Republic of Slovenia
2007 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Slovenia
Author:
International Monetary Fund
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Publication Date:
24 May 2007
eISBN:
9781451835809
Language:
English
Keywords:
ISCR; CR; headline inflation; deficit; Euro adoption process; economy; Slovenia's integration; banking sector; core inflation; exchange rate; EU accession candidate; investment funds; Inflation; Europe
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This 2007 Article IV Consultation highlights that economic performance of Slovenia strengthened in 2006, supported by a recovery in investment and continued growth spillovers from the European Union. Declining real interest rates in the run-up to euro adoption on January 1, 2007 helped sustain credit growth and domestic demand. The strong economy boosted job creation, while unemployment declined and capacity utilization reached record high levels. Growth is projected to slow down slightly in 2007–08, as the investment boom decelerates.

Abstract

This 2007 Article IV Consultation highlights that economic performance of Slovenia strengthened in 2006, supported by a recovery in investment and continued growth spillovers from the European Union. Declining real interest rates in the run-up to euro adoption on January 1, 2007 helped sustain credit growth and domestic demand. The strong economy boosted job creation, while unemployment declined and capacity utilization reached record high levels. Growth is projected to slow down slightly in 2007–08, as the investment boom decelerates.

I. Introduction

1. After 15 years of transition, Slovenia became the first new EU member to adopt the euro in January 2007. Favorable initial conditions and sound macroeconomic policies over the past decade have allowed Slovenia to sustain robust growth with small external imbalances and public debt while gradually lowering inflation and interest rates to euro area levels. PPP-based per capita income reached about 80 percent of EU-average in 2006, putting Slovenia on par with Greece and above Portugal.

2. Growth spillovers from the region intensified in 2004–06. Since EU entry in 2004, trade integration has deepened and exports have been buoyed by euro area recovery. Declining real interest rates and risk premia have sustained strong credit growth, boosting domestic demand. These factors led growth to near record levels in 2006.

3. Sustaining this performance in the euro area will require Slovenia to maintain policy discipline while addressing structural rigidities more vigorously. The strong fiscal and wage policy discipline that preceded euro adoption needs to be sustained to ensure continued balanced expansion. Fiscal flexibility is constrained by one of the most rigid public spending structures in Europe, limiting the scope of countercyclical policies, while rapid aging is exacerbating longer run fiscal pressures. Efficiency of the largely state-controlled financial sector is low, hampering financial intermediation and longer-term growth. To address these issues, the 2007 Article IV consultation focused on challenges in the financial sector and fiscal reforms, complementing last year’s in-depth assessments of the structure of public spending, long-run fiscal sustainability and structural challenges in product and labor markets.1

uA01fig01

In 2006, growth accelerated while inflation stabilized.

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Sources: Statistical Office of the Republic of Slovenia; and Bank of Slovenia.

II. Background

4. Growth accelerated in 2006, led by investment demand (Table 1, Figures 1 and 2). Growth rose from 4 percent in 2005 to 5¼ percent in 2006, the highest level in this decade as a recovery in investment, driven by robust credit growth and infrastructure spending, took over from exports as the main engine of activity. Private consumption remained stable, reflecting moderate wage increases. The strong economy boosted job creation mainly in services, and unemployment continued to decline. These trends, along with strong labor demand as indicated by employment rates and the continued rise in capacity utilization to record levels, suggest that the economy has reached capacity limits.

uA01fig02
Sources: Eurostat; Haver; and Statistical Office of the Republic of Slovenia.
Table 1.

Slovenia: Selected Economic Indicators, 2003-08

article image
Sources: Data provided by the Slovene authorities; and Fund staff calculations and projections.

For 2007-08, forecasts in the Stability Program.

Revenue and expenditure exclude social security contributions paid for government employees. 2007-08 projections correspond to the budget, but exclude VAT revenues of 0.4 percent of GDP in 2008. Additional deficit from railways of 0.4 and 0.5 percent of GDP in 2007 and 2008 are excluded.

For deposits with maturity between 31 days and 1 year.

Figure 1.
Figure 1.

Slovenia: Economic Indicators, 2000–08

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Sources: Bank of Slovenia; Ministry of Finance; Statistical Office; and IMF staff projections.1/ Fiscal deficit and public debt as of end-2005; interest rate as of February 2006; inflation rate as of March 2006.
Figure 2.
Figure 2.

Slovenia: Labor Market Indicators, 2000-06 (y-o-y percent change, unless otherwise indicated)

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Sources: Employment Service of Slovenia; Monthly Bulletin, Bank of Slovenia; WEO; and IMF staff estimates.

5. The fiscal deficit continued to narrow in 2006, aided by the rapid growth (Table 2). In keeping with its tradition of fiscal prudence, Slovenia further lowered the general government deficit to about ¾ percent of GDP in 2006 from about 1 percent in 2005. The budgetary overperformance, of around ½ percent of GDP, primarily reflected stronger-than-planned tax revenues owing to both cyclical gains and one-off factors. In particular, windfall gains related to the adoption of International Accounting Standards helped boost corporate income tax collections, more than compensating for the reduction in payroll taxes. A lower-than-expected wage bill also contributed to maintaining stable expenditure levels. All in all, this implied a neutral fiscal impulse for the year.

Table 2.

Slovenia: Summary of General Government Operations, 2003-2009

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Sources: Ministry of Finance; and Fund staff calculations and estimates.

Excludes revenues for budgeted VAT increase in 2008 and 2009 (0.4 percent of GDP) that will be foregone.

6. Monetary conditions in 2006 were broadly neutral as policy rates converged in the run up to euro adoption (Figure 3). In the face of continued strong capital inflows, the Bank of Slovenia (BoS) lowered its key policy rate (60-day bills) to 3¼ percent in the first half of the year, after keeping them constant at 4 percent since ERM2 entry in 2004. With the increases in the European Central Bank (ECB) rate, the interest rate differential was closed by year-end. As the tolar-euro rate and average inflation remained stable, real interest rates declined slightly.

uA01fig03

Core inflation has reached EU levels.

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Sources: Statistical Office of the Republic of Slovenia; and Eurostat.1/ For EU-15, core inflation corresponds to total CPI excluding energy and seasonal food from the European Index of Consumer Prices.
Figure 3.
Figure 3.

Slovenia: Monetary Conditions, 2000-07

(In percent)

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Sources: Bank of Slovenia; Eurostat; and Statistical Office of the Republic of Slovenia.1/ Vis-à-vis the euro.

7. Besides balanced macroeconomic policies, incomes policies helped to contain inflation (Figures 4 and 5). Prudent wage policies, elimination of import duties, and increased competition following EU accession drove core inflation in 2005 below one percent. By mid-2006, it had reverted to the EU-15 average, picking up further towards end-year owing to capacity constraints and rapid credit growth. In this context, collective wage agreements that continued to set wage increases below productivity growth were key to price stability by containing second-round effects of energy price increases and demand pressures. Average headline inflation remained stable at 2½ percent, aided by receding oil prices.

Figure 4.
Figure 4.

Slovenia: CPI Inflation and Components, 2000-07

(Year-on-year change, in percent)

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Sources: Statistical Office of the Republic of Slovenia; Eurostat; and IMF staff calculations.1/ For EU-13, core inflation corresponds to total CPI excluding energy and seasonal food from the European Index of Consumer Prices.
Figure 5.
Figure 5.

Slovenia: Wages and Productivity, 2001-06

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: Statistical Office of the Republic of Slovenia; and IMF staff calculations.1/ Wages in respective sector divided by wages in the manufacturing sector.2/ Includes public administration; education; health; and other social services.3/ Includes distributive trade; hotels and restaurants; transport, storage, and communications; financial intermediation; and real estate.

8. The current account deficit widened slightly, mainly reflecting increased factor payments (Table 3, Figure 6). Strong demand in Europe helped sustain robust export growth at 10 percent in 2006 driven by chemicals and automotive industries. Imports accelerated to over 10 percent, owing to demand for investment goods. This, together with the higher, partly one-off, outflows of dividends to foreign investors, resulted in a widening of the current account deficit from 2 percent of GDP in 2005 to an estimated 2.6 percent in 2006.

Table 3.

Slovenia: Balance of Payments, 2004-09

(In millions of euros, unless otherwise noted)

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Source: Bank of Slovenia and IMF staff projections.

A negative number indicates net creditor position.

Figure 6.
Figure 6.

Slovenia: External Sector Developments, 2001-06

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Sources: Monthly Bulletin, Bank of Slovenia; and IMF staff calculations.

9. Competitiveness appears adequate, although Slovenia’s ability to sustain its export markets remains a longer-run concern (Figures 7-9). Low inflation has led to stable real effective exchange rates while moderate wage increases and a recent surge in productivity have contributed to lower unit labor costs. Export growth is solid and staff estimates using the CGER methodology suggest that the real exchange rate is aligned with fundamentals. However, gains in export market shares have been sluggish reflecting, in part, rapid catch-up by lower-cost regional competitors. Technological upgrading, which is crucial for a high-wage economy such as Slovenia’s, has been lagging behind regional competitors, reflecting relatively low FDI.2

uA01fig04

Slovenia’s gains in export market share have been lacklustre.

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

1/ Value index, major Slovene trading partners include Austria, France, Germany, Italy, UK, and USA.Source: IMF DOT; and IMF Staff calculations.
Figure 7.
Figure 7.

Slovenia: Exchange Rate Indicators, 1998-2006 (1998q1=100) 1/

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Sources: Bank of Slovenia Bulletin; Eurostat; IFS; and IMF staff calculations.1/ Trade weights based on 1998-2000 data for exports of goods. Partner countries comprise: Austria, Croatia, France, Germany, Italy, Poland, United Kingdom, and United States.2/ Unit labor costs in trading partner countries relative to those in Slovenia, adjusted for manufacturing producer price inflation–a rough indicator of developments in profitability.
Figure 8.
Figure 8.

Slovenia: Wages, Productivity, and Product ULC in Manufacturing, 1998-2006 (1998q1=100) 1/

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Sources: Statistical Office of the Republic of Slovenia; and IMF staff calculations.1/ Seasonally adjusted. Trade weights based on 1998-2000 data for exports of goods. Partner countries comprise: Austria, Croatia, France, Germany, Italy, Poland, United Kingdom, and United States.2/ Defined as the ratio of nominal wages to producer price index.3/ Defined as the ratio of real product wages to productivity.
Figure 9.
Figure 9.

Slovenia: Competitiveness Indicators and Export Market Shares of Slovenia and New Member States (1998q1=100), 1998-2006

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Sources: IMF Direction of Trade Statistics; and IMF staff calculations based on data from national authorities.1/ ULC in manufacturing in euros.2/ Ratio of Euro ULC between Slovenia and EU accession candidates. An increase indicates appreciation.3/ Calculated as the share of nominal exports of each individual country in the combined nominal imports of the following countries: Austria, France, Germany, Italy, United Kingdom, and United States. The share declines for all countries in 2004 because of higher oil and commodity imports.

10. Cross-border investment positions continued to expand in 2006, raising vulnerability to external conditions. With declining domestic interest rates, households turned to foreign-oriented mutual funds, while banks and enterprises increased their holdings in high-return countries, especially in Southeastern Europe. To finance these investments and the rising credit demand, banks continue to resort to cheaper foreign borrowing, which made gross external debt to climb to 80 percent of GDP and reversed Slovenia’ net creditor position.

Banks have increased foreign borrowing to finance asset growth. Slovenia: Sources of Growth of Bank Balance Sheets, 2001-05

(In percentage points of GDP, y-on-y change)

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Source: Bank of Slovenia.

11. Rapid credit growth is increasing credit risks, especially in the corporate sector (Box 1). Real credit to the private sector continued to grow by nearly 25 percent, driven by investment demand. Household credit, at 15 percent of GDP, is still low compared to countries with similar incomes (Figure 10), but rising rapidly owing to the greater demand for housing. In contrast, credit to enterprises is near euro area levels. Given low FDI and absence of a developed equity market, enterprises have relied primarily on debt financing, which has led to relatively high leverage ratios compared to the region.

Sectoral Balance Sheet Analysis

The corporate sector in Slovenia has important net total and non-equity financial liabilities, which coupled with the high debt-to-assets-ratio point to rising leverage of enterprises. The liabilities are mainly to domestic banks, increasing the banks’ exposure to credit risks. Banks’ rising net foreign liabilities, in turn, are increasing their vulnerability to changes in foreign market conditions.

Indicators of underlying corporate vulnerabilities in selected markets, 2005

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Source: Corporate Vulnerability Database.

Based on limited sample

uA01fig05

Slovenia: Total Net Financial Position of Main Sectors, 2001-05

(All assets less liabilities as share of GDP)

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: Bank of Slovenia; and IMF staff estimates.
uA01fig06

Slovenia: Net International Financial Position, 2001-05

(Percent of GDP)

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Figure 10.
Figure 10.

Bank Credit to Households and Non-financial Corporations in European Emerging Markets, 2005

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: Eurostat; ECB; Country Authorities; and IMF staff calculations.1/ Credit figures include domestic and foreign loans. For EMU, loans to enterprises include loans to domestic and (other) euro area countries.

12. The financial sector remains sound to deal with these risks, but vulnerabilities are building up (Tables 4-5). Banks’ financial soundness indicators remain adequate. However, declining interest margins and loss of foreign exchange revenue are putting pressure on profitability, which is already regionally low. High levels of indirect ownership linkages could amplify transmission of shocks in the economy.

uA01fig07

Return on equity is among lowest in the region.

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: FSI database.
Table 4.

Slovenia: Banking Sector Soundness Indicators, 2002–06

(In percent; end of period)

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Source: Bank of Slovenia.

2006 data as of Q3.

Table 5.

Slovenia: Vulnerability Indicators, 2002-07

(In percent of GDP, unless otherwise indicated)

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Sources: Data provided by the Slovene authorities; Bloomberg; and IMF staff calculations.

Credit including loans and other claims.

Yield differential between 5.38 percent (coupon) Slovene eurobond maturing 2010 and 5.38 percent (coupon) German government bond maturing 2010.

Remaining maturity basis.

Series present a structural break in 2004.

III. Report On The Discussions

13. Against this background, the discussions focused on the main current policy challenges for Slovenia—maintaining the strong commitment to policy discipline and advancing structural reforms—to ensure continued success in the euro zone. The main themes were policy requirements for a balanced expansion, and using the favorable times to contain vulnerabilities and increase economic flexibility and productivity. In line with past consultations, there was broad agreement on the direction of policies.

Slovenia: Effectiveness of Fund Surveillance

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A. Outlook

14. The authorities and staff expect the near-term economic outlook to remain favorable (Table 6). Growth in 2007 is projected to slow down, but remain robust at 4½ percent, assuming prudent fiscal and wage policies. With household consumption rising in line with higher disposable incomes, domestic demand is expected to continue driving growth. While the investment boom should decelerate owing to the reduced tax breaks and higher interest rates, business confidence surveys, manufacturing orders, and infrastructure investment plans suggest still strong trends. While the euro area slowdown will affect exports, a concurrent decline in imports will limit the impact on net exports and the current account is expected to be broadly unchanged at 2½ percent of GDP. Despite the pressures on capacity, there are no signs of overheating as yet, with private consumption flat and inflation expectations stable. Headline inflation is projected to remain at 2.6 percent, assuming prudent macroeconomic policies and moderate increases in administrative prices, and core inflation will gradually rise on account of services. This assessment is broadly in line with BoS and consensus forecasts.

uA01fig08

Confidence indicators point to sustained growth.

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: Statistical Office of the Republic of Slovenia.

Growth will slow down moderately in line with Euro-area trends. Summary of Macroeconomic indicators

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Source: WEO.
Table 6.

Slovenia: Macroeconomic Framework, 2003-12

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

Government capital transfers are not included in government investment. In 2002 correcting to move to cash accounting.

Includes the statistical discrepancy.

15. Views differed mainly on overheating risks to this outlook. Staff and BoS noted that the tightening labor market, strong credit growth and climbing asset prices could raise demand pressures. With growing constraints on resources as suggested by record high capacity utilization rates and estimates of a positive output gap since 2006 (using both HP-filter and production function methodologies), overheating risks are on the rise. However, the Ministry of Finance considered overheating risks as contained, as it viewed the economy as growing at a higher potential rate following euro adoption, which is not captured by these empirical estimates based on short historical series. There was agreement that external risks can arise from higher world oil prices, and a potential disorderly unwinding of global imbalances that would lead to euro appreciation and lower growth.

16. The authorities concurred that near-term external and financial vulnerabilities are contained. The risks to financial stability in Slovenia are currently low. Although the rising reliance on cross-border capital flows exposes Slovenia to changes in investor sentiment, market confidence remains high as indicated by declining spreads and solid credit ratings (Figure 11). Debt sustainability analysis also shows that, despite rising gross debt, the risks are contained by a large share of long-term liabilities. Net debt remains at a low 5 percent of GDP (Appendix I).

Figure 11.
Figure 11.

Slovenia: Market Risk Indicators, 2005-07

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: Bloomberg; and IMF staff calculations.

17. There was agreement that the main risk to medium-term growth and faster convergence arises from a failure to maintain competitiveness. Both sides noted the experience with sluggish growth of some of the current EMU members since they adopted the euro. In the absence of flexible fiscal and labor policies, a credit-induced boom mostly in the nontradable sector resulted in real appreciation and loss of competitiveness (Box 2). Reducing structural rigidities in the budget, and in the financial and labor markets was thus crucial for demand management and growth. The authorities agreed that increases in real wages to catch up to productivity, as currently discussed between social partners, would need to be implemented over a longer term horizon to safeguard competitiveness.

Slovenia—Lessons from Portugal and Ireland from Euro Adoption

As in Slovenia, euro adoption in Ireland and Portugal was preceded by strong growth, aided by capital inflows. In Ireland, large FDI inflows raised productivity. Low taxes encouraged labor supply and investment, while wage growth below productivity and skilled labor offered high returns in export-oriented activities. Upon euro adoption, Ireland continued to grow. In Portugal, credit boosted consumption and housing while productivity growth slowed sharply as a cumbersome business environment and excessive wage growth discouraged investment in manufacturing. A pro-cyclical fiscal policy added to demand pressures, and led to a real appreciation. A boom-bust cycle ensued as a drop in consumption and a loss of competitiveness stalled growth. Adjustment has been slow given limited fiscal space, downward rigid wages and low productivity.

To avoid the low-growth trap, Slovenia should accelerate structural reforms and improve economic flexibility. It is entering the euro zone with strong growth sustained by a foreign financed investment boom. Although productivity growth has picked-up in recent years, low FDI and slow technological upgrading of production are a risk for its future sustainability. Therefore, it is important to improve allocation of investments to high productivity projects by reforms that encourage economic flexibility.

uA01fig09

Selected Euro Area Countries: Macroeconomic Indicators at the Time of Euro Adoption

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: Eurostat, OECD Productivity Database and AMECO.

B. Fiscal Policy

18. Echoing the different assessments of the risks of overheating, views differed on the need for a tighter-than-planned fiscal stance in 2007–08. The government’s fiscal plans target an increase in the general government deficit from ¾ percent in 2006 to 1.3 percent and 1.7 percent of GDP in 2007-08 (including the railway company but without the budgeted VAT increase, which the government plans to forego).3 This implies a procyclical impulse—measured as a change in the primary structural balance—of about 1 percent of GDP over 2007-08. While acknowledging that potential growth estimates in a transition economy are highly uncertain, staff viewed growth as being above potential in light of the tightening resource constraints and recommended, at a minimum, a neutral fiscal stance—to be achieved through reforms in areas such as the inefficient current transfers and the wage bill. The Ministry of Finance argued that the current plans are appropriate given uncertainties about the cyclical position of the economy. Moreover, it saw limited scope for further expenditure rationalization in the near term.

Near-term fiscal stance is projected to be expansionary. Fiscal Outlook, 2005-09

(In percent of GDP)

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Source: Slovene authorities, and staff calculations.

Corresponds to the cash budget deficit, adjusted to include railways agency deficit and exclude budgeted revenues from VAT rate increase (0.4 percent of GDP in 2008 and 2009) that will not be implemented.

2006 Stability Program adjusted for VAT in 2008 and 2009.

19. In the medium term, the government targets a sharp decline in deficits, with a lower tax burden to be accompanied by reductions in spending. The current plans envisage a deficit of 1.1 percent of GDP in 2009, and a structural balance by 2011. An ambitious tax reform is underway to reduce the high personal and corporate income taxes and gradually eliminate the payroll tax. To accommodate the decline in revenues without increases in indirect taxes, the authorities plan to contain wages and cut employment, and implement stricter eligibility for, and reindexation of, social benefits. Spending will also be reoriented towards growth-related priorities, such as R&D, active labor market policies, and restructuring of the railway company. However, many of the required reductions in spending are delayed to 2009 and beyond, and the measures are not yet fully identified.

20. Staff noted that a more frontloaded consolidation with up-front expenditure reforms would reduce risks to these targets and enhance flexibility to absorb potential shocks. Projections for a number of budget categories appear optimistic: the expected rise in corporate income tax collections is highly uncertain given the windfall gains in 2006 (about ½-1 percent of GDP), and the tight wage bill and capital spending budgets, particularly in an election year, need to be backed up with more concrete measures. The planned introduction of regional governments and modernization of the railway (about 30 percent of GDP over the next decade) also add to spending pressures. To deal with these challenges and improve fiscal flexibility, staff urged more up-front expenditure reforms in rigid spending. Staff’s cross-country analysis shows room for efficiency gains in areas such as health care, education, and social transfers.4

Fiscal Reform Package

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Source: 2006 Stability Program.
uA01fig10

Medium-term fiscal plans envisage reduced tax burden and spending cuts to achieve lower deficits.

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: Slovene Authorities.

21. While the authorities agreed on the desirability of expenditure reforms, they were less concerned about risks to the fiscal targets. The authorities consider near-term fiscal risks as contained with revenues stronger than planned and spending under control. They also noted that recent measures to streamline social benefits and unify the registries in 2009 would reduce mandatory expenditure over the longer run, and that the fiscal burden from railways would be eliminated by seeking public-private-partnerships. Staff welcomed these measures, but noted that substantial fiscal risks are likely to remain given difficulties in transferring all financial risks in a railway to the private sector. Nevertheless, the authorities agreed with staff that speedy implementation of performance budgeting is needed to identify more specific and durable measures to reduce inefficient spending, but only over time.

22. The authorities acknowledged that the pension system remains an important challenge for longer-term sustainability, but systemic reform is not politically feasible in the near term. The public pension system faces one of the most rapidly aging populations, lowest average retirement age, and highest pension to wages ratio in Europe. Under current policies, the demographic pressures are expected to increase age-related expenditures from 19 percent of GDP presently to almost 28 percent by 2050, increasing the public debt to unsustainable levels (Appendix I). Staff reiterated that systemic reforms are needed to restore fiscal viability sooner than later with the increasing political clout of pensioners—in less than ten years more than half of voters are retirees. Noting that pension deficits are contained for the next decade, the authorities indicated that political support is lacking for more substantive reform beyond the current program of “active aging”—increasing incentives to retire later—and removal of restrictions on private pensions. In the absence of a more substantial reform, staff recommended that the medium-term fiscal consolidation should be more ambitious to generate savings for future pension payments.

23. Staff proposed supporting expenditure reform with measures to strengthen the national fiscal framework. Slovenia currently has a two–year rolling budget framework. The medium term budget implementation has, however, lagged behind initial plans as the targets are recurrently shifted out. Staff noted that strengthening the role of an independent fiscal institution in policy monitoring could enhance fiscal discipline. Furthermore, a nominal expenditure rule based on a structural balance could enable more expenditure-based consolidation while preserving cyclical gains (SIP). Citing lack of sufficient expertise for independent external analysis in a small country, the authorities stated that budgetary projections are already based on conservative and independently formed growth assumptions in line with international best practice. Discussions are underway for an annual deficit rule, and a fiscal rule is needed for the new regional governments.

uA01fig11

Medium-term fiscal targets have tended to slip away.

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: Pre-Accession Economic Programs (PEP) and Convergence Programs (CP).

C. Financial Sector

24. The authorities and staff concurred that risks from rapid credit growth, especially to the leveraged enterprises, and foreign expansion warrant closer monitoring. Attractive profits abroad are likely to entice further expansion of foreign operations of Slovene banks and enterprises increasing market-related risks, while competition for market share is likely to sustain strong credit growth despite rising credit risks. To mitigate these risks, the authorities have stepped up supervision, including close collaboration with foreign supervisors, and plan to broaden the coverage of credit registries. They agreed on the need for bank-specific stress tests and closer monitoring of balance sheet mismatches in the enterprise sector, and supported the development of the nonbank financial sector to improve access to equity finance. While a continued increase in mortgage credit from low levels (5 percent of GDP, compared to the EU average of 36 percent) is unlikely to threaten financial stability in the near term, house price developments and household credit will need to be followed closely to detect any asset bubbles (Figure 12).5

Figure 12.
Figure 12.

Slovenia: Housing Market Indicators, 1995-2006

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: Country authorities, Ljubljana; Bank of Slovenia; Statistical Office of the Republic of Slovenia; ECB; and RICS European housing review, 2005.1/ Various years, usually 2000-02.
uA01fig12

Corporate net liabilities have risen rapidly. Slovenia: Corporate Non-equity Net Liabilities to Other Main Sectors, 2001-05

(Total assets less liabilities as share of GDP)

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: Bank of Slovenia; and IMF staff estimates.

25. To enhance future financial stability, the authorities agreed on the need to strengthen the banking sector in good times. Although the sector remains sound and resilient to shocks as indicated by BoS stress tests (SIP), rapid expansion and margin compression could start stretching capital adequacy ratios (Figure 13).6 The high degree of state ownership in the bank and nonbank sectors may also have constrained competition with adverse impact on efficiency as indicated by Slovenia’s low rank on the market contestability index (Box 3). The Bank of Slovenia noted that regulations on bank board memberships are being improved in line with EU norms, which should help improve efficiency through better corporate governance. In this context, staff recommended rapid implementation of the government’s plans for bank privatization and supported the listing of large banks and insurance companies in the stock exchange. Furthermore, a clear business strategy, including on eventual capital needs, is needed for banks in which the government holds important stakes. The authorities agreed in principle, although the Ministry of Finance expressed reservations on selling the largest bank as it might open the door to a majority foreign ownership, which it opposes until issues with home-host supervision under EU Directives are resolved in a way that does not separate supervisory decision-making power from the responsibility for bank failure.

Bank profitability is under pressure. Slovenia: Banking Sector Soundness Indicators, 2003-05

(In percent; end of period)

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Source: Bank of Slovenia.
Figure 13.
Figure 13.

Financial Soundness Indicators, 2005 1/

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: FSI database, IMF.1/ NMS excludes Cyprus and Malta.

Performance of Slovene Banks in the Regional Context

Cost-to-income ratios and distance from the best-practice cost frontier show Slovene banks are less efficient than their EU peers, especially in the three large state-dominated banks. This is also reflected in stagnant bank profitability, in contrast with rapid improvements in much of EU. Slovenia also ranks low within the EU on banking sector contestability index, which may reflect still limited integration with EU markets and a dominant position of one large state-owned bank.

uA01fig13

Selected Performance Inidcators of Slovene Banking Sector

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: Bankscope; and IMF staff calcualtions.

26. The authorities also concurred on the need to boost capital market development along with stronger supervision. Capital market development in Slovenia has lagged behind its EMU peers (Figure 14), and integration with European capital markets is just beginning (SIP). The recent listing of the telecommunications company has been an important start for improving the depth and liquidity of the local stock market. The plans to link the local stock exchange to EU counterparts, and the recent implementation of several EU directives should also help market development. Staff recommended listings of other large companies and welcomed plans to relax the minimum required returns for private pension funds and insurance investments to further deepen markets. In addition, the introduction of new laws on venture capital funds and the amendment of the law on investment funds should help financial innovation and equity financing for SMEs. Staff also welcomed plans to strenghen non-bank supervision in a unified structure to ensure a balanced development in the sector.

Capital market development lags behind EMU peers. Financial System by Assets, 2005

(Percent of GDP, EMU=100; end of period)

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Source: EU Banking Structures, ECB, October 2006.
Figure 14.
Figure 14.

Banking Sector, Equity and Bond Market Development Indicators, 2004

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: Financial Sector Development Indicators, World Bank.

D. Structural Reforms

27. The authorities agreed that reforms in the financial sector and greater labor participation and flexibility and are needed to boost growth. To increase productivity, the authorities have attached high priority to high-tech products in exports and value-added, as shown by increasing R&D support in the budget. Reforms for an active aging strategy is likely to increase labor participation by the elderly, which is low compared to EU peers. Staff urged more substantive steps to liberalize employment protection regulations to lower the high costs of firing and hiring, thereby enhancing labor flexibility and demand. The staff also pointed out that structural weaknesses in the financial sector may have contributed to problems in allocating resources to higher productivity activities. The largely bank-based financial sector in Slovenia may have focused on providing credit to existing clients, while studies show that arms-length systems are better at allocating resources to new firms, technologies and activities (WEO 2006). The authorities agreed that the development of capital markets can also make a contribution to boosting technological upgrading and productivity.

uA01fig14

Technological upgrading is needed to boost productivity. Selected EU and OECD Countries: Indicators of Technology Upgrading, 2004-05

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: European Innovation Scoreboard, 2006.

28. While acknowledging recent progress in improving the business climate, staff encouraged further privatization to boost productivity. Slovenia has ranked relatively low among European economies in the ease of doing business. This has resulted in low FDI contributing to slow adoption of new technologies. Staff welcomed recent initiatives to impose a mandatory assessment of administrative burden for new regulatory proposals, and recommended speedy implementation of the one-stop-shop for business registration for corporations envisaged for November to alleviate the administrative burden on business enterprises. Rapid implementation of the government’s privatization plans would also help attract FDI and enhance efficiency.

uA01fig15

The business environment is one of the most cumbersome in Europe.

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: World Bank.

IV. Staff Appraisal

29. Slovenia’s recent euro zone entry is a testimony of its commitment to sound macroeconomic policies. Fiscal prudence, income policies that kept wage growth below productivity, and a cautious monetary stance brought down inflation and interest rates to Maastricht levels while keeping external deficits and net debt low. Macroeconomic stability and a deepening integration with the rest of Europe have helped sustain solid growth and lifted the standard of living for Slovenes.

30. Sustaining macroeconomic policy discipline while increasing attention to structural reforms will be key for success in the euro zone. The loss of the exchange rate instrument puts the burden of macroeconomic management on fiscal and wage policies, and reinforces the role of economic flexibility and productivity in maintaining competitiveness. Therefore, more emphasis is needed in Slovenia on policies that reduce structural rigidities, especially in the fiscal and financial sectors, boost productivity, and ensure sustainable public finances.

31. While the outlook remains good, complacency is a risk going forward. Growth is expected to slow down, reducing excess demand pressures, and inflation to remain contained, assuming continued prudent wage and fiscal policies. However, tightening capacity constraints suggest that overheating risks are rising. Sustained strong credit growth and rapid increases in asset prices add to the risks. Given the cyclical context, the policy mix should aim at reducing demand pressures with tight wage and fiscal policies. The current favorable economic environment is an opportune time for ensuring future financial stability by reducing vulnerabilities, and speeding up additional structural reforms.

32. To contain inflation risks in an economy facing growing pressures on resources, the fiscal stance in the near term should be at least neutral. Implementing the 2007-08 budget and the railway investments would add an impulse of about 1 percent of GDP to the already strong domestic demand. A neutral stance requires a fiscal deficit of about 0.6 percent of GDP for 2007 and 0.7 percent in 2008. To preserve the gains from the lowering of the tax burden, fiscal consolidation needs to focus on reforming the rigid and inefficient spending structure.

33. Over the medium term, achieving the fiscal targets without up-front spending reforms will be difficult against declining tax revenues and mounting fiscal pressures. While the tax reform package is commendable, it is not revenue neutral. Much of the spending cuts to reach the medium-term fiscal targets are backloaded and measures remain to be fully identified. Higher-than-planned wage bill and capital spending, and uncertainties in income tax collections add to the risks. A faster and more front-loaded consolidation with cuts in non-discretionary spending and pension reform when times are still good would not only support balanced growth, but also increase budgetary flexibility and address longer-term fiscal sustainability concerns from age-related spending. In the absence of substantive pension reform, medium term fiscal consolidation should be more ambitious than envisaged.

34. Although the financial sector is sound, the gradual rise in credit risks and increasing exposure to foreign markets requires close monitoring. Risks from rapid credit growth, especially to the leveraged enterprise sector, and increasing foreign activities of banks warrants closer supervision. The active cooperation with foreign supervisors and the establishment of a credit registry are welcome, and should be complemented by greater use of bank specific stress tests, and vigilance on balance sheet mismatches.

35. Using good times to reduce vulnerabilities would enhance future financial stability. Bank profitability is under pressure from declining interest margins and loss of foreign exchange revenue. Rapid expansion is also starting to stretch capital adequacy ratios. Dominance by the state in the sector may be constraining competition, while the absence of the large banks from the stock exchange weakens transparency and oversight over management. To reduce these vulnerabilities, rapid progress should be made with bank privatization and the large banks should be listed in the stock exchange. The government should establish a clear strategy for banks in which it continues to hold important stakes, including for possible capital increases, in particular if the rapid pace of expansion in their foreign operations continues.

36. Strengthening the role of capital markets in the economy would help contain vulnerabilities while boosting growth. Financial development is lagging behind EU peers, and integration with EU capital markets is at early stages. More diversified financial products and deeper integration with EU networks would help lower credit risks by risk transfer and improving access to equity finance. Plans to link the local stock exchange to EU networks, reduce minimum return restrictions on private pensions and the adoption of laws on investment funds and venture capital should deepen markets, help financial innovation and access to finance of new companies. This, in turn, can speed up technological upgrading of production and productivity growth.

37. To maintain competitiveness, further structural reforms are needed in labor markets and the business environment. At present the real exchange rate appears to be in line with fundamentals. However, the high cost of doing business and rigid labor markets have distracted FDI, and contributed to low innovation and structural change with Slovenia falling behind its peers in gaining market share in the EU in higher technology products. Recent initiatives for e-government, one-stop shops for company registration, and reduction of administrative burden are commendable. Linking unemployment benefits to work acceptance and implementation of the authorities’ “active aging” initiative should increase labor participation. To safeguard competitiveness, firmer action is needed to implement privatization plans and reduce the high costs of employment protection regulations.

38. It is recommended that next Article IV Consultation with Slovenia be held on the standard 12-month cycle.

Appendix I. Slovenia: Debt Sustainability Analysis

External sustainability

Although Slovenia’s outlook does not raise major concerns regarding external sustainability, the recent deterioration in the external debt situation needs monitoring. The external debt-to-GDP ratio increased by 12.6 percentage points in 2005 to 71 percent of GDP. Under the baseline scenario, it is projected to continue rising, albeit at a slower pace, reaching 99.5 percent in 2012 (Table A1). This increase is attributable to two main factors. First, as part of a worldwide financial globalization trend, gross debt levels for both claims and liabilities continue to increase. Second, current account deficit, projected at around 2.0 percent of GDP, is primarily financed through debt, as non-debt-generating capital flows, such as FDI and equity, have a considerably smaller weight in Slovene capital inflows than outflows. In 2005, such flows accounted for 12 percent of capital inflows and 34 percent of outflows. As a result, Slovene net debt-to-GDP has gradually increased from -10.8 percent in 2002 to 1.5 in 2005 and is projected to reach 18 percent by 2012.

Table A1.

Country: External Debt Sustainability Framework, 2002-2012

(In percent of GDP, unless otherwise indicated)

article image

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

The contribution from price and exchange rate changes is defined as [-ρ(1 +g) + εα(1 +r)]/(1 +g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 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; Euro 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, Euro deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Stress tests suggest that over the medium term, Slovenia’s gross debt levels are resilient to standard macroeconomic shocks. Bound tests show a jump in the external debt-to-GDP ratio in 2008 by an average of 0.6 percentage points and further gradual increases to at most 103.2 percent by 2012 (3.7 points more than the baseline). A scenario with variables at historic averages would worsen debt trends slightly, increasing debt to 104.7 percent of GDP by 2012.

Slovene debt position is sensitive to assumptions about the size and composition of gross capital flows. The baseline projection assumes FDI inflows in Slovenia will be 2.4 percent of GDP and 40 percent of portfolio inflows will be in the form of equity during 2007-2012. By historical standards, this scenario is optimistic, as FDI inflows constituted 1.7 percent of GDP and 20 percent of portfolio inflows were in the form of equity over the past three years. An alternative projection, based on historical averages for FDI inflows, loan inflows and equity outflows, shows gross debt increasing to 116 percent of GDP, while net debt increases to 28 percent of GDP by 2012.

uA01fig16
Source: Bank of Slovenia and staff calculations.

Public debt sustainability

Slovenia’s general government debt remained at 28 percent of GDP at end-2006, well under the debt threshold under the Maastricht criterion. A decline in fiscal deficits, supported by growth rising to record levels in this decade, and early debt repayment contributed to a lowering of the debt burden over the past two years. This trend marks a reversal of debt dynamics in earlier years when government borrowing through inflation-linked instruments led to a rising debt profile despite a strong fiscal position.

Under the baseline scenario, assuming that deficits stay at currently planned levels, the medium term debt outlook is favorable. The government medium term budget plans to lower the deficit to around 1 percent of GDP in 2009, whereby tax reductions are broadly offset by tightening of some non-discretionary expenditures. Primary surpluses and strong growth would contribute to a gradual decline of the debt stock to below 26 percent of GDP by 2012 (Table A2). The public debt position is resilient to standard shocks to growth, interest rate and the exchange rate and public debt sustainability is not a concern in the medium term.

Table A2.

Country: Public Sector Debt Sustainability Framework, 2002-2012

(In percent of GDP, unless otherwise indicated)

article image

General government gross debt.

Derived as [(r - π(1 +g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

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

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

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.

For Slovenia, the main challenge to debt sustainability arise from age-related spending pressures. With one of the fastest aging populations in Europe, and a generous pension system, Slovenia’s debt is expected to rise rapidly after 2020 undermining its long-run fiscal sustainability and growth prospects. Long run fiscal sustainability analysis shows that Slovenia will need to run surpluses and build up reserves to offset the future rise in age-related spending, in order to achieve a target debt to GDP ratio of 60 percent by 2050. Indeed, a fiscal adjustment of around 10 percent of GDP would be required to restore the intertemporal balance and each year of delay in adjustment will require additional adjustment by 1/8 percent of GDP to restore the balance, placing a significant debt burden for future generations.

uA01fig17

Gross Public Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

Source: IMF staff calculations.
Figure A1.
Figure A1.

Country: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2007, 183; 10.5089/9781451835809.002.A001

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/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2008, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

1

This year’s Selected Issues Papers cover: (i) bank efficiency in the EU context; (ii) risks with cross-border flows; (iii) capital market development; and (iv) fiscal frameworks.

2

Country Report 06/250.

3

Recently passed legislation would bring the railway company within the general government budget beginning with the supplemental budget planned later this year.

4

IMF Country Report 06/250.

5

IMF Country Report 05/266.

6

The adoption of International Financial Reporting Standards in 2006 will lower required provisioning and support profits.

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Cover IMF Staff Country Reports
Republic of Slovenia: 2007 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Slovenia
Author:
International Monetary Fund
Volume/Issue:
Volume 2007: Issue 183
Publisher:
International Monetary Fund
ISBN:
9781451835809
ISSN:
1934-7685
Pages:
61
DOI:
https://doi.org/10.5089/9781451835809.002
  • View in gallery

    In 2006, growth accelerated while inflation stabilized.

  • View in gallery
  • Figure 1.
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    Figure 1.

    Slovenia: Economic Indicators, 2000–08

  • Figure 2.
    View in gallery
    Figure 2.

    Slovenia: Labor Market Indicators, 2000-06 (y-o-y percent change, unless otherwise indicated)

  • View in gallery

    Core inflation has reached EU levels.

  • Figure 3.
    View in gallery
    Figure 3.

    Slovenia: Monetary Conditions, 2000-07

    (In percent)

  • Figure 4.
    View in gallery
    Figure 4.

    Slovenia: CPI Inflation and Components, 2000-07

    (Year-on-year change, in percent)

  • Figure 5.
    View in gallery
    Figure 5.

    Slovenia: Wages and Productivity, 2001-06

  • Figure 6.
    View in gallery
    Figure 6.

    Slovenia: External Sector Developments, 2001-06

    (In percent of GDP, unless otherwise indicated)

  • View in gallery

    Slovenia’s gains in export market share have been lacklustre.

  • Figure 7.
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    Figure 7.

    Slovenia: Exchange Rate Indicators, 1998-2006 (1998q1=100) 1/

  • Figure 8.
    View in gallery
    Figure 8.

    Slovenia: Wages, Productivity, and Product ULC in Manufacturing, 1998-2006 (1998q1=100) 1/

  • Figure 9.
    View in gallery
    Figure 9.

    Slovenia: Competitiveness Indicators and Export Market Shares of Slovenia and New Member States (1998q1=100), 1998-2006

  • View in gallery

    Slovenia: Total Net Financial Position of Main Sectors, 2001-05

    (All assets less liabilities as share of GDP)

  • View in gallery

    Slovenia: Net International Financial Position, 2001-05

    (Percent of GDP)

  • Figure 10.
    View in gallery
    Figure 10.

    Bank Credit to Households and Non-financial Corporations in European Emerging Markets, 2005

  • View in gallery

    Return on equity is among lowest in the region.

  • View in gallery

    Confidence indicators point to sustained growth.

  • Figure 11.
    View in gallery
    Figure 11.

    Slovenia: Market Risk Indicators, 2005-07

  • View in gallery

    Selected Euro Area Countries: Macroeconomic Indicators at the Time of Euro Adoption

  • View in gallery

    Medium-term fiscal plans envisage reduced tax burden and spending cuts to achieve lower deficits.

  • View in gallery

    Medium-term fiscal targets have tended to slip away.

  • Figure 12.
    View in gallery
    Figure 12.

    Slovenia: Housing Market Indicators, 1995-2006

  • View in gallery

    Corporate net liabilities have risen rapidly. Slovenia: Corporate Non-equity Net Liabilities to Other Main Sectors, 2001-05

    (Total assets less liabilities as share of GDP)

  • Figure 13.
    View in gallery
    Figure 13.

    Financial Soundness Indicators, 2005 1/

  • View in gallery

    Selected Performance Inidcators of Slovene Banking Sector

  • Figure 14.
    View in gallery
    Figure 14.

    Banking Sector, Equity and Bond Market Development Indicators, 2004

  • View in gallery

    Technological upgrading is needed to boost productivity. Selected EU and OECD Countries: Indicators of Technology Upgrading, 2004-05

  • View in gallery

    The business environment is one of the most cumbersome in Europe.

  • View in gallery
  • View in gallery

    Gross Public Debt

    (In percent of GDP)

  • Figure A1.
    View in gallery
    Figure A1.

    Country: Public Debt Sustainability: Bound Tests 1/

    (Public debt in percent of GDP)

In 2006, growth accelerated while inflation stabilized.
Figure 1.

Slovenia: Economic Indicators, 2000–08
Figure 2.

Slovenia: Labor Market Indicators, 2000-06 (y-o-y percent change, unless otherwise indicated)

Core inflation has reached EU levels.
Figure 3.

Slovenia: Monetary Conditions, 2000-07

(In percent)
Figure 4.

Slovenia: CPI Inflation and Components, 2000-07

(Year-on-year change, in percent)
Figure 5.

Slovenia: Wages and Productivity, 2001-06
Figure 6.

Slovenia: External Sector Developments, 2001-06

(In percent of GDP, unless otherwise indicated)

Slovenia’s gains in export market share have been lacklustre.
Figure 7.

Slovenia: Exchange Rate Indicators, 1998-2006 (1998q1=100) 1/
Figure 8.

Slovenia: Wages, Productivity, and Product ULC in Manufacturing, 1998-2006 (1998q1=100) 1/
Figure 9.

Slovenia: Competitiveness Indicators and Export Market Shares of Slovenia and New Member States (1998q1=100), 1998-2006

Slovenia: Total Net Financial Position of Main Sectors, 2001-05

(All assets less liabilities as share of GDP)

Slovenia: Net International Financial Position, 2001-05

(Percent of GDP)
Figure 10.

Bank Credit to Households and Non-financial Corporations in European Emerging Markets, 2005

Return on equity is among lowest in the region.

Confidence indicators point to sustained growth.
Figure 11.

Slovenia: Market Risk Indicators, 2005-07

Selected Euro Area Countries: Macroeconomic Indicators at the Time of Euro Adoption

Medium-term fiscal plans envisage reduced tax burden and spending cuts to achieve lower deficits.

Medium-term fiscal targets have tended to slip away.
Figure 12.

Slovenia: Housing Market Indicators, 1995-2006

Corporate net liabilities have risen rapidly. Slovenia: Corporate Non-equity Net Liabilities to Other Main Sectors, 2001-05

(Total assets less liabilities as share of GDP)
Figure 13.

Financial Soundness Indicators, 2005 1/

Selected Performance Inidcators of Slovene Banking Sector
Figure 14.

Banking Sector, Equity and Bond Market Development Indicators, 2004

Technological upgrading is needed to boost productivity. Selected EU and OECD Countries: Indicators of Technology Upgrading, 2004-05

The business environment is one of the most cumbersome in Europe.

Gross Public Debt

(In percent of GDP)
Figure A1.

Country: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)