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

Author(s):
International Monetary Fund. European Dept.
Published Date:
February 2015
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On February 13, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Republic of Slovenia.

Slovenia is recovering from a deep crisis. Growth is estimated to have reached around 2.6 percent in 2014, supported by strong exports and EU-funded public investment. The financial sector has stabilized following recapitalization of the major banks by the state. Government bonds yields have declined markedly.

Nevertheless, the legacies of the crisis weigh on the outlook. Output remains below pre-crisis levels, unemployment is high, and strained public and private balance sheets continue to weigh on domestic demand. Growth is thus projected at around 1.9 and 1.7 percent in 2015 and 2016, respectively, with potential growth well below pre-crisis levels. Risks are tilted to the downside, and include those of insufficient reform implementation and weaker-than-expected external demand.

The key policy challenges include (i) strengthening the health of the banking sector to enable it to support the economy; (ii) accelerating corporate restructuring to address the large debt overhang and reduce the role of the state in the economy; (iii) putting public finances on a sustainable path; and (v) further boosting the economy’s potential growth through ambitious structural reforms.

Executive Board Assessment2

Executive Directors welcomed that Slovenia’s economy is recovering and commended the authorities for their efforts to mend the banking system, facilitate corporate debt restructuring, and consolidate the public finances. Nevertheless, continued comprehensive actions are needed to restore the health of the financial and corporate sectors, ensure fiscal and debt sustainability, and foster sustainable long-term growth.

Directors agreed that reducing the still high non-performing loans (NPLs) is a key priority. Measures to be considered in this context are additional transfers to the bank asset management company (BAMC), the development of guidelines for voluntary negotiations with SMEs, and the setting of ambitious NPL reduction targets by the supervisory authorities with monitoring of progress against them. Directors urged the authorities to press ahead with efforts to strengthen bank governance, and privatize state-owned banks. They also encouraged the authorities to address remaining capital shortfalls promptly and transparently, while minimizing fiscal costs, and to strengthen risk management and oversight on connected lending.

Directors highlighted the need to accelerate the restructuring of corporate debt by using all available tools. They emphasized that the BAMC should play a leading role in this process and stressed the importance of safeguarding its independence from political interference. Directors noted that increasing the effectiveness of the new insolvency framework by addressing operational bottlenecks can help facilitate restructurings. They also highlighted the importance of strengthening corporate governance to facilitate the sector’s restructuring and attract much needed equity, and of stepping up privatization efforts, while avoiding fire sales.

Directors welcomed the authorities’ renewed fiscal consolidation efforts, aiming to bring the budget deficit in check, and the progress towards implementing a fiscal rule. Most Directors recommended a somewhat more ambitious structural improvement, while being mindful of the still nascent recovery, to achieve fiscal balance and place debt on a sustained downward path. Structural fiscal reforms should underpin the durability of the adjustment. In this context, Directors emphasized the importance of pension reforms to address looming demographic pressures; tax reforms, including revamping the property tax system; and efforts to increase efficiency in health, education, and the public administration.

Directors called for continued structural reforms to support employment and growth. Noting the positive impact of earlier labor market reforms, they encouraged additional efforts to reduce the protection of open-ended contracts to facilitate labor reallocation as the corporate sector restructures and boost long-term employment prospects for the youth. Further reforms to improve the business environment, including by cutting red tape, to spur domestic and foreign investment are also important.

Slovenia: Selected Economic Indicators, 2010–16(annual percentage change, unless otherwise indicated)
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 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).

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 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).

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.

1Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
2At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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