Fiscal developments

Abrogation of the European Commission’s Excessive Deficit Procedure for Slovenia in 2016 was a milestone in the fiscal consolidation process. Since then, progress has been made with reducing the deficit to 1.8 percent in 2016 (0.4 percentage points lower than envisaged) and expected to decline further to 0.8 percent in 2017. Importantly, public debt declined for the first time in nominal terms and as a percent of GDP in 2016. The banking sector bail-out, structural reforms, enhancement of the fiscal framework and post crisis fiscal restraint have proven to be efficient. A neutral tax reform and improvement in tax procedures would contribute to improving the business environment and economic performance.

The fiscal framework has been substantially upgraded. Following the introduction of the fiscal rule in 2015 and expenditure ceilings in 2016, the Fiscal Council has been fully operational since March 2017.

In late April, the government adopted the 2017–2018 National Reform Program and adjustments to the 2017 Stability Program. It is envisaged that in 2017, the general government deficit will fall to 0.8 percent of GDP and turn into surplus in 2019.

Recent monetary developments

Staff expects that robust economic activity and rising commodity prices will raise inflation this and next year to around 1.75 - 2.0 percent. Confirming this projection, the very recent Statistical Office information shows that inflation in April 2017 stood at 1.8 percent. Price developments have primarily been influenced by oil-based products price movements while growth in domestic demand and the increase in unit labor have not had a significant impact so far.

Credit market

The credit market is highly competitive, and faces a decline in corporate sector demand for loans due to the increased use of internal resources and non-bank resources. The line between domestic and foreign credit supply is waning, particularly in the context of the EU single market for financial services.

The most recent data of Banka Slovenije for February 2017 show that the nonfinancial corporate sector credit growth in the first quarter of 2017 turned positive after 6 years of continuous decline. Households’ credit lately grows at somewhat below 6 percent on y-o-y basis. Risks to the household sector remain subdued given that Slovenian households’ debt is among the lowest in Europe and that over 60 percent of the population live in an owner-occupied home for which there is no outstanding loan or mortgage.

The creditworthy enterprises, including small and medium-sized enterprises (SMEs), are mostly able to access credit smoothly. According to the European Commission’s February 2017 Country Report on Slovenia, access to finance for SMEs has improved and is in line with the EU average. In 2016, some 9 percent of SMEs had their loan applications rejected, down from 24 percent in 2014. Both the willingness of banks to lend money and access to public financial support that include guarantees have improved, and access to finance is no longer seen to be among the main obstacles for the operation of Slovenian micro, small and medium-sized businesses.¹

Smooth credit market functioning in Slovenia is not yet reflected in the World Bank Doing Business ranking in the category of “getting credit” mainly because of the past credit register deficiencies. These deficiencies were however addressed in January 2017 when Banka Slovenije replaced the old system with a full-fledged credit register.

Banking sector

The process of bailing out banks in Slovenia has been a clear game changer in terms of confidence both externally (government yields) and internally (confidence indicators) affecting positively economic growth. Banks in Slovenia are now adequately capitalized and better shielded against risks. Between 2012 and 2016 the banking sector’s regulatory capital to risk-weighted assets (CAR) increased from 11.4 percent to 19.2 percent due to various measures in addition to the capital increase and cleaning of NPLs, such as restructuring and continuing deleveraging of corporates. Coverage of nonperforming claims by impairments is high and the banking system’s capital is five times the stock of claims more than 90 days overdue not covered by impairments.

Banks’ recapitalization and revamped insolvency regulation helped reduce the high share of NPLs² in total gross claims. In 2016, the process was accelerated resulting in a decline from 10 percent to 5.1 percent. Regarding the remaining NPLs, largely with SMEs, policy measures have already been taken. Banka Slovenije and the Banking Association issued NPLs guidelines for SME resolution supporting the process of evaluating bank NPL resolution strategies by the supervisor, including annual NPL reduction targets for 2017–19 and assisting banks to develop a tool kit for restructuring. In March 2017, the Handbook for management of nonperforming loans of micro, small and medium-sized companies was issued. It has been the result of the cooperation of the World Bank and Banka Slovenije in a project financed by European Commission.

The Bank Assets Management Company (BAMC) has been an important part of the NPL reduction process in 2013 and 2014 and operates well. Its management stabilized and measures were taken in late 2015 to shield the BAMC’s independence: (i) the BAMC is operationally independent, as the Ministry of Finance may not issue instructions to the BAMC for action on individual cases; (ii) management of the BAMC rests with its executive directors; and (iii) the BAMC has broad powers to restructure companies in its portfolio. According to the BAMC’s end-April 2017 information, cash generated from asset management in 2016 corresponded to 18.3 percent of the transfer value of the assets. This is substantially exceeding the legal requirement of annual liquidation of at least 10 percent of the estimated value of the assets.

In 2016, return on equity of the Slovenian banking sector doubled to more than 8 percent. Going forward however, bank profitability pressures will require adjustments in the industry. The market-driven consolidation process in the Slovenian banking system may likely continue. The three systemic banks in Slovenia are supervised by the Single Supervisory Mechanism. The banking system’s supervision has undergone improvements, including with the support of 6 rounds of much appreciated Fund TA provided between 2012 and 2014. Future adjustments of banking business models are largely expected to be made within the wider European banking industry, while supervisors will in parallel concentrate on banking regulation compliance and containing risks to the financial system. Lastly, the authorities remain committed to privatize two of the remaining banks which received state aid after having privatized the third one in 2016.

The Financial Stability Board in Slovenia is a fully operational macro-prudential authority and macroprudential policy is proactively pursued. Given the increasing property prices, in August, 2016, Banka Slovenije issued non-binding guidelines on loan-to-value and debt–to-income guidelines. The 2015 strategic framework for macroprudential policy for the banking sector and the related guidelines were updated in January 2017.

External developments

The elevated surplus in Slovenia’s balance of payments’ current transactions reflects export competitiveness gains in the tradable sector, corporate sector deleveraging and the low level of domestic consumption in previous years. The authorities expect that this and next year the current account surplus will decline to around 4.5 percent of GDP. In 2017 price factors, mainly deteriorating terms of merchandise trade, would drive the decline. The lower current account balance, the expected balancing of the international investment position by 2022 and the gradual public debt reduction will further improve macroeconomic stability of Slovenia’s highly open economy.

Structural reforms

The 2017-2018 National Reform Program aims at supporting economic growth and public finance stability and sustainability through a comprehensive set of structural measures. In March 2016, the Parliament adopted a strategic plan for developing the health care system and in December 2016 the new Pharmacies Act was adopted. The Health Care and Health Insurance Act, the central piece of the health care reform, is in public consultation phase and envisaged for adoption by the Government in July. In addition, the prioritized introduction of the long-term care system aims at sending the needed new regulation for public consultation by the end of July this year. The 2012 pension reform’s notable positive effects are still supporting the pension system’s sustainability. To strengthen it over a longer horizon amid significant aging population pressures, the April 2016 White Paper provides the basis for the next round of adjustments to the pension system. The related consultation period is ending and the necessary regulation should allow new measures to start kicking in in 2020. Lastly, revisions to the Public Finance Act are in the pipeline. Following the introduction of a fiscal rule, they refocus budgeting to medium term and strengthen the budget discipline.

The medium- and short-term measures concentrate on improvements in debt management, local communities financing, public sector wage and employment regulation and budget transfers. The third set of envisaged measures is growth-supporting and spreads across 15 areas. Among them are administrative barriers reduction and investment support measures, improvements in tax collection, public procurement, judicial system, construction and spatial planning regulation and labor market functioning.

Slovenia’s unemployment rate is below EU average. However, in 2016, there were 8.1 percent fewer persons employed in Slovenia than in 2008. Also, compared to EU average, Slovenia has a below average employment rate among the youth and the elderly. The 2013 labor market reform to further improve the labor market, contributed to better labor outcome and the authorities are now moving on in the areas where weaknesses remained. In early 2016 tax relief and exemption from paying social security contributions for employers hiring workers above the age of 55 has been introduced. The forthcoming introduction of vocational training should address youth unemployment and skills mismatch. More broadly, in 2016 a policy paper and an action plan were adopted to reduce the problem of elderly unemployment, complementing the White Paper on pensions. Two additional programs are being prepared to support employment of longer unemployed and elderly, and the drafted amendments of three labor market acts, aimed at improving its functioning, are in process.

The authorities remain committed to further pursuing policies of macroeconomic stabilization and on implementing their multipronged structural measures program.