach the medium-term objective in a well-specified and realistic timeframe. This is a key to enhancing predictability and safeguarding the credibility of fiscal policy and debt sustainability. Specification of automatic corrective mechanisms to deal with unforeseen deviations and with large shocks impacting the fiscal accounts would also help.

34. The authorities had a more sanguine view of short and medium-term fiscal prospects. They were confident that the new fiscal measures (which they estimate to have a higher yield than staff expects), together with large and positive cash-accrual adjustments and substantially improved financial outturns of extra-budgetary entities would be sufficient to attain the 2015 EDP target. Moreover, they considered that a pace of fiscal adjustment of ½ percent of GDP per year would be appropriate from a cyclical perspective, while being sufficient to meet their SGP targets in the medium term. They agreed that further adjustment should be supported by structural reforms, but did not see an urgency to implement the real-estate tax and pension reforms.

D. Structural Reforms

Structural reforms can help support corporate restructuring, jobs, and growth

35. Structural bottlenecks hinder investment and growth (Figure 8). In the labor market, the 2013 reform reducing severance payments and notice periods has led to an increase in the share of new contracts that are open-ended.9 Yet, the number of temporary contracts remains large and is among the highest in the EU, discouraging job-specific investment in human capital, which is especially problematic for the youth. In addition, following a 23 percent minimum-wage increase in 2010, the wage structure is highly compressed, which also affects employment negatively and limits productivity. Entry barriers in restricted professions further constrain employment opportunities, despite some recent liberalization.10 Finally, restrictive product market regulations and red tape hinder competition, investment, and FDI.

Figure 8.Slovenia: Structural Indicators

Notes: For each indicator, “World Best Practice” is defined as the average of the five best performers and is set equal to 100, while the worst performer in the EU27 is set equal to zero. For a description of the indicators and their sources, see Cheptea and Velculescu (2014), “A Disaggregated Approach to Prioritizing Structural Reforms for Growth and Employment”, in Jobs and Growth: Supporting the European Recovery, IMF.

Economy-Wide Product Market Regulations, 2013 1/

(Index from 0 to 6; least to most restrictive)

Source: OECD.

1/ 2013 data is missing for USA. 2008 vaules are used instead.

Minimum Wages and Temporary Work

(Percent)

Sources: Eurostat and OECD.

36. Further labor and service-market reforms can help boost long-term youth employment. Such reforms are also key to facilitating the reallocation of labor across firms and sectors, supporting corporate restructuring and boosting long-run productivity. Building on the 2013 reform, the authorities should take further steps to reduce the protection of open-ended contracts, in particular on collective dismissals, where Slovenia still lags the OECD average.11 Active labor market policies can also be better focused on providing the skills required by changing economic conditions. Additionally, reducing wage compression, for example through slower indexation of minimum wages, can help boost employment and reward (and retain) strong performers. And closed professions should be further liberalized.

37. Other institutional reforms can help spur domestic and foreign investment. Streamlining procedures and regulations (e.g., easing rules for registering or selling property, simplifying requirements for foreign trade, cutting barriers to business development, and eliminating red tape related to the granting of construction permits) can help attract fresh capital in the economy, including from abroad. To boost long-run growth and innovation, education curricula can be better aligned to the needs of the economy, and cooperation between universities and industry strengthened. Bringing the institutional environment in line with best practice could have a significant impact on growth (with the upside estimated at up to 2–2¾ percentage points), and carefully prioritizing reforms can maximize their impact (see Selected Issues Paper “Prioritizing Structural Reforms to Support the Recovery”).

38. The authorities concurred with the need to strengthen institutions to boost jobs and growth. However, they considered that the 2013 labor market reform, together with recent measures to increase payroll taxes on student work, are sufficient to reduce discrepancies between temporary and permanent contracts. The authorities agreed that there is further scope to improve the business environment and noted that they have recently integrated plans from various ministries into a single reform strategy aiming, inter alia, at reducing the administrative burden by 25 percent.12

Staff Appraisal

39. Slovenia is recovering from a profound recession. The economy was hit hard by global developments, which, combined with domestic imbalances, culminated in a banking crisis in 2013. The authorities responded by providing significant state support to the banks and implementing measures to facilitate corporate-debt restructuring and bolster the public finances. As confidence returned and external conditions improved, activity rebounded last year, supported by strong exports and EU-funded public investment.

40. But the legacies of the crisis weigh on the outlook. Output remains well below pre-crisis levels, and unemployment is still very high. Bank NPLs remain excessive, also reflecting the overindebtedness of the corporate sector, hampering investment and job creation. And the public finances are strained, as the large bank recapitalization costs boosted the deficit and debt, placing a heavy burden on future generations of taxpayers. As a result, the growth outlook remains subdued and the economy is still vulnerable to shocks.

41. Resolute policy action therefore remains of the essence to reduce vulnerabilities and boost growth. With the balance sheets of banks, corporations, and the state still weak and deeply interlinked, continued comprehensive reforms are needed to strengthen the economy’s resilience to shocks, improve the monetary transmission mechanism, and pave the way for sustainable long-term growth. Policy complacency, on the other hand, could lead to more losses down the road, risking renewed financial stress.

42. A key policy priority is to address NPLs decisively and strengthen bank governance. The authorities should take steps to ensure more active use of transfers to the BAMC, as these are a critical element of any strategy to reduce large corporate NPLs. For SMEs, guidelines for voluntary negotiations including simplified debt-restructuring options could help promote work-outs for viable firms. The supervisory authorities should monitor banks’ operational capacity to deal with NPLs, set ambitious targets, and monitor progress toward these. Bank governance should be strengthened and state-owned banks (including the largest bank) should be fully privatized as soon as possible, in order to reduce the risk of political interference in credit allocation.

43. Bank restructuring should be completed, and macro-financial risk management strengthened. To safeguard financial stability, any remaining capital shortfalls should be addressed in a timely and transparent manner, while minimizing taxpayer costs. Ongoing wind-down procedures need to be completed. With the SSM now in effect, supervision is expected to be strengthened. Still, there is scope to enhance the monitoring of risks, including by implementing a centralized credit registry and a monitoring system for connected lending.

44. Corporate-sector restructuring should accelerate. The BAMC should play a leading role in the restructuring process, to achieve economies of scale and sever corporate-bank links. Safeguarding the BAMC’s independence from political interference is essential to maximizing taxpayer returns. The authorities should encourage the use of existing legal tools to restructure the debt of viable companies, including through debt-to-equity swaps. Increasing the operational effectiveness of the insolvency framework can help facilitate this process.

45. Corporate governance should be strengthened, including by speeding up privatizations. Weak governance and pervasive state control in the economy were at the root of the crisis. To address this, facilitate corporate restructuring, and attract much needed equity capital in the economy, the authorities need to intensify privatization efforts, while avoiding fire sales. Strategic state-owned assets should be managed independently, without undue political interference.

46. Another policy priority is to put public finances on a sustainable footing. After the 2014 fiscal targets were missed due to slippages and setbacks, the 2015 budget includes additional consolidation measures to bring the deficit in check. In light of still rising and vulnerable public debt, the authorities could target a somewhat more ambitious structural improvement this year, aiming for an adjustment of about 1 percent of GDP. Additional structural measures of about ¾ percent of GDP per year over the subsequent four years would be needed to reach structural balance and place debt on a sustained downward path by 2020.

47. Structural fiscal reforms need to underpin the adjustment. Implementation of a new property-tax system in line with the constitution can help boost revenues and enhance intergenerational equity. Comprehensive pension reform is critical to address the large costs of population aging. Further tax reform can help simplify the system, reduce compliance costs, and eliminate biases in favor of debt. And reforms of the health sector and public administration can help reduce fiscal costs and boost efficiency.

48. Other institutional reforms can help support employment and long-term growth. Addressing labor market segmentation by taking further steps to reduce the protection of open-ended contracts can help facilitate labor relocation as the corporate sector restructures, while boosting long-term prospects for youth employment. Improving the business environment, including by cutting red tape, is key to spurring investment, including from abroad. Careful prioritization of structural reforms can maximize their impact on growth.

49. It is proposed that the next Article IV consultation be held on the 12-month cycle.

Table 1.Slovenia: Selected Economic Indicators, 2010–16

(Annual percentage change, unless noted otherwise)

Key Export Markets: Germany, Italy, Countries of Former Yugoslavia, France, Austria

Quota (as of June 30, 2014): SDR 275 million

Main products/exports: Automotive, Machinery-Appliances, Tourism, Transportation

Est.Projections
2010201120122013201420152016
Nominal GDP (EUR millions)36,22036,86836,00636,14437,07937,76838,681
GDP per Capita (EUR)17,69417,98317,51717,55617,98118,28518,697
Real economy
Real GDP1.20.6−2.6−1.02.61.91.7
Domestic demand−0.9−0.8−5.6−2.10.91.01.8
Private consumption1.0−0.1−3.0−3.90.40.81.6
Public consumption0.1−1.3−1.5−1.1−0.6−0.60.7
Gross capital formation−6.3−1.8−16.52.25.63.13.2
Net exports (contribution to growth)2.31.53.11.11.40.80.1
Exports of goods and services10.17.00.32.65.84.13.8
Imports of goods and services6.65.0−3.91.44.53.74.2
Output gap (in percent of potential GDP)−1.6−1.3−3.8−4.5−2.3−0.9−0.2
Prices
Consumer prices (national definition, period average)1.81.82.61.80.2−0.20.8
Core inflation (period average)−0.4−0.40.70.90.3
Employment and wages
Unemployment rate (in percent, ILO definition)7.38.28.910.19.79.08.4
Employment (Full time basis, national accounts)−2.2−1.6−0.8−1.50.60.70.7
Nominal wages (all sectors)3.92.00.1−0.11.10.41.1
Real wages (all sectors)2.00.2−2.5−1.91.10.60.3
Public finance (percent of GDP)
General government balance 1/−5.2−5.5−3.1−13.8−6.0−4.0−3.5
General government balance excl. bank support 1/−5.2−4.2−3.1−4.3−3.7−4.0−3.5
Structural balance 2/−4.6−4.1−2.2−2.2−3.5−2.9−3.4
Structural primary balance 2/−3.4−2.8−0.50.1−0.40.1−0.2
General government debt 3/37.946.253.370.083.280.582.9
Monetary and financial indicators
Credit to the private sector 4/2.9−1.9−5.4−6.9−6.8−4.6−2.8
Lending rates 5/4.95.04.74.54.2
Deposit rates 6/1.82.22.31.91.0
Government bond yield (10-year)3.85.05.85.83.3
Balance of payments (percent of GDP)
Trade balance (goods and services)−2.3−2.6−0.51.83.24.14.1
Current account balance−0.10.42.85.85.56.25.7
Gross external debt (percent of GDP, end-period)112.4108.8114.6110.5119.0115.3110.7
Nominal effective exchange rate (2010=100)100.0100.499.3100.7
Real effective exchange rate (2010=100, CPI-based)100.099.498.299.7
Sources: Data provided by the Slovenian authorities; and IMF staff calculations and projections.

Includes 9.5 percent of GDP in 2013 and 2.3 percent of GDP in 2014 in capital injections into banks and support for deposit redemptions in banks being wound

Excludes bank support and other one-offs. Adjusted for calendar year shifts between receipt and expenditure of earmarked EU funds.

Includes EUR 1.1 bn in 2013 and EUR 0.7 bn in 2014 of debt issuance of the Bank Asset Management Company (BAMC).

2013 and 2014 data are adjusted to exclude the impact of transfers to the BAMC. 2014 data reflects November 2014.

Floating or up-to-one-year fixed rate for new loans to non-financial corporations over 1 million euros. 2014 entry is the January-November average.

For household time deposits with maturity up to one year. 2014 entry is the January-November average.

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

Includes 9.5 percent of GDP in 2013 and 2.3 percent of GDP in 2014 in capital injections into banks and support for deposit redemptions in banks being wound

Excludes bank support and other one-offs. Adjusted for calendar year shifts between receipt and expenditure of earmarked EU funds.

Includes EUR 1.1 bn in 2013 and EUR 0.7 bn in 2014 of debt issuance of the Bank Asset Management Company (BAMC).

2013 and 2014 data are adjusted to exclude the impact of transfers to the BAMC. 2014 data reflects November 2014.

Floating or up-to-one-year fixed rate for new loans to non-financial corporations over 1 million euros. 2014 entry is the January-November average.

For household time deposits with maturity up to one year. 2014 entry is the January-November average.

Table 2.Slovenia: Balance of Payments, 2010–20(Percent of GDP, unless otherwise noted)
Est.Projections
20102011201220132014201520162017201820192020
Current account−0.10.42.85.85.56.25.75.34.84.13.5
Trade balance, goods and services1.21.44.37.28.19.19.08.58.07.46.8
Goods−2.3−2.6−0.51.83.24.14.13.83.63.32.9
Exports f.o.b.52.458.260.160.963.064.465.867.268.670.171.6
Imports f.o.b.−54.7−60.8−60.6−59.2−59.8−60.2−61.7−63.3−65.0−66.9−68.7
Services3.54.04.85.44.95.04.94.74.54.23.9
Exports12.713.114.114.814.915.015.115.315.415.515.7
Imports−9.1−9.1−9.3−9.4−10.0−10.0−10.2−10.6−10.9−11.4−11.8
Income, net−1.6−1.4−1.5−1.6−2.8−3.1−3.5−3.4−3.4−3.5−3.5
Current transfers, net0.20.40.00.20.20.20.20.20.20.20.2
Capital account0.1−0.20.10.30.30.30.30.30.30.30.2
Financial account, excl. reserves1.3−1.2−3.0−8.1−7.3−6.5−6.0−5.5−5.1−4.4−3.7
Direct investment, net1.21.70.5−1.71.21.51.51.01.01.01.0
In Slovenia0.81.9−0.2−2.21.72.02.02.02.02.02.0
Abroad0.4−0.20.60.5−0.5−0.5−0.5−1.0−1.0−1.0−1.0
Portfolio investment, net5.45.0−0.611.09.6−2.3−1.9−2.3−2.5−2.4−2.5
Financial derivatives−0.3−0.4−0.30.20.00.00.00.00.00.00.0
Other investment, net−5.0−7.5−2.6−17.4−18.0−5.7−5.6−4.2−3.6−3.0−2.2
Government0.00.21.71.2−0.1−0.1−0.1−0.1−0.1−0.10.0
Bank of Slovenia0.30.00.00.00.00.00.00.00.00.00.0
Commercial banks−2.5−4.20.1−15.4−4.8−4.3−4.2−3.4−3.1−2.6−1.8
Nonbank private sector2.5−3.9−3.1−4.9−11.30.30.60.91.00.60.3
Loans0.1−0.40.30.7−0.1−0.1−0.1−0.1−0.1−0.10.0
Currency and deposits−2.5−2.8−3.6−1.2−11.2−0.20.10.50.60.2−0.2
Trade credits0.50.20.9−0.50.50.50.50.50.50.50.5
Other4.3−0.8−0.7−3.9−0.50.00.00.00.00.00.0
Net errors and omissions−1.30.5−0.12.01.50.00.00.00.00.00.0
Overall balance−0.1−0.6−0.10.00.00.00.00.00.00.00.0
Change in official reserves (-: increase)0.10.20.10.00.00.00.00.00.00.00.0
Memorandum items:
Export of goods (percent change in value)14.413.01.02.16.24.14.85.55.55.55.5
Import of goods (percent change in value)15.312.6−2.50.43.83.04.56.16.06.16.2
Terms of trade (percent change)−4.8−1.6−1.21.00.10.50.50.10.10.00.0
Gross external debt (billion euros)40.740.141.339.944.143.642.842.141.441.141.3
(percent of GDP)112.4108.8114.6110.5119.0115.3110.7105.2100.296.594.0
International investment position (net, percent GDP)−42.3−40.0−44.9−37.8−29.8−22.8−16.3−10.2−4.8−0.33.4
Sources: Data provided by the Slovenian authorities; and IMF staff calculations and projections.
Sources: Data provided by the Slovenian authorities; and IMF staff calculations and projections.
Table 3.Slovenia: General Government Operations, 2010–20(In percent of GDP, unless indicated otherwise)
20102011201220132014201520162017201820192020
Est.Projections
Revenue40.040.341.340.341.941.041.141.141.241.241.2
Taxes21.021.521.920.821.421.421.321.421.421.521.6
Taxes on income, profit, payroll6.97.57.46.06.56.56.46.56.56.56.5
Taxes on goods and services13.413.413.814.114.314.214.214.214.214.314.3
Other taxes0.60.60.70.70.70.70.70.70.70.70.7
Social contributions14.514.314.614.214.214.214.114.214.114.114.0
Other revenue4.54.54.95.36.25.45.75.65.65.65.6
Expenditure45.345.844.554.147.945.144.644.644.744.844.9
Expense42.543.442.351.744.041.141.241.241.441.541.6
Compensation of employees10.810.510.410.09.89.69.49.39.39.29.1
Purchases of goods and services6.96.66.66.26.06.46.56.56.56.56.5
Interest1.31.41.82.33.13.03.23.43.63.73.8
Transfers to individuals and households17.317.717.717.517.116.816.816.917.017.117.2
of which: pensions11.111.211.511.811.611.411.611.711.912.112.2
Subsidies1.61.31.41.41.30.90.90.90.90.80.8
Other transfers4.45.74.414.26.74.44.34.24.14.14.1
of which: capital transfers1.12.30.910.42.01.01.01.01.01.01.0
transfers to the EU budget1.11.11.11.21.11.11.11.11.11.11.1
Net acquisition of non-financial assets2.82.42.22.43.93.93.53.33.33.33.3
Gross operating balance 1/−2.4−3.1−0.9−11.4−2.1−0.1−0.1−0.1−0.2−0.3−0.4
Net lending / Net borrowing 1/−5.2−5.5−3.1−13.8−6.0−4.0−3.5−3.5−3.6−3.6−3.7
excluding bank related costs−5.2−4.2−3.1−4.3−3.7−4.0−3.5−3.5−3.6−3.6−3.7
Net acquisition of financial assets−2.82.6
Net incurrence of liabilities2.48.1
Memorandum item:
Primary balance 1/−4.0−4.2−1.4−11.6−3.0−1.1−0.4−0.20.00.00.0
Structural budget balance 2/−4.6−4.1−2.2−2.2−3.5−2.9−3.4−3.5−3.6−3.7−3.7
Structural primary balance 2/−3.4−2.8−0.50.1−0.40.1−0.2−0.2−0.10.00.0
General government debt 3/37.946.253.370.083.280.582.984.486.087.689.3
Sources: Ministry of Finance; and IMF staff calculations.

Includes 9.5 percent of GDP in 2013 and 2.3 percent of GDP in 2014 in capital injections into banks and support for deposit redemptions in banks being wound down.

Excludes bank support and other one-offs. Adjusted for calendar year shifts between receipt and expenditure of earmarked EU funds.

Includes EUR 1.1 bn in 2013 and EUR 0.7 bn in 2014 of debt issuance of the Bank Asset Management Company (BAMC).

Sources: Ministry of Finance; and IMF staff calculations.

Includes 9.5 percent of GDP in 2013 and 2.3 percent of GDP in 2014 in capital injections into banks and support for deposit redemptions in banks being wound down.

Excludes bank support and other one-offs. Adjusted for calendar year shifts between receipt and expenditure of earmarked EU funds.

Includes EUR 1.1 bn in 2013 and EUR 0.7 bn in 2014 of debt issuance of the Bank Asset Management Company (BAMC).

Table 4.Slovenia: Macroeconomic Framework, 2010–20
Est.Projections
20102011201220132014201520162017201820192020
Real GDP (percent change)1.20.6−2.6−1.02.61.91.71.81.81.81.7
Contributions to growth
Domestic demand−0.9−0.7−5.4−1.90.60.91.62.12.02.22.2
Private consumption0.5−0.1−1.6−2.10.20.40.81.11.11.21.2
Government consumption0.0−0.2−0.3−0.2−0.1−0.10.10.10.10.10.1
Gross capital formation−1.6−0.4−3.70.41.10.60.70.90.90.90.9
Net exports2.31.53.11.11.40.80.1−0.2−0.3−0.4−0.5
Exports of goods and services6.75.00.22.14.73.53.33.33.43.53.5
Imports of goods and services4.33.5−2.81.03.32.73.23.63.73.94.0
Growth rates
Domestic demand−0.9−0.8−5.6−2.10.91.01.82.32.32.42.4
Consumption0.7−0.5−2.6−3.10.10.41.31.81.71.81.9
Private1.0−0.1−3.0−3.90.40.81.62.12.12.22.2
Public0.1−1.3−1.5−1.1−0.6−0.60.70.70.50.60.7
Gross capital formation−6.3−1.8−16.52.25.63.13.24.04.04.04.0
Fixed investment−13.7−4.6−8.91.95.73.13.24.04.04.04.0
Change in stocks (contribution to GDP growth)2.00.6−1.80.10.00.00.00.00.00.00.0
Exports of goods and services10.17.00.32.65.84.13.83.83.83.83.8
Imports of goods and services6.65.0−3.91.44.53.74.24.64.64.74.7
Output gap (in percent of potential)−1.6−1.3−3.8−4.5−2.3−0.9−0.20.10.20.10.0
Potential growth0.40.3−0.2−0.20.20.51.01.51.71.81.8
Savings and investment (percent of GDP)
National saving22.022.121.825.325.726.626.426.426.426.226.1
Government−0.5−0.50.3−0.60.10.10.40.50.70.90.0
Non-government22.522.621.525.925.626.526.025.925.725.426.1
Gross capital formation22.221.719.019.520.220.420.721.121.622.122.6
Foreign saving0.1−0.4−2.8−5.8−5.5−6.2−5.7−5.3−4.8−4.1−3.5
Private sector credit growth (year-over-year)2.9−1.9−5.4−6.9−6.8−4.6−2.8−1.20.40.92.5
Prices
Consumer price inflation1.81.82.61.80.2−0.20.81.51.51.51.5
GDP deflator−1.11.20.31.40.00.00.71.51.41.51.5
Employment (percent change)−2.2−1.6−0.8−1.50.60.70.70.70.60.40.4
Unemployment rate (ILO, percent)7.38.28.910.19.79.08.47.87.06.56.0
Real wages (percent change)2.00.2−2.5−1.91.10.60.30.60.50.50.5
Government budget (percent of GDP)
General government balance 1/−5.2−5.5−3.1−13.8−6.0−4.0−3.5−3.5−3.6−3.6−3.7
General government balance excl. bank support 1/−5.2−4.2−3.1−4.3−3.7−4.0−3.5−3.5−3.6−3.6−3.7
Structural government balance 2/−4.6−4.1−2.2−2.2−3.5−2.9−3.4−3.5−3.6−3.7−3.7
Structural primary balance 2/−3.4−2.8−0.50.1−0.40.1−0.2−0.2−0.10.00.0
General government debt 3/37.946.253.370.083.280.582.984.486.087.689.3
Merchandise trade (percent change)
Export volume11.98.20.02.86.34.44.04.04.04.04.0
Import volume7.46.0−4.62.24.03.84.34.64.64.74.7
Export value14.413.01.02.16.24.14.85.55.55.55.5
Import value15.312.6−2.50.43.83.04.56.16.06.16.2
External balances (in billions of euros)
Trade balance (merchandise)−0.8−1.0−0.20.61.21.61.61.51.51.41.3
in percent of GDP−2.3−2.6−0.51.83.24.14.13.83.63.32.9
Exports of goods19.021.421.622.023.424.325.526.928.329.931.5
Imports of goods19.822.421.821.422.222.723.925.326.828.530.2
Current account0.00.11.02.12.02.32.22.12.01.81.5
in percent of GDP−0.10.42.85.85.56.25.75.34.84.13.5
Sources: Data provided by the authorities; and IMF staff projections.

Includes 9.5 percent of GDP in 2013 and 2.3 percent of GDP in 2014 in capital injections into banks and support for deposit redemptions in banks being wound down.

Excludes bank support and other one-offs. Adjusted for calendar year shifts between receipt and expenditure of earmarked EU funds.

Includes EUR 1.1 bn in 2013 and EUR 0.7 bn in 2014 of debt issuance of the Bank Asset Management Company (BAMC).

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

Includes 9.5 percent of GDP in 2013 and 2.3 percent of GDP in 2014 in capital injections into banks and support for deposit redemptions in banks being wound down.

Excludes bank support and other one-offs. Adjusted for calendar year shifts between receipt and expenditure of earmarked EU funds.

Includes EUR 1.1 bn in 2013 and EUR 0.7 bn in 2014 of debt issuance of the Bank Asset Management Company (BAMC).

Table 5.Slovenia: Financial Soundness Indicators, 2008–14(in percent unless indicated otherwise)
200820092010201120122013Sep-14
Capital
Regulatory capital to risk-weighted assets11.711.711.311.911.413.715.8
Regulatory Tier 1 capital to risk-weighted assets9.09.38.69.39.812.915.1
Profitability
Return on assets0.50.2−0.2−0.9−1.5−7.30.4
Return on equity7.12.0−3.2−11.8−19.6−97.63.8
Interest margin to gross income65.761.363.665.358.053.755.1
Noninterest expenses to gross income62.560.257.963.063.977.360.2
Liquidity
Liquid assets to total assets13.913.814.213.414.717.524.5
Liquid assets to short-term liabilities34.836.242.940.343.545.657.3
Sensitivity to market risk
Net open position in foreign exchange to capital−2.2−0.9−1.2−1.8−2.7−4.1−1.7
Asset quality
Nonperforming loans to total gross loans 1/4.25.88.211.815.213.313.2
Non-performing loans net of provisions to capital30.241.750.571.085.855.360.8
Sectoral distribution of loans
Central Bank0.00.00.70.92.24.52.8
General Government3.03.74.76.78.69.29.5
Financial corporations11.112.513.513.012.19.79.0
Nonfinancial Corporations51.549.048.547.044.840.239.3
Other Domestic Sectors19.219.320.721.121.023.324.1
Nonresidents15.215.411.911.311.213.015.2
Source: Financial Soundness Indicators; Financial Stability Review.

The 2014 figure refers to end-October and is from the 2014 Stability of the Slovenian Banking System Report.

Source: Financial Soundness Indicators; Financial Stability Review.

The 2014 figure refers to end-October and is from the 2014 Stability of the Slovenian Banking System Report.

Annex I. Public Debt Sustainability Analysis

On the basis of current policies, Slovenia’s public debt is projected to continue to slowly increase toward 90 percent of GDP by the end of the decade, raising sustainability concerns. Moreover, public debt dynamics are highly vulnerable to shocks. In particular, the materialization of part of outstanding government guarantees or a prolonged deflation shock could bring debt above 100 percent of GDP by 2019, while a combined growth-primary fiscal balance shock could increase it even further, to close to 115 percent of GDP; if the latter shock is also combined with fiscal losses from the financial sector, debt would rise to 135 percent of GDP. This analysis highlights the importance of resolute policy action to ensure debt sustainability. In particular, a durable and credible fiscal consolidation can help put debt on a sustained downward path. Restructuring of the bank and corporate sectors, improved governance, and a reduction of the role of the state in the economy can strengthen the resilience of the economy to shocks. And structural reforms can boost potential growth.

Slovenia’s public debt is projected to gradually increase over the medium term under the baseline scenario. Without additional fiscal consolidation beyond the 2015 proposed measures, the debt ratio would be rising by around 1¾ percentage points of GDP per year on average, approaching 90 percent by the end of the decade. While debt dynamics in 2013–14 were dominated by the impact of bank restructuring, the medium-term increase in the debt ratio largely reflects the limited adjustment, with the primary surplus too low to offset the impact on debt dynamics of the unfavorable growth-real interest rate differential and of “below-the-line” liabilities, including called guarantees (assumed at ½ percent of GDP annually, in line with the 2013–14 average).1

While staff’s forecasting performance to date has been mixed, the current macroeconomic baseline remains conservative. Staff’s real sector forecast has tended to underestimate growth in the period preceding the crisis, and overestimate it since then. The depth of the global downturn in 2009 was difficult to forecast, as was the second dip in the recession. Staff has also tended to over-predict inflation, which in the more recent period reflected the unanticipated depth and duration of the recession, and also the consistent undershooting of the ECB’s inflation target. In this context, staff’s current macroeconomic baseline—based on slow reforms and fiscal consolidation in 2015 alone—is more conservative than indicated by quarterly growth trends, and the inflation forecast has been brought down.

The baseline fiscal adjustment is broadly realistic, although staff’s recommended adjustment is ambitious by international standards. Staff’s past fiscal forecasts have been close to the actual outturn, with the forecasting error remaining within the 25–75 inter-quartile range. The projected fiscal adjustment under the baseline falls below the top quartile, and the primary balance is slightly below the median of the distribution. However, the baseline adjustment is insufficient to place the debt ratio on a downward path. Staff recommendations would put Slovenia well into the top quartile in terms of size of required adjustment, and the primary balance at the low end of the top quartile. While these targets may be viewed as ambitious, Slovenia has achieved an adjustment in the primary structural balance of a similar size during 2011–13 (half of the time span currently envisaged), while the economy was in recession.

Slovenia’s high level of public debt and debt service are the main areas of vulnerability, in particular under the stress scenarios. The debt ratio remains below 90 percent of GDP throughout the medium term under the baseline, but is projected to exceed this threshold under stress scenarios, in some cases substantially. In terms of debt structure, the shares of non-resident holders and of short-term debt in total debt are moderate, and Slovenia’s spreads have fallen steadily to low levels. Debt service is projected to remain marginally below 20 percent of GDP during most of the medium term, but it exceeds this threshold in 2019, when two large maturities come due. However, debt service is projected to cross the threshold much earlier under standardized stress scenarios, and to approach 30 percent of GDP under the most adverse ones.

Slovenia’s debt dynamics are highly vulnerable to specific shocks:

  • Standardized macro shocks: Sensitivity to GDP growth shocks is especially noteworthy: a negative 1-standard deviation growth shock over 2 years would bring the debt ratio to almost 110 percent by 2020.
  • Country-specific shocks:
    • Contingent liabilities from government guarantees are a potential source of vulnerability. Guarantees amount to 18 percent of GDP, and the weak financial position of borrowers raises the probability that guarantees may be called. To illustrate, calling of some 10 percent of GDP of guarantees outstanding would bring the debt ratio to over 100 percent by 2020, highlighting the importance of reducing the state’s involvement in the economy.
    • A deflation shock would have an adverse impact on debt dynamics. A negative 1-standard deviation shock over 2 years would bring the debt ratio close to 105 percent by 2020.
    • A combined macro-fiscal shock (with GDP growth at the level of the adverse growth scenario, inflation and fiscal revenue at the respective minima of the standardized scenarios, and fiscal expenditure, exchange rate, and interest rate spread at the respective maxima of the standardized scenarios) would bring debt above 115 percent of GDP by the end of the projection period, highlighting the importance of a credible medium-term fiscal policy.
    • A macro-financial shock could have dramatic effects on debt dynamics. A scenario combining the macro-fiscal shock presented above with further losses from the corporate and banking sector (10 percent of GDP) would bring the debt-to-GDP ratio to around 135 percent by 2020. This highlights the importance of policies to strengthen the banking and corporate sectors and reducing the state’s direct and indirect involvement in the economy.
    • An active scenario of fiscal adjustment along the lines of staff’s recommendations can put debt dynamics on a firmly downward path. Adoption of structural fiscal measures of ¾ percent of GDP in 2015–19, implying a cumulative improvement in the structural primary balance of 3¾ percentage points of GDP over that period, would bring debt down to close to 75 percent by 2020, even as medium-term growth would be somewhat lower, as a result of the fiscal headwinds. Structural reforms, including privatization, could further reduce the debt-to GDP ratio.

Slovenia: Public Debt Sustainability Analysis – Risk Assessment

Source: IMF staff. This is an update of the assessment presented in the 2013 Art IV staff report, to reflected intervened reductions in sovereign spreads, the fact that the bank recapitalization has taken place (partly in the form of a bond) in late 2013 rather than in early 2014, and the 2013Q4 headline GDP figures

1/ The cell is highlighted in green if debt burden benchmark of 85% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

2/ The cell is highlighted in green if gross financing needs benchmark of 20% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 400 and 600 basis points for bond spreads; 17 and 25 percent of GDP for external financing requirement; 1 and 1.5 percent for change in the share of short-term debt; 30 and 45 percent for the public debt held by non-residents.

4/ An average over 01-Nov-13 through 30-Jan-14.

Slovenia: Public Debt Sustainability Analysis – Realism of Baseline Assumptions

Source: IMF Staff.

1/ Plotted distribution includes all countries, percentile rank refers to all countries.

2/ Projections made in the spring WEO vintage of the preceding year.

3/ Not applicable for Slovenia.

4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.

5/ For Slovenia, the CAPB is excluding bank support outlays.

Slovenia: Public Sector Debt Sustainability Analysis – Baseline Scenario

(in percent of GDP unless otherwise indicated)

Source: IMF staff.

1/ Public sector is defined as general government.

2/ Based on available data.

3/ Bond Spread over German Bonds.

4/ Defined as interest payments divided by debt stock at the end of previous year.

5/ Derived as [(r − p(1+g) − g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

6/ The real interest rate contribution is derived from the denominator in footnote 4 as r − π(1+g) and the real growth contribution as −g.

7/ The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

8/ Assumes issuance of EUR 1.7bn of bonds by the Bad Assets Management Company (BAMCO), and recap of EUR 3 bn at end 2013 (of which, EUR 2 bn in cash), and—conservatively—government recap of EUR 0.6 bn in 2014 of two currently privately-owned small banks.

9/ For projections, this line includes exchange rate changes during the projection period. The figures in 2013 and 2014 reflect accumulation and subsequent use of cash balances around the bank recapitalization

10/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Slovenia: Public Debt Sustainability Analysis – Composition of Public Debt and Alternative Scenarios

Source: IMF staff.

Slovenia: Public Debt Sustainability Analysis – Stress Tests

Source: IMF staff.

Annex II. External Debt Sustainability Analysis

The gross external debt ratio is expected to fall gradually to around 94 percent of GDP by 2020. External debt rose by about 10 percent of GDP in 2014 due to external issuances to prefinance 2015 needs. In the medium term, external public debt is expected to decline gradually, as additional government debt issuance is expected to be more than offset by a reduction in private sector external liabilities. The net international investment position is expected to reach broad balance by 2020.

External debt dynamics are vulnerable to shocks. In particular, a growth shock (involving a reduction by one-half of a standard deviation relative to the baseline) could push external debt up to close to 120 percent of GDP. A worse-than expected current account (also by one-half of a standard deviation relative to the baseline), also results in an increase in the external debt/GDP ratio to 110 percent of GDP, with a combined shock bringing the external debt-to-GDP ratio to 115 percent of GDP.

Slovenia: External Debt Sustainability Framework, 2009–20(In percent of GDP, unless otherwise indicated)
Projections
200920102011201220132014201520162017201820192020Debt-stabilizing non-interest current account 6/
1 Baseline: External debt111.5112.4108.8114.6110.5119.0115.3110.7105.2100.296.594.0−3.1
2 Change in external debt8.11.0−3.75.8−4.18.5−3.6−4.6−5.5−5.0−3.7−2.5
3 Identified external debt-creating flows (4+8+9)13.64.1−11.07.6−9.4−9.5−10.3−9.6−8.5−7.9−8.1−10.8
4 Current account deficit, excluding interest payments−1.8−2.0−3.0−5.3−8.3−8.2−9.0−8.4−8.0−7.4−6.7−6.0
5 Deficit in balance of goods and services−113.7−128.9−141.2−144.1−144.4−147.7−149.6−152.9−156.3−160.0−163.9−167.9
6 Exports57.865.171.374.275.877.979.381.082.484.085.787.3
7 Imports−55.8−63.8−69.9−69.9−68.6−69.8−70.2−72.0−73.9−76.0−78.2−80.5
8 Net non-debt creating capital inflows (negative)1.8−1.5−3.4−1.50.5−1.3−2.0−2.0−1.3−1.3−1.4−1.4
9 Automatic debt dynamics 1/13.67.7−4.614.4−1.70.00.60.80.70.80.0−3.4
10 Contribution from nominal interest rate2.42.32.52.62.42.72.72.72.72.62.62.5
11 Contribution from real GDP growth8.9−1.4−0.63.21.1−2.8−2.2−1.9−2.0−1.8−1.7−1.6
12 Contribution from price and exchange rate changes 2/2.36.8−6.58.6−5.2
13 Residual, incl. change in gross foreign assets (2–3) 3/−5.5−3.17.3−1.75.318.06.75.03.13.03.54.1
External debt-to-exports ratio (in percent)192.7172.8152.5154.5145.8152.7145.3136.7127.7119.3112.7107.6
Gross external financing need (in millions of euros) 4/172961584314743135571450110970106731067410585105571065610877
in percent of GDP47.843.740.037.740.129.630.629.728.327.026.125.5
Scenario with key variables at their historical averages 5/10-Year Historical Average10-Year Historical Average118.9121.0121.9121.7121.2121.1−2.8
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (in percent)−7.81.20.6−2.6−1.01.54.42.61.91.71.81.81.81.7
GDP deflator in US dollars (change in percent)−2.2−5.76.1−7.34.84.07.60.1−7.81.42.42.62.72.7
Nominal external interest rate (in percent)2.12.02.42.22.22.80.82.52.32.42.52.62.72.8
Growth of exports (US dollar terms, in percent)−17.912.711.61.62.57.510.45.43.84.55.25.25.25.2
Growth of imports (US dollar terms, in percent)−22.914.511.5−2.4−1.56.712.64.42.54.96.16.26.36.3
Current account balance, excluding interest payments1.82.03.05.38.31.73.28.29.08.48.07.46.76.0
Net non-debt creating capital inflows−1.81.53.41.5−0.5−0.31.81.32.02.01.31.31.41.4

Derived as [r − g − r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [−r(1+g) + ea(1+r)]/(1+g + r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r − g − r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [−r(1+g) + ea(1+r)]/(1+g + r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 1.Slovenia: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2014.

Annex III. External Assessment

Various indicators of the external balance and real exchange rate suggest that, on balance, Slovenia does not appear to suffer from competitiveness problems, as also evidenced by strong export performance and broadly stable market shares. This suggests that the current account and the real exchange rate are broadly consistent with medium-term fundamentals and desirable policies. Model-based indicators of the real exchange rate give a mixed picture; their results should be interpreted with care, given the models’ weak fit for Slovenia after the crisis period.

The current account (CA) has adjusted sharply following the crisis. It went from a deficit of 5.3 percent of GDP in 2008 to a surplus of 5.8 percent in 2013. Resilient exports contributed to the adjustment, owing to integration in core euro-area supply chains. But import compression also played a significant role, as domestic demand and in particular import-intensive investment plunged, offset in part by the large import-component of exports. The income deficit remained at around 1½ percent of GDP as rising labor income from abroad was offset by rising interest payments. This year, the current account is expected to remain in surplus of about 5.6 percent of GDP, well above its long-term (1996–2008) average of -1 percent of GDP.

The large current account reversal was largely driven by capital flows. Slovenia’s investment boom during 2004–08 was mainly financed by domestic banks making use of cheap foreign funds. The combination of low FDI inflows, high corporate leverage, focus on non-tradable investment, and a local boom in mergers & acquisitions did not prepare Slovenia well for the eventual turn of the tide. As Slovenian banks lost access to external markets in 2008–09, they had to repay large external maturities, with an attendant collapse of investment. Between mid-2008 and end-2013, the net reduction in banks’ external liabilities reached €11.8 billion, ¼ of the end-2008 aggregate balance sheet, or 30 percent of GDP.

Current Account Balance

Source: Haver.

Real Exchange Rates

Source: Haver.

The real exchange rate has also adjusted. The CPI-based REER declined by about 5 percent relative to its peak, and ULC-based REER adjusted by about 10 percent from its peak. Both stand close to their long-run historical averages. Still, the external competiveness impact of the reduction in the ULC-based indicator has been limited, as it was largely driven by gains in the non-traded goods sector, in particular the public sector, where wage cuts of about 6 percent were implemented over 2012–13. In contrast, ULCs in the tradable-goods sector have remained broadly flat, as productivity growth due to employment reductions was offset by rising wages. Market shares have remained broadly flat.

Model-based indicators of the real exchange rate (REER) give a mixed picture, in part due to difficulties in capturing structural factors during the post-crisis adjustment. In particular, the models do not appear to capture well the specifics of the Slovenian case, such as the large collapse in demand and 11 percent of GDP CA reversal, the sudden stop in credit (which went from growth of 34 percent in 2007 to a 6 percent decline in 2013), and the large external deleveraging of banks since the crisis (by about 30 percent of GDP). As such, the results should be interpreted with caution:

  • CGER-like methodologies paint a mixed picture. On one hand, the method estimating the REER deviation from an equilibrium value based on fundamentals suggests that, despite the depreciation to date, the REER remains slightly above its equilibrium value (by close to 4 percent). On the other hand, the macro-balance (MB) model points to an undervaluation of the REER (of 12½ percent), as the gap between the medium-term CA and its “norm” is estimated at around 7 percent of GDP. Finally, the external sustainability approach points to a REER undervaluation of 7 percent, given that the CA deficit required to maintain the IIP at the current level is higher than the long-term projected CA.
CGER-like Methodology
CGER MethodsREER misallignment relative to equilibrium 1/Current account norm (percent GDP)Deviation from current account norm (percent GDP)
Macroeconomc Balance−12.6−2.96.8
Equilibrium Exchange Rate4.3n.a.n.a.
External Sustainability−7.1−0.34.2

percent deviation; positive indicates overvaluation

percent deviation; positive indicates overvaluation

  • The EBA-lite model points to an undervaluation of the REER. Given a sizeable gap (7.5 percent of GDP) between the actual CA and its calculated norm (the latter is based on a cross-country panel regression model and an extended sample of variables compared to the MB model), the REER appears to be undervalued by close to 15 percent.
EBA-lite Methodology
Summary Table
CA-Actual5.8%CA-Fitted−3.5%
CA-Norm−1.7%Residual9.3%
CA-GAP7.5%Policy gap−1.8%
Elasticity−0.51
Real Exchange Rate Gap−14.7%Cyclical Contributions0.3%
Cyclically adjusted CA5.5%
Cyclically adjusted CA Norm−2.0%
Annex IV. Slovenia: Risk Assessment Matrix1
Potential Deviations from Baseline
Nature/Sources of Main RisksOverall Level of Concern
Relative Likelihood (high, medium, or low)Impact if Realized (high, medium, or low)
Domestic Risks
HighHigh
1. Inadequate progress with private-sector balance-sheet clean up, restructuring, and privatization• Political complacency can result in failure to lower NPLs, inability to restructure the corporate sector, reduce its indebtedness, and privatize SOEs and banks.• High corporate leverage and NPLs and weak governance prevent a recovery in credit and foster inefficiencies, weakening investment and growth.
HighMedium
2. Failure to credibly address fiscal slippages• Political resistance can result in a watering down of fiscal measures, falling significantly short of targets, eroding credibility of fiscal policy, and pushing debt higher.• Increased debt sustainability concerns push borrowing costs higher, eroding confidence, and potentially curtailing market access.
MediumMedium
3. Deflation sets in• A deflationary spiral can emerge, as public and private sector real debt burdens rise.• Domestic demand weakens and debt dynamics worsen.
External Risks
HighHigh
4. Protracted period of slower growth in advanced economies• Lower-than-anticipated potential growth and persistently low inflation due to a failure to fully address legacies of the financial crisis, leading to secular stagnation.• Exports decline, leading to lower growth; debt dynamics deteriorate further, eroding confidence.
MediumMedium
5. Geopolitical fragmentation persists• Sustained tensions in Russia/Ukraine depress business confidence and heighten risk aversion, amid disturbances in global financial, trade and commodity markets.• Exports to Russia and third parties decline and energy costs increase, depressing growth.

The RAM shows events that could materially alter the baseline path discussed in this report (the scenario most likely to materialize in the view of the staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding this baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff’s views on the source of risks and overall level of concerns as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

The RAM shows events that could materially alter the baseline path discussed in this report (the scenario most likely to materialize in the view of the staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding this baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff’s views on the source of risks and overall level of concerns as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

1Bank of Slovenia, 2014 Financial Stability Review, Box 6.4.
2According to the European Commission’s “2014 SBA Fact Sheet.”
3Evidence suggests that countries with a higher prevalence of SMEs tended to recover more slowly from the global crisis (see IMF WP/14/98).
4An example is Ireland’s Relationship Framework between state-owned banks and the Ministry of Finance.
5See Box 6.1 of the 2014 Financial Stability Review by the Bank of Slovenia.
6See Zakharova, Dalgic, and Lombardo, 2014, “Reviving Credit Growth for Strong and Sustainable Recovery,” The Journal of Money and Banking of Slovenia Banking Association, vol. 63, No. 11, November 2014.
7Such cases include the Finnish and Swedish AMCs established in the early 1990s. See Klingebiel, Daniela. The use of asset management companies in the resolution of banking crises: cross-country experience. No. 2284. World Bank, Financial Sector Strategy and Policy Group, 2000.
8See IMAD “Slovenian Economic Mirror,” October 2014, No. 10, Vol XX.
9See “Labor market performance and challenges during the crisis”, in IMAD Economic Issues 2014, June 2014.
10According to the European Commission’s Member States’ Competitiveness Report 2014, there are still 262 regulated professions.
11Reforms reducing the gap between the protection of permanent and temporary contracts have been found to support youth employment. See Banerji et al., (2014) “Youth unemployment in Europe: Searching for Solutions.”
1The projections assume a gradual reduction in the cash buffer from over 10 percent of GDP in 2014 to under 5 percent over the medium term.

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