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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:
May 2017
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On May 10, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Republic of Slovenia.

Slovenia has entered a fourth year of steady economic recovery following decisive measures by the authorities to address a looming banking crisis in 2013. Output and employment have risen considerably. The external position has strengthened, reflecting robust exports and strong tourism. The financial system has substantially improved in the past few years.

Rising domestic demand and continuing strong exports will support projected growth of about 3 percent in 2017. Inflation will hover around 2 percent, with core inflation gradually rising toward this level. The external current account surplus will start declining on the strength of domestic demand and higher international energy prices. Over the medium term, economic growth will converge to the estimated potential GDP growth rate of 1¾-2 percent. This low potential growth rate can be raised by policies to increase investment, reduce labor skills mismatches, and boost total-factor productivity growth.

The policy agenda should be geared toward rebuilding macroeconomic buffers and fostering broad-based and sustainable growth. On the fiscal front, the authorities aim to eliminate the structural budget deficit by 2020 and maintain that level afterwards. This will require substantial new fiscal reforms. Implementation of plans to complete the resolution of non-performing bank loans to small and medium enterprises (SMEs) and privatize major banks will support investment and growth, as will measures to improve the functioning of Slovenia’s labor market and step up privatization.

Executive Board Assessment2

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Slovenia’s steady economic recovery fostered by decisive restructuring of ailing banks and prudent macroeconomic policies after the 2013 crisis. At the same time, Directors emphasized the need to address outstanding fiscal and financial vulnerabilities by rebuilding fiscal buffers and completing the repair of bank and corporate balance sheets. Stepping up structural reforms, particularly to improve labor market functioning and accelerate privatization, would enhance efficiency and support medium-term growth.

To promote the long-term sustainability of public finances, Directors supported the authorities’ fiscal consolidation plan aimed at eliminating the structural budget deficit by 2020. This would put public debt on a steady downward path and create fiscal space to respond to adverse shocks and address the looming aging-related rise in spending.

Directors encouraged the authorities to generate the needed budget savings with structural fiscal reforms. They noted that measures aimed at enhancing the sustainability of the pension and public wage systems, rationalizing health care and education spending, and reviewing the real estate tax system would alleviate pressures on public finances, achieve efficiency gains, and create room for raising public investment.

Directors welcomed the substantial progress in resolving banks’ non-performing loans (NPLs) to large companies, and noted that the bank asset management company (BAMC) had been particularly instrumental in this effort. They urged continued reliance on the BAMC to complete the corporate restructuring process and emphasized the importance of safeguarding the BAMC’s independence. Directors welcomed the authorities’ efforts to accelerate reduction of NPLs to SMEs and called for a timely and effective implementation of banks’ plans in this area.

Directors welcomed the authorities’ intentions to proceed with the privatization of the two large state banks. They noted that attracting high-quality strategic investors would facilitate business model adjustments to reduce pressures on profitability in the current low interest rate environment. They cautioned, however, that the authorities’ intention to maintain a controlling equity stake in the largest bank could reduce investor interest.

Directors urged deeper structural reforms to improve the business environment and increase labor market flexibility. While acknowledging the efforts embedded in the 2013 labor market reform, they called on the authorities to further increase the flexibility of employment contracts to boost long-term employment prospects for the young. They also urged the authorities to press ahead with retraining the unemployed and implementing an apprenticeship system to address skill mismatches. Expanding the range of SOEs eligible for privatization would improve governance and strengthen enterprise viability, raise productivity, and reduce public debt.

It is expected that the next Article IV consultation with the Republic of Slovenia will be held on the standard 12-month cycle.

Slovenia: Selected Economic Indicators, 2011–18(Annual percentage change, unless noted otherwise)
Key Export Markets: Germany, Italy, Countries of Former Yugoslavia, France, AustriaPopulation (2015): 2.1 million
Quota (as of January 31, 2016): SDR 586.5 millionLiteracy Rate (in percent): 99.5
Main products/exports: Automotive, Machinery-Appliances, Tourism, TransportationAt-risk poverty rate (pct., 2015): 14.3
20112012201320142015201620172018
Staff Proj.
Nominal GDP (EUR millions)36,89636,00335,91737,33238,57039,76941,24743,116
GDP per Capita (EUR)17,99717,51517,44518,11318,69719,26619,97020,861
Real economy
Real GDP0.6−2.7−1.13.12.32.53.02.3
Domestic demand−0.7−5.7−2.01.81.42.43.42.6
Private consumption0.0−2.5−4.02.00.52.82.52.0
Public consumption−0.7−2.2−2.1−1.22.52.63.82.3
Gross capital formation−2.2−17.54.34.32.81.05.64.5
Net exports (contribution to growth)1.32.80.81.41.10.3−0.1−0.1
Exports of goods and services6.90.63.15.75.65.95.33.7
Imports of goods and services5.0−3.72.14.24.66.26.04.2
Output gap (in percent of potential GDP)−1.0−4.0−5.5−3.4−2.3−1.20.00.6
Prices
Consumer prices (national definition, period average)1.82.61.80.2−0.4−0.11.72.0
Employment and wages
Unemployment rate (in percent, ILO definition)8.28.910.19.79.07.97.06.4
Employment (domestic concept, period average)−1.7−0.9−1.10.41.12.01.21.2
Nominal wages (all sectors)2.00.1−0.21.50.71.83.43.3
Real wages (all sectors)0.2−2.5−1.91.31.21.91.71.3
Public finance (percent of GDP)
General government balance 1/−5.5−3.1−13.9−5.8−3.3−1.8−1.3−1.3
General government balance excl. bank support 1/−4.2−3.1−4.3−3.5−3.3−1.8−1.3−1.3
Structural balance 2/−4.3−2.1−1.7−2.8−1.9−1.3−1.1−1.6
Structural primary balance 2/−3.0−0.40.50.10.91.41.10.6
General government debt 3/46.453.971.080.983.179.778.077.0
Monetary and financial indicators
Credit to the private sector 4/−1.9−5.5−17.4−13.3−5.4−2.63.03.0
Lending rates 5/5.04.74.54.12.92.2
Deposit rates 6/2.22.31.91.00.40.2
Government bond yield (10-year)4.75.95.83.31.71.1
Balance of payments (percent of GDP)
Trade balance (goods and services)1.24.06.87.79.19.78.48.2
Current account balance0.22.64.86.25.26.85.85.5
Gross external debt (percent of GDP, end-period)112.9119.1116.6126.8116.6108.8103.099.7
Nominal effective exchange rate (2010=100)100.499.3100.7101.7100.3101.3
Real effective exchange rate (2010=100, CPI-based)99.498.299.699.797.197.3
Sources: Data provided by the Slovenian authorities; and IMF staff calculations and projections.

Staff projections, cash basis. 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.

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

For household time deposits with maturity up to one year.

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

Staff projections, cash basis. 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.

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

For household time deposits with maturity up to one year.

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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