Republic of Slovenia: 2018 ARTICLE IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Republic of Slovenia

2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Republic of Slovenia


2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Republic of Slovenia


1. The post-crisis recovery continues.

  • Growth accelerated to 4.9 percent in 2017 mainly led by strong exports, and it is estimated to have reached 4.5 percent in 2018, still well above potential growth. Domestic demand, particularly public investment, has picked up recently, complementing exports as the key driver of growth.

  • Labor market conditions are increasingly tight. The unemployment rate has declined to about 5 percent, the lowest level in a decade, while real wage grew by 2 percent in 2018. Skills shortages are emerging.

  • Inflation has been subdued, with the average headline inflation estimated at 1.9 percent in 2018. Core inflation remained low at around 1 percent, slightly above the euro area average.

  • The fiscal balance continues to improve, mainly driven by increased tax collection associated with strong growth. Thus, the fiscal deficit was halved in 2017 to 0.8 percent of Gross Domestic Product (GDP), followed by a fiscal surplus of about ½ percent of GDP in 2018.

  • Financial sector soundness continues to improve. However, SME NPLs remain elevated.

  • Income inequality is low, with a GINI index at 0.24, compared to the OECD average of 0.32.1 However, the share of people at risk of poverty and social exclusion (19.9 percent in 2016) remains above the EU average of 17.7 percent2

  • The first minority coalition government in history took office in September 2018. The new government is supported by a five-party coalition and another party from the opposition.


Contribution to Real GDP Growth

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Source: Haver Analytics.

Unemployment Rate and Inflation


Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Source: Haver Analytics.

Fiscal Balance

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Sources: Slovenia authorities and IMF staff calculations.


2. Near-term growth prospects are positive.

  • Staff expects growth to slow moderately to 3.4 percent in 2019, as export demand will continue to ease, and capacity limitations and skill shortages will become more severe. After years of weakness, private investment is starting to pick up. EU-financed public investment should grow strongly as well, and a projected fiscal expansion will also support domestic demand. The current account surplus is projected to decline somewhat to about 5 percent of GDP in 2019, as export growth moderates and domestic demand continues to recover.

  • Inflation is projected to reach 2.2 percent in 2019, as robust economic activity and wage pressures will keep price pressure up. In the medium term, higher core inflation is partially offset by a decline in energy prices.

Text Table 1.

Selected Economic Indicators, 2018–23

(Percent of GDP, unless noted otherwise)

article image
Sources: Slovenian authorities and IMF staff.

3. The medium-term outlook is less favorable. Growth is projected to decline gradually to 2.1 percent in 2023, with output remaining above its potential level. In the medium run, the potential growth rate is constrained by adverse demographic trends (Annex V on Output Gap Estimates). The positive output gap will decline over time but not fully close, as a euro area accommodative monetary policy and waning private sector deleveraging will support domestic demand.

4. Risks remain tilted to the downside (Annex I). Externally, a rise in protectionism would hit Slovenia hard given its reliance on exports and integration in global value chains. Intensified policy uncertainty in Europe or weaker-than-expected global demand could affect Slovenia through confidence, trade, and financial channels, thereby slowing investment and hiring. A faster-than-expected euro area monetary normalization could weaken public and private balance sheets. Domestically, rule by a five-party minority government entails risks to policymaking and consensus building, which may slow down structural reforms.

5. The external position is assessed as substantially stronger than suggested by fundamentals and desirable policies, but the current account is expected to revert toward its norm in the medium term (Annex II). The current account balance has risen from a deficit of 4.1 percent of GDP in 2007 to a surplus of 6.4 percent of GDP in 2018. Based on the Fund’s methodology, staff assesses that a country with Slovenia’s characteristics would have a current account surplus of about 1.9 percent of GDP in 2018, implying a gap of 4.5 percent of GDP. With the policy gap being virtually zero (-0.02 percent of GDP), the gap of 4.5 percent of GDP is not explained by the model but could be caused by temporarily weak consumption and investment (a legacy of the financial crises). As the net international investment position (NIIP) is still relatively large and negative, reflecting the imbalances created by the recent banking crisis, the large external surplus helps reduce external vulnerabilities and reflects a desirable deleveraging process in the private sector. The external surplus is expected to moderate in the medium term as consumption and investment fully recover from the crisis. Policies to address legacy problems (1115) and product and service-market reforms (1126) could boost investment and help reduce the current account surplus. The current account gap translates into an 8 percent REER undervaluation at standard elasticities. However, the large change in the current account balance over the past 10 years despite a relatively stable REER suggests that the higher than expected surplus was caused by factors unrelated to the REER.


Current Account and Net IIP

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Sources: Statistical office of Slovenia; Bank of Slovenia; and Haver Analytics.

Unit Labor Cost – Manufacturing

(Index, 2005= 100)

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Sources: Haver Analytics; and IMF staff calculations.

Authorities’ Views

6. The authorities broadly agreed with staff’s economic outlook and risks. For 2019, the central bank’s growth and inflation projections coincided with staff’s views. The authorities concurred that growth will decelerate in the medium term while rebalancing toward domestic demand as consumption and investment continue to recover. The authorities stressed that the main risks to the outlook are rising trade conflicts and political tensions, notably in the three largest euro area economies. The central bank agreed that the large current account surplus might decline faster than expected in its latest projections given high probability of faster growth in domestic spending due to stronger government investment and faster growth in wages, while at the same time risks surrounding export growth have been increasing. The government’s forecasting arm (IMAD) saw persistent high current account in the medium term, considering the strong private sector savings and high uncertainties on investment prospects. However, IMAD noted that risks to the current account balance is tilted to the downside.

Policy Discussions

7. Population ageing is emerging as the dominant challenge to longer-term prosperity. Slovenia enjoyed healthy natural population growth until 1990. During the last 20 years, net migration has boosted population while natural growth was anemic and is expected to turn strongly negative in the immediate future. Although currently the long-term old-age dependency ratio is broadly in line with the EU average (50.2 versus 51.2), the population is ageing more rapidly than in most other OECD countries, posing risks to fiscal sustainability and long-term growth. In fact, Slovenia has one of the largest projected increase in age-related spending (see text figure in Section A). Fiscal and structural policies are needed to prepare the economy for these challenges.


Size of the Labor Force and Age Composition

(Thousands of persons)

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Source: ILO Labour Force Estimates and Projections (LFEP) Database.

Contributions to Total Population Growth

(Percent change and thousands of persons)

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Sources: United Nations World Population Prospects 2017; and IMF staff calculations.

A. Fiscal Policy: Rebuild Fiscal Buffers and Ensure Sustainability

8. Slovenia has achieved substantial fiscal consolidation since the 2013 banking crisis. The structural fiscal balance improved by 2.3 percentage points of GDP between 2013 and 2017. Consolidation was achieved by a mix of structural measures (e.g., pension reform, VAT rate increases, and debt reprofiling) and crisis-motivated temporary measures (e.g., one-off freeze on wages and social transfers indexation, and cut in non-EU-financed public investment). These consolidation efforts allowed Slovenia to exit the Excessive Deficit Procedure (EDP) of the European Commission (EC) in 2016.

9. However, fiscal vulnerabilities remain. At about 69 percent of GDP, public debt is constraining the fiscal space for countercyclical response to external shocks in a small open economy with significant contingent liabilities (Annex IV on DSA). Moreover, public debt is above the rule of 60 percent of GDP under the Stability and Growth Pact (Text Table 2). Finally, as Slovenia has one of the largest projected long-run increase in age-related public spending in the EU, public debt will start growing rapidly in the medium term. Overall, fiscal space is at risk with or without fiscal rules.


Change in Age-Related Public Expenditure, 2016–70

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Source: European Commission 2018 Aging Report.
Text Table 2.

Medium-Term Budget Targets, 2018–23

(Percent of GDP, unless noted otherwise)

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Sources: Slovenian authorities and IMF staff.

10. The amended Draft Budgetary Plan (DBP) for 2019 envisages a fiscal expansion. The headline fiscal surplus was estimated at 0.4 percent of GDP in 2018, corresponding to a balanced structural position. The amended DBP will likely result in an increase in the structural deficit by 0.7 percent of GDP in 2019 mostly because of increased social transfers and wages with no offsetting spending or tax measures. Specifically, staff estimated that public sector wages will increase by about 0.3 percent of GDP in 2019, followed by further wage increases in 2020.

11. The authorities should avoid a pro-cyclical fiscal expansion and preserve structural fiscal balance in 2019. The Medium-Term Objective (MTO) of structural balance is an appropriate fiscal anchor in view of the need to reduce high public debt, while the favorable cyclical position suggests that there is no cyclical need for fiscal relaxation. Additional spending plans should be reversed or postponed until they can be accommodated through spending cuts elsewhere or tax-base broadening as part of structural fiscal reforms that generate permanent savings while modernizing government (see below). The Fiscal Council urged the government to keep public finances in structural balance in 2019. It also emphasized the need to adopt measures in 2019 to address long-term fiscal challenges.


Structural balance and public debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Source: IMF staff estimates.

12. To prepare the budget for pressures coming from population ageing, spending reforms should focus on pension, health, education, and the wage bill.

  • Pension system. Despite the 2012 pension reform, further actions are needed to ensure the adequacy and the sustainability of the pension system. The government’s White Paper proposals to raise the retirement age to 67 and automatically adjust it to demographic trends, as well as to restrict early retirement further, should be taken up. Additional reforms could include: (i) indexing pensions to inflation only rather than wages; and (ii) abolishing the pension bonus. To increase the effective retirement age, staff suggested gradually eliminating the long-service early retirement provision (40 years rule) and discontinuing the arrangement whereby up to 5 years of service time can be purchased prior to retirement. Together, all the above reforms would ensure sustainability of the pension system.

  • Health and education reforms. Recent studies have found efficiency gaps compared to euro area peers.3 Potential reforms include: (i) expanding centralized procurement to benefit from more supplier competition and economies of scale; (ii) improving means-testing financial support for tertiary students; and (iii) linking university funding to students’ labor market outcomes.4

  • Wage bill. Since the public wage bill is high in international comparison despite the recent freeze during the crisis, the authorities should undertake a functional and institutional review to prepare a reform of public employment (Figure 3). The reformed system should link public wage dynamic with economic conditions and motivate employees by rewarding good performance rather than providing automatic, seniority-based wage hikes. A multi-annual remuneration framework, with separate limits for the number of employees and for wage increases by sector, would also be useful.

Figure 1.
Figure 1.

Macroeconomic Developments

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Sources: Slovenia authorities; Eurostat; and Haver Analytics.
Figure 2.
Figure 2.

Labor Market

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Sources: Bank of Slovenia; Eurostat; and Haver Analytics.1/ Public administration and defense; compulsory social security; education; human health and social work activities; arts, entertainment and recreation; other service activities (NACE rev. 2).2/ Industry, construction and services except activities of households as employers and extra-territorial organizations and bodies (NACE rev. 2).
Figure 3.
Figure 3.

Fiscal Context

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Sources: Slovenia authorities; OECD (2018); Eurostat; Haver Analytics; and IMF staff.1/ Tax wedge for singles with no child earning the average wage. Based on Joint EC – OECD Tax & benefits indicators.2/ Compensation of employees includes wages and salaries and employer’s social contribution.

13. New emphasis should be put on growth-enhancing tax reform. Slovenia has a relatively high tax wedge (Figure 3). The average worker in Slovenia faced a tax wedge that is higher than that of the euro area average (Box 1). The wedge could be reduced by cutting social security contributions and broadening the base for the value-added tax (VAT) and personal income tax (PIT), or increasing market value-based property taxes, and environmental taxes. Higher revenues could also come from rationalizing tax expenditures in the immovable property tax and capital net gains tax. Staff estimated that these tax and spending reforms measures could generate a potential saving of 1.7 percent of GDP. This could help offset the rising fiscal burden of an ageing population as well as make room for additional spending on growth-enhancing measures, such as training and active labor market policies (Section C). On the other hand, a reform shifting the tax burden from labor to consumption and other taxes in a revenue-neutral way could increase Slovenia’s output level by 0.5 percent in the medium- to long-term.

Text Table 3.

Potential Fiscal Savings by 2020

(In percent of GDP)

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Source: Staff calculations.

Based on the OECD (2018) estimate on the option of cutting the labor tax wedge by 5 percentage points.

By closing part of the gap to the efficiency frontier of OECD countries, including lower wage bill.

Growth-Enhancing Tax Reform1/

Tax reform presents strong potential to raise revenue more efficiently while incentivizing work and boosting growth in Slovenia. While labor is heavily taxed (the tax wedge was 42.7 percent in 2016 compared to 40.3 percent in the EU28), generous tax incentives such as reduced rates and exclusions erode revenues from the PIT, VAT, and corporate income tax (CIT). Property tax revenue is well below the EU average. Tax expenditures stand at 4.9 percent of GDP (compared to 0.6 percent in Germany). Revenue-neutral tax reform could accelerate employment growth by shifting the tax burden to less distortive sources of revenue and by rationalizing tax expenditure. It would help improve efficient resource allocation, encourage labor participation, and reduce informality.

Options for reform include the following:

  • Broadening the PIT base. The PIT base, currently eroded by PIT tax expenditure costs of 2.1 percent of GDP, could be broadened by withdrawing the exemptions for the reimbursement of home-to-work travel expenses and the tax-free meals provided during work.

  • Rationalizing PIT allowances. The PIT system is granting multiple tax allowances. Converting allowances, which give a larger tax reduction to high-income earners, into cost-effective tax credits could finance downward PIT rate adjustments.

  • Reducing tax exemption on benefits. Benefits that are currently exempted from taxation (performance, Christmas, and holiday bonuses) could be made taxable as ordinary income.

  • Broadening the VAT base. Broadening the VAT base by applying the standard rate (22 percent) to poorly-targeted reduced-rate (9.5 percent) supplies could raise revenue by 0.5 percent of GDP.

  • Reforming the capital gains tax (CGT). Capital gains are taxed at a flat rate of 25 percent, but the rate tapers out to zero percent after an asset holding period of 20 years. By eliminating the CGT taper relief, capital income taxes will become more progressive.

Other core tax instruments also offer opportunities for raising revenue to compensate lower labor taxes. The main options include introducing a value-based property tax, tightening the application of the flat-rate business tax, and adopting stricter debt/equity limits for tax purposes.

Tax reform could substantially invigorate growth. A simulation exercise indicates that shifting the tax burden from labor to consumption and other taxes in a revenue-neutral way could increase Slovenia’s output level by 0.5 percent in the medium- to long-term.

1/ See the accompanying Selected Issues Paper for details

Authorities’ Views

14. The authorities reiterated their commitment to fiscal consolidation through structural fiscal reforms. They noted Slovenia was one of the euro area’s best performers in reducing public debt over 2015–18 and is set to keep this path as a key policy priority. With a goal to reduce public debt below 60 percent of GDP in the medium term, they plan to further improve the fiscal space. This could impact the calculation of the MTO. For the short term, they noted that the headline surplus—despite the sizable fiscal impact of the public wage negotiations—would help advance public debt reduction in 2019. They explained that the structural balance could not improve, because the coalition government, after years of strong economic growth and gradual relaxation of crisis-related freeze on wages and social transfers, decided to improve the incomes of civil servants and social transfers recipients, with the aim to boost economic growth through consumption. They believe that some of the fiscal space can be used to address these spending needs while maintaining medium-term consolidation. They also cautioned that the envisaged structural reforms in 2019 would need broad consensus within the five-party coalition. Nevertheless, they stressed that several fiscal reforms would be needed in 2020, including revenue-neutral tax rebalancing. On pensions, they explained that the current annual bonus helps address pension adequacy for poor pensioners. On health, the authorities stressed that their priority is to reduce the waiting time, including through digitalization. Regarding wages, they noted that the successful wage negotiations are a basis for broader mid-term, public wage reform.

B. Financial Policy: Address Legacy Problems and Emerging Risks

15. Since the 2013 banking crisis, financial sector stability has improved though some legacy problems remain (Figure 5). Banks are well capitalized and liquid, and overall asset quality has improved. Profitability also increased, but largely because of the one-off release of impairment provisions. The deleveraging process of the corporate sector is well advanced. The privatization of the largest bank, Nova Ljubljanska Banka (NLB), has advanced, as the government sold 65 percent of the bank in 2018 and plans to sell another 10 percent in 2019; meanwhile, the third largest bank, Abanka, is expected to be privatized in 2019.5 However, since 2012, banks’ net interest income has declined markedly, and it is likely to fall further as the policy interest rate remains low and banks face uneven recovery in lending activity, with lagging corporate lending. Although progress was made in resolving overall NPLs, SME NPLs remain elevated in the low double digits. Staff welcomed the adoption of the toolkit and handbook for resolving SME NPLs in addition to the NPL guidelines, the European Central Bank’s measures for the three banks it oversees, and the large banks’ proactive management of NPLs. Supervisors should actively engage with banks on business models in light of the declining net interest income, and they should push banks to speed up the resolution of SME NPLs. Further efforts in strengthening insolvency procedures for SMEs would also help.6

Figure 4.
Figure 4.

External Sector Developments

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Sources: Bank of Slovenia; Direction of Trade Statistic; European Central Bank; Haver Analytics; Statistical Office of Slovenia; and IMF staff estimates.
Figure 5.
Figure 5.

Financial Sector Developments

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Sources: Slovenia authorities; Eurostat; and Haver Analytics.1/ Due to the 2012–13 crisis, credit growth for non-financial corporations had a sharp contraction in 2013–14 and then experienced recovery with the support of crisis measures.

Outstanding Credit to Private Sector

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Sources: Haver Analytics; and IMF staff calculations.

16. Meanwhile, new financial vulnerabilities could emerge, including in the housing market. Credit risks could emerge due to the elevated share of high variable-interest loans to both households and non-financial corporations. In addition, risks in the housing market need to be closely watched. At 13.4 percent in 2018: Q2, Slovenia’s housing price growth rate was one of the highest in the euro area, but the relatively low price-income ratio does not point to any overheating yet (see Annex VII). Moreover, only about 10 percent of households have a mortgage (19 percent in the euro area), and about a third of the recent housing transactions was carried out with equity (i.e., without bank financing).

17. The decision to broaden the scope of macroprudential tools for the real estate market to cover total household lending is welcome. The Bank of Slovenia (BoS) maintains its macro-prudential guidance as recommendation to banks. It recommends that the loan to value ratio not exceed 80 percent and the debt service to income (DSTI) ratio be limited to 50 percent for lower incomes and 67 percent for higher incomes. It is also recommended that consumer credit maturities not exceed 120 months. But the limits could be made mandatory and be set at more binding levels when needed.


Housing Prices

(Index: 2015–100)

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Source: Eurostat.

Housing Prices to Income

(Index, 2008=100)

Citation: IMF Staff Country Reports 2019, 058; 10.5089/9781484399514.002.A001

Source: OECD.

18. The shortcomings of the AML/CFT framework identified in the 2017 Moneyval report should be addressed. Notably, the authorities should take steps to enhance targeted financial sanctions related to proliferation financing (i.e., financing that facilitates the proliferation of weapons of mass destruction). In this regard, BoS should strengthen the supervision of banks’ implementation of national requirements.

Authorities’ Views

19. The authorities agreed with staff’s analysis and advice. They stressed their recent successes in helping banks to substantially reduce NPLs, increase asset quality, and improve core business profitability. They agreed on the need to continue such efforts to further reduce SME NPLs. Continued progress in their planned bank privatization is also expected to further strengthen bank’s efficiency and governance. The government reiterated its commitment to complete the privatization of NLB and the sale of Abanka in 2019. The national authorities agreed to closely monitor risks in the housing market and take further macroprudential measures if needed. Regarding AML/CFT, the national authority has completed a progress report on addressing the main recommendations from the 2017 Moneyval report, including taking steps to enhance targeted sanctions related to proliferation financing.

C. Structural Reforms: Support Employment and Productivity Growth

20. Higher productivity will be required to mitigate the impact of ageing. Since the population is ageing rapidly, economic growth will increasingly depend on productivity growth and the higher levels of supportive skills, notably information technology specialists, scientists, and engineers. Further reforms of labor markets, SOEs, and product and service markets will raise Slovenia potential output and productivity growth.7

Labor Markets and Skill Development Reforms

21. Recent reforms of apprenticeship and vocational training are welcome, and their effectiveness should be monitored. Reforms include the Apprenticeship Act, aimed to promote employability of young people through a closer integration of the business sector and education; the amended Vocational Education Act, which seeks to improve education outcome quality and provide internationally comparable vocational qualifications; and a new Adult Education Act re-establishing a public network of institutions to train adults and vulnerable groups to foster a culture of lifelong learning. If well-implemented, these reforms will also promote inclusion, as low-performing and disadvantaged students are highly concentrated in vocational programs. Moreover, they will help address the increasing skills shortages.8 The authorities should closely monitor the effects of the reforms and reinforce them if needed.

22. The recently amended Labor Market Act provides stronger incentive for low-skilled unemployed to take up full-time employment. Low-after-tax earnings and relatively generous unemployment benefits reduce incentives to work. For instance, the replacement rate of unemployment benefits has been above 80 percent in the first months of unemployment for low-wage earners, higher than the EU average (67 percent).9 With the new Act, however, when taking a full-time job, a worker will enjoy an additional 20 percent of the last unemployment benefit on top of his salary until expiration of the unemployment benefit. For older workers, the Act exempts wages from social security contributions. This should improve work incentives and reduce structural unemployment.

23. The authorities should pursue additional reforms as follows:

  • Further reforming the tax-benefit system. Rebalancing taxation from labor to consumption and wealth, as discussed above, would stimulate labor supply broadly. In addition, the government could bring down the replacement rate of unemployment benefits closer to the EU average.

  • Further increase the flexibility of labor market. Worker protection of open-ended contracts is still perceived by employers to be excessive relative to peer countries, mainly because of high layoff costs. Recent staff analysis also finds consistent evidence that calls for further actions.10 A reform of unemployment benefits to “protect workers rather than jobs” would be desirable.

  • Developing training in entrepreneurship and new technologies. Entrepreneurship education is well below the EU average.11 Together with new technology training, entrepreneurship skills should help workers adapt to and succeed in the digital economy and fast-changing technological world.

SOEs Reforms

24. Extensive presence of SOEs in the economy may impede private investment and productivity growth and privatization should be accelerated. SOEs account for 20 percent of non-financial employment and make the government the largest asset holder.12 SOEs are dominant in the network sectors (telecom, energy, transportation) and even present in competitive sectors like tourism and textiles. EC analysis suggests that total factor productivity of large SOEs lags that of private companies. Slovenia has underperformed in large-scale privatization relative to other CESEE countries.13 With the investment to GDP ratio still well below the pre-crisis level, accelerating the privatization program could boost private and foreign investment and technological know-how that would benefit the broader economy.14 In this regard, the list of companies classified as “strategic” and “important” should be reduced.

25. The authorities should closely monitor the SOEs governance framework. Effective enforcement will help to ensure that SOEs consistently comply with international standards in the following key areas: (i) financial reporting and auditing standards; (ii) timely and accurate disclosure rules; (iii) supervisory board; and (iv) equitable treatment of minority and foreign shareholders. Monitoring fiscal risks stemming from SOEs drawing on best practices is also desirable.15

Product and Service-Market Reforms

26. The regulatory burden in product and services markets should be reduced to support investment and firm growth. Slovenia maintains a more restrictive regulatory system than the OECD average and that of most EU members. Notably, it has 220 regulated professions, which places the country among the largest in EU countries and four times more than that in the least regulated countries (Sweden and the Baltics).16 The number of regulated professions should be reduced to enhance competition and increase productivity. New legislation entered into force in mid-2018 should simplify building permits acquisition procedures and reduce administrative burden and risks for SMEs. Rapid progress to implement the new legislation and further streamline spatial planning and construction regulation would benefit the housing market and investment.

Authorities’ Views

27. The authorities concurred that more could be done to further reform the tax-benefit system. However, they cautioned that no new structural reforms are planned on these fronts in 2019, as consultations continue. Meanwhile, the government will forge ahead with its implementation plan for active employment measure that will seek to activate long-term unemployed, younger and older unemployed, and people with low levels of education.

28. Regarding labor market flexibility, the authorities thought an in-depth analysis of the impact of the 2013 reform would be needed before introducing new measures. They also viewed low participation by older workers and the increasing use of atypical forms of work and precarious work as problematic.

29. They reiterated their commitment to pursue the privatization program. They noted that recent successful initial public offering of the NLB will provide a new momentum. They explained that it would take time for the parliament to reconsider the list of companies where the state would retain control. Regarding the SOEs governance framework, the authorities stressed that effective implementation of the OECD guidelines will address staff’s advice.

30. The authorities highlighted ongoing initiatives to reduce administrative burden to support enterprise development. Notably, they pointed to their SME test in assessing the impact of the administrative burden of new regulations on SMEs and the one-stop shop program that coordinate all government services in one place to investors. They agreed to closely monitor the impact of the streamlined spatial planning and construction regulation and take additional steps if needed.

Staff Appraisal

31. As Slovenia continues its post-crisis recovery, growth remains well above the euro area average, helped by sound policies. Growth is expected to remain robust in the near term, although the medium-term prospects would be constrained by adverse demographic outlook. Therefore, going forward the authorities should take advantage of the positive economic cycle to deepen fiscal and structural reforms, rebuild fiscal buffers, and increase productivity growth.

32. The gains from past fiscal consolidation should be preserved, and a procyclical fiscal expansion should be avoided. The authorities’ MTO of structural fiscal balance is an appropriate anchor, and it will help bring down the high public debt gradually towards 60 percent of GDP and build fiscal buffers. This target was estimated to be met in 2018, but the amended DBP for 2019 envisages higher spending that will result in a sizable structural deterioration. Considering the strong current economic performance and positive output gap, higher spending should be accommodated through fiscal savings as part of structural reforms.

33. There is scope for fiscal reforms that generates permanent savings while modernizing government operations. These reforms would help mitigate the medium-term fiscal impact of the unfavorable demographic outlook. They should focus on pensions, health, education, and the wage bill. They should be complemented by a growth-enhancing tax rebalancing away from social security contributions towards property taxes and by rationalizing tax expenditures.

34. Slovenia’s external position in 2018 is assessed as substantially stronger than suggested by fundamentals and desirable policies, but the current account is expected to revert toward its norm in the medium term. As the NIIP is still relatively large and negative, the large current account surplus is helping reduce external vulnerabilities and reflects needed deleveraging by the private sector. Slovenia’s current account surplus is expected to moderate as consumption and investment fully recover from the crisis and the NIIP improves. In this regard, policies to address legacy problems and product and service-market reforms could accelerate the recovery of investment.

35. Financial stability has improved, thanks to the decisive restructuring of ailing banks and prudent macroeconomic policies. BoS’s NPL guideline and supervisory dialogue, as well as the measures introduced by the European Central Bank for the three directly supervised institutions, helped banks make progress in resolving NPLs. Large banks have adopted a proactive management of their NPLs, and supervisory authorities should continue to encourage and support these efforts.

36. 36. Emerging risks in the housing market need enhanced vigilance. Although the relatively low price-income ratio does not point to any overheating yet, the recent double-digit increases in housing prices warranted close monitoring. In this regard, BoS’s proactive decision to build the macroprudential toolkit is welcome.

37. Continued structural reforms are key to ensure long-term prosperity, while strengthening the economy’s resilience to shocks. Effective implementation of the recently enacted reforms of vocational training, apprenticeship, and adult education would help address skill shortages, support employment of younger and older people, and boost productivity growth. There is still scope to further increase labor market flexibility and reform the tax-benefit system to make work pay. Similarly, the administrative and regulatory burden needs to be reduced further to support investment and firm growth. Accelerating the privatization program would inject capital and technological know-how that would benefit the broader economy.

38. It is proposed that the next Article IV consultation take place on the standard 12-month cycle.

Table 1.

Selected Economic Indicators, 2015–23

(Annual percentage change, unless indicated otherwise)

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

Reflected national account data update by the authorities as of November 30, 2018.

The stock includes debt issuances of the Bank Asset Management Company (BAMC) in 2013–14.

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.

Table 2.

General Government Operations, 2015–23

(Percent of GDP, unless indicated otherwise)

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Sources: Ministry of Finance; and IMF staff calculations.

Excludes one-offs and includes cylical adjustments and calendar year shifts between receipt and expenditure of earmarked EU funds.

The stock includes debt issuances of the Bank Asset Management Company (BAMC) in 2013–14. Bank privatization receipts have contributed to reduce public debt, and so will future privatization.

Table 3.

Balance of Payments, 2015–23

(Percent of GDP, unless indicated otherwise)

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Sources: Data provided by the Slovenian authorities; and IMF staff calculations and projections.
Table 4.

Vulnerability Indicators, 2009–17

(Percent of GDP, unless indicated otherwise)

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Sources: Slovenia Statistics Office; Bank of Slovenia; Haver; International Financial Statistics; OECD; and Bloomberg.
Table 5.

Core Financial Soundness Indicators, 2012–18

(Percent, unless indicated otherwise)

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Sources: Bank of Slovenia and IMF FSI.

Annex I. Risk Assessment Matrix1

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Annex II. External Sector Assessment

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Annex III. External Debt Sustainability Analysis

1. The gross external debt ratio is projected to fall gradually from 100 percent of GDP in 2017 to 76 percent of GDP in 2023. Between end-2016 and end-2017, external debt fell by 11 percentage points of GDP, contributed by falling public external debt and external liabilities of banks. Over the medium term, the private sector is expected to continue to reduce external debt significantly while public external debt is projected to decline by about 6 percentage points to 45 percent of GDP in 2023.

2. Slovenia’s NIIP remains negative but has been improving. The current account surplus in recent years have helped deleverage the corporate sector and improve the negative NIIP, which has increased from the trough of -50 percent of GDP in 2012 to about -30 percent of GDP at end-2017. In addition, the projected sizable, albeit declining, current account surpluses over the medium term will further support closing the gap toward a balanced NIIP (Annex II).

3. External debt dynamics show moderate vulnerability to standard shocks. With low interest rates over the last several years and most debt euro-denominated, an increase in nominal interest rates or a depreciation are not expected to materially affect the outlook for external debt. A shock to current account (about 1.8 percent of GDP) would push the external debt up by about 9 percentage points to 85 percent of GDP in 2023, while a shock to real GDP growth (about 1.9 percentage points) or a combination of smaller shocks to interest rates, growth, and the current account would push external debt up by about 8 percentage points. 1 In addition, while the scenario with key variables at their historical averages shows that the external debt-to-GDP ratio would rise above 99 percent in 2023, this was mainly driven by debt accumulation by financial institutions as experienced during the global financial crisis and Slovenia’s 2012–13 banking crisis. The impact of crisis was successfully addressed by the authorities’ bank recapitalization and burden sharing with the banks’ creditors. Thus, a repeat of the historical scenario appears unlikely.

Table 1.

External Debt Sustainability Framework, 2013–23

(Percent of GDP, unless otherwise indicated)

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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.