Republic of Slovenia: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Slovenia
Author:
International Monetary Fund. European Dept.
Search for other papers by International Monetary Fund. European Dept. in
Current site
Google Scholar Close
Publication Date:
25 May 2021
eISBN:
9781513573007
Language:
English
Keywords:
Slovenia authorities; return on assets; response measure; return on equity; core inflation; Income
Download PDF (1,011.4 KB)

1. After containing the first wave of COVID-19, Slovenia witnessed an exponential increase of cases during the second wave. Since the first confirmed COVID-19 infection on March 4, 2020, there have been over 200 thousand cases (10 percent of the population) and more than 4,000 deaths. The first wave of infections was relatively contained, and the authorities lifted most restrictions in May. COVID-19 cases surged in the fall, prompting another lockdown in October, and a third one in April 2021. The share of old-age population and prevalence of comorbidities have contributed to a high death rate.

Abstract

1. After containing the first wave of COVID-19, Slovenia witnessed an exponential increase of cases during the second wave. Since the first confirmed COVID-19 infection on March 4, 2020, there have been over 200 thousand cases (10 percent of the population) and more than 4,000 deaths. The first wave of infections was relatively contained, and the authorities lifted most restrictions in May. COVID-19 cases surged in the fall, prompting another lockdown in October, and a third one in April 2021. The share of old-age population and prevalence of comorbidities have contributed to a high death rate.

Context

1. After containing the first wave of COVID-19, Slovenia witnessed an exponential increase of cases during the second wave. Since the first confirmed COVID-19 infection on March 4, 2020, there have been over 200 thousand cases (10 percent of the population) and more than 4,000 deaths. The first wave of infections was relatively contained, and the authorities lifted most restrictions in May. COVID-19 cases surged in the fall, prompting another lockdown in October, and a third one in April 2021. The share of old-age population and prevalence of comorbidities have contributed to a high death rate.

uA001fig01

COVID-19: Cumulative Reported Cases

(7-day moving average, per 100,000 residents, as of April 23)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: Bloomberg

2. Meanwhile, mass vaccination has progressed, notably among the elderly population, thus reducing the pressure on hospitals. About 18 percent of the population have received at least one dose as of end-March (Box 1). The well-developed network of primary care has helped to give a strong start to the vaccination campaign.

Covid-19 Testing, Vaccination and Containment

To limit the spread of the coronavirus by detecting asymptomatic cases, the authorities launched a mass-testing program in December and the average number of daily tests more than tripled in Q1:2021 compared to Q4:2020.

Besides mass testing and contact tracing (where possible), the authorities consider vaccination as the most effective public health measure to combat COVID- 19. Slovenia received the first doses of COVID-19 vaccines on December 26,2020 and started vaccination the following day. To reduce the incidence of severe forms of the coronavirus disease and mortality, priority was given to elderly people and residents of care facilities. The strategy helped decrease hospitalizations by 60 percent in March relative to December, and the number of deaths by 85 percent. The authorities aim to vaccinate 60 percent of the adult population in the first half of the year.

uA001fig02

Covid-19 Administered Vaccine Doses

(Cumulative vaccine shots per 100 people; population weighted averages)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: Bloomberg; WEO; and IMF staff calculations

The containment policy entails five phases (black, red, orange, yellow and green) and envisages lifting restrictions based on seven-day averages of the number of new infections and hospitalizations. The transition between phases is done by region and in compliance with the guidelines of the National Institute of Public Health.

As of end-March, three regions were in the red phase, six regions in the orange phase and three regions in the yellow phase. Yet, to counteract an emerging third wave of COVID-19 infections, the government decided to impose an 11-day lockdown.

The Economic Impact of the COVID-19 Crisis and Policy Responses

3. Prior to the pandemic, Slovenia’s economy was enjoying broad-based growth, but structural challenges remained. Growth was above the euro area average which helped bring down unemployment and assisted in consolidating the fiscal accounts. Inflation remained in check, while the external position continued to record large surpluses. Financial sector stability improved, notwithstanding continued deleveraging and legacy imbalances from the 2013 crisis. Structural challenges persist, however, with aging population, low productivity growth, skills shortages, high tax wedge, heavy regulatory system, and extensive presence of state-owned enterprises (SOEs).

4. The COVID-19 crisis triggered a sizeable economic contraction, falling prices and rising unemployment.

• Real GDP declined by 5.5 percent in 2020, as containment measures led to falling economic activity. Gross value added decreased in most sectors, but especially in those directly affected by the lockdowns (entertainment, accommodation and food services, trade). On the demand side, household consumption was the main contributor to the decline, reflecting limited spending opportunities and increased precautionary savings.

• Inflation turned negative in 2020 (-1.1 percent in December, year-on-year), mainly reflecting weak domestic demand and lower energy prices. Core inflation (HICP excluding food, energy, alcohol, and tobacco) stood at0.1 percent in end-2020.

• Labor market conditions deteriorated but thanks to various support measures the unemployment rate rose only to 5.0 percent, from 4.5 percent in 2019. Earnings, on the other hand, increased on average, including due to increases in the minimum and public sector wages and bonus payments to frontline workers.

uA001fig03

COVID-19 Government Response Stringency Index

(Index: 100=most restrictive)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: Our World in Data
uA001fig04

Sectoral Real GVA Change, 2019–2020

(Percent)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: Haver Analytics, IMF staff calculations

5. The current account surplus rose further, driven by an increase of private sector saving relative to investment. Lower net imports of energy goods and recovering manufacturing exports contributed to an increase in the trade surplus and further strengthening of the current account to 7.1 percent of GDP. Financial flows in 2020 reflected the higher reliance on public debt, while the private sector continued its long-term deleveraging trend, amid thinning net FDI inflows.

uA001fig05

EU-27: Fiscal Response to COVID-19 Pandemic

(Percent of GDP)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

1/ Loans, equity injections, asset purchases, and debt assumptions.2/ Guarantees and quasi-fiscal operations.Source: October 2020 Fiscal Monitor

6. The fiscal deficit increased, and public debt soared. In 2020, revenue declined by 4.6 percent, while expenditure increased by 14.8 percent, driven by COVID-related spending. As a result, the headline fiscal deficit jumped to 8.4 percent of GDP (Table 2). Public debt soared to 80.8 percent of GDP at end-2020, from 65.6 percent at end-2019; contingent liabilities increased as well.

Table 1.

Slovenia: Selected Economic Indicators, 2018–26

(Annual percentage change, unless indicated otherwise)

article image
Sources: Slovenia authorities; and IMF staff calculations and projections.

Accrual basis.

Excludes one-offs and adjusted for calendar year shifts between receipts and expenditures of earmarked EU funds.

Includes the 2013–14 debt issuances of the Bank Asset Management Company.

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.

Slovenia: General Government Operations, 2018–26

(Percent of GDP, unless indicated otherwise)

article image
Sources: Ministry of Finance; and IMF staff calculations.

While most private sector workers were exempt from paying social security contributions in 2020, their contributions were covered by the budget (see Annex I).

Excludes bank support and other one-offs. Adjusted for calendar year shifts between receipt and expenditure of earmarked EU funds.

Includes EUR 1.1 bn in 2013 and EUR 0.7 bn in 2014 of debt issuance of the Bank Asset Management Company (BAMC).

uA001fig06

Change in the Debt-to-GDP ratio (2019–2020)

(Percent Y-on-Y)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Sources: Oct’20 World Economic Outlook

7. The crisis has added to legacy problems in the banking sector. Non-Performing Loans (NPL) have remained low overall at 3 percent on account of the freeze on bankruptcies for excessive indebtedness and support to corporate liquidity, but in some contact-intensive sectors NPLs have risen above 10 percent of total loans. Banks’ margins continue to decline because of decreasing net interest income, high competition among the banks, and high operating costs. Overall credit growth has continued to stagnate; as of February 2021, corporate loans declined by 2.8 percent and household loans by 0.7 percent, mainly driven by a decline in consumer lending (-8.6 percent).1

uA001fig07

Change in Non-Performing Loans, 2019 Q3 – 2020 Q3 1/

(Percentage points)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: IMF (Financial Soundness Indicators).1/ Non-performing loans to total gross loans.2/ Data for 2019 Q2 – 2020 Q2

8. The authorities’ policy response was swift, substantial, and well-coordinated, but the take-up of some measures remains low. As of end – March, eight packages of stimulus measures (13.6 percent of GDP, broadly in line with peers) have been adopted (Annex I), but the take-up has been low for new loans guarantees, due to weak demand for credit and complex application requirements. In addition, the Bank of Slovenia (BoS)―as part of the Eurosystem―extended the ECB prudential flexibility measures for banks under the single supervisory mechanism to all banks and savings banks in Slovenia to ensure equal treatment.

9. The anti-crisis measures have been instrumental in mitigating the economic and social impact of COVID-19. Additional funding for healthcare ensured that the system had adequate resources to fight the pandemic; wage compensations for temporary lay-offs, subsidies for shorter work hours and basic monthly income prevented a much more severe downturn in the labor market (Annex II), and liquidity support and loan moratoria helped avoid massive bankruptcies. Slovenia experienced a lesser decline in GDP than the EU average and a smaller increase in unemployment than most other EU countries.

uA001fig08

Change in the Unemployment Rate

(2020–2019, Q1-Q3 average, in ppt)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Sources: Eurostat, IMF staff calculations
uA001fig09

Decline in GDP, 2020

(Percent change)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Sources: Eurostat and IMF staff calculations

Slovenia: COVID-19 Response Measures

(percent of GDP)

article image
Sources: Slovenian authorities and IMF staff estimates.

Outlook and Risks

10. A strong economic recovery is expected once the pandemic abates and restrictions are lifted. Real GDP is projected to grow by 3.9 percent this year and 4.5 percent in 2022. Consumption and investment are expected to be the main drivers, the latter benefitting also from the EU funds. Assuming continuation but adaptation of support measures while the crisis lasts, the baseline scenario projects that output would return to its pre-crisis level in 2022. Inflation would remain subdued in the near term and the current account surplus would be reduced as consumption and investment pick up.

11. Uncertainty remains unusually high and risks to the outlook are tilted to the downside (Annex III).

• If new infections accelerate, longer-lasting national lockdowns might become necessary, with adverse economic impacts. Moreover, delays in mass vaccination and the spread of new virus variants could also require stricter containment measures.

• The crisis may have permanent effects on output and employment, especially in hard-hit sectors. Although corporate bankruptcies have not risen so far, the situation may change when the exceptional policy support is unwound.

• External risks relate to a protracted COVID-19 pandemic, falling demand in main trading partners and faster-than-expected tightening of global financial markets conditions.

12. The external position is assessed as substantially stronger than the level implied by medium-term fundamentals and desirable policies, but the current account surplus is expected to decrease toward its norm (Annex IV). Based on the EBA methodology, staff assesses that a country with Slovenia’s characteristics should have a current account surplus of about 1.7 percent of GDP in 2020, implying a gap of 5.7 percent of GDP. The relative policy gap is estimated at 2 percent of GDP.2 The external surplus is expected to moderate in the medium term as consumption and investment gradually recover. Policies to address legacy problems and product and service-market reforms, together with the surge in EU-financed public investment, could boost investment and help reduce the current account surplus. The current account gap translates into a 10.3 percent REER undervaluation at standard elasticities. However, the large swing in the current account balance over the past decade, despite a relatively stable REER, suggests that the surplus was caused by factors unrelated to the REER (e.g., the above-mentioned deleveraging). External debt remains sustainable but vulnerable to shocks (Annex V). Slovenia introduced FDI screening in May 2020 to address concerns about increasing risks to strategic sectors, including healthcare. It is important that restrictions to address risks, including on national security grounds, are used judiciously to avoid distorting FDI flows to the broader economy.

Slovenia: Model Estimates for 2020

(in percent of GDP)

article image

Additional cyclical adjustment to account for the temporary impact of the pandemic on oil trade balances (+2.4 percent of GDP) and on tourism (-1.8 percent of GDP).

Cyclically adjusted, including multilateral consistency adjustments.

uA001fig10

Current Account and Net IIP

(Percent of GDP)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Sources: Statistical office of Slovenia; Bank of Slovenia; and Haver Analytics.
uA001fig11

Real Effective Exchange Rate

(Index, 2015= 100)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Sources: Haver Analytics and IMF staff calculations.

Authorities’ Views

13. The authorities broadly agreed with staff’s assessment but foresaw a slightly stronger recovery in 2021. They noted that the better-than-expected outcome in 2020 reflects an improved targeting of the containment measures during the second wave and better adaptation of the economy, along with a smaller slowdown in Slovenia’s main trading partners compared to initial expectations. The government’s forecasting arm (IMAD) estimated that without the measures to mitigate the COVID-19 epidemic, GDP would have declined by at least4 percentage points more in 2020. Both IMAD and the BoS concurred that consumption and investment will be the main drivers of growth going forward, but anticipate a faster and stronger rebound, with GDP growth above 4 percent this year. The authorities agreed that the main risk is still the epidemiological developments. The authorities attributed the strong performance of the external sector in 2020 to the improved terms-of-trade and lower energy imports, as well as the ongoing recovery of manufacturing and transport, indicating that these sectors were much less affected by the second wave of infections. They agreed that the high current account surplus last year also reflects increased savings in the private sector and depressed investment in the context of the COVID-19 pandemic. Taking a longer-term perspective, they shared staff assessment that the current account surplus will likely decline because of the stepped-up investment.

Policy Discussions: Securing a Strong Recovery and Sustainable Growth

Discussions focused on the authorities’ response to the COVID-19 pandemic. Policies should remain supportive in the near term and should be adjusted flexibly to the evolving conditions. As the recovery becomes entrenched, policies should shift toward facilitating reallocation and securing smarter, greener, and more inclusive growth.

A. Fiscal Policy: Sustainably Supporting the Recovery

14. The authorities’ budget for 2021 envisages continued support, with big plans for investment to bolster an inclusive, smart, and green recovery. Discretionary fiscal measures played a crucial role in combating the consequences of the pandemic, by forestalling a vicious circle of falling activity and escalating debt burdens. While most of the COVID-19 measures are temporary and are due to expire in the second half of 2021, the short-time work program will be retained to strengthen the social safety net. Supported by the Next Generation EU (NGEU) funds, public investment is projected to increase this year by almost half of its 2020 level in nominal terms. Spending priorities will be health and social protection, infrastructure, green investment, and digitalization. Overall, the headline fiscal deficit is projected at 8.6 percent of GDP in 2021, declining to 5.7 percent in 2022 on the back of the economic rebound and phasing out of measures. The national fiscal rule escape clause applies in 2021, while decision about 2022 will follow the EU-wide decision.

15. Fiscal policy should remain supportive until the recovery firms up. Fiscal support needs to remain available until the recovery is well-established. At the same time, the effectiveness of the measures deployed should be assessed and adjustments should be made where necessary. Targeting and efficiency will remain key to preserve valuable fiscal space. All COVID-19-related transactions should be reported transparently and audited independently, and information on awarded contracts should be publicly available. More generally, Slovenia’s recent adherence to IMF’s Special Data Dissemination Standard Plus―the highest tier of the Data Standards Initiatives―is a welcome step to increasing the transparency in the compilation and dissemination of statistics.

16. Once the recovery is entrenched, fiscal support should be re-purposed toward “building forward better” and reestablishing policy space. The emergency relief measures should be gradually withdrawn and repurposed toward building a better economy once the recovery is on a solid footing, with due consideration to economic and social implications. Public debt remains sustainable; after peaking at 80.8 percent of GDP last year, public debt would start to decline but stay at elevated levels (Annex VI). Additional fiscal effort would likely be needed to reduce the budget deficit. In terms of measures, staff’s past recommendations can guide the consolidation plan. 3 These include structural fiscal reforms in the areas of pensions, health and long-term care, public wage policy, and tax rebalancing. Fiscal risks, in particular those related to the SOE sector and contingent liabilities, should be carefully assessed and managed.

Next Generation EU and Slovenia

Slovenia is eligible to receive €2.2 billion (excluding loans available under the RRF) under the Next Generation EU instrument to help deal with the consequences of the COVID-19 pandemic and support a sustainable and greener recovery.

In October 2020, the Slovenian government approved the draft National Recovery and Resilience Plan (NRRP), which provides a blueprint for the use of €0.3 billion of grants to support reforms and €1.7 billion of grants and €2.9 billion of loans for projects.

The largest amounts will be allocated to financing the green transition (€0.7 billion) and digitalization (€0.3 billion). The NRRP is expected to be finalized by end-April 2021. Funds available under REACT-EU would be used for projects in health, labor market, infrastructure, and development of entrepreneurship.

Next Generation EU Allocations to Slovenia

(EUR billion at cuurent prices, unless noted otherwise)

article image

At 2018 prices.

Source: European Commission
uA001fig12

Breakdown of RRF Grants Use by Project Area

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: Government Office for Development and European Cohesion Policy

17. High governance standards should accompany the ambitious investment plan to achieve value for money. Slovenia is due to receive €2.2 billion (4.8 percent of GDP) under the Next Generation EU instrument (Box 2). The efficient use of these resources can boost the economy’s productive potential and facilitate its digital and green transformation. However, the planned rapid increase in investment bears execution risks and improving public investment management is critical. While projects in priority areas should advance without delays, safeguards need to be in place to ensure that decisions are based on robust selection criteria; and procurement, project management, and oversight are effective and transparent.

uA001fig13

RRF Grants

(percent of 2020 GDP)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: EC Debt Sustainability Monitor

18. The credibility of the medium-term fiscal framework (MTFF) should continue to be supported by fiscal rules. Fiscal consolidation should not start until the recovery is entrenched but the planning process should begin now. Slovenia’s MTFF is guided by the EU fiscal rules under the Stability and Growth Pact (SGP) and it requires a balanced structural budget over the business cycle. As the EU fiscal rules are currently being reviewed, the authorities may need to reexamine their national rule to ensure proper alignment.

Authorities’ Views

19. The authorities agreed that fiscal support should be maintained in the near term. They emphasized that their comprehensive policy measures averted a larger output loss and prevented massive unemployment and bankruptcies. In line with staff advice, the authorities will maintain support to fight the COVID-19 crisis as needed in 2021 and 2022, while improving the targeting and efficiency of these policy measures. They noted that, by law, the COVID-19 measures remain temporary, except for the short-time work scheme, which will be made permanent to further strengthen social protection and reduce inequality. The authorities also noted that like any other spending in the budget, all COVID-19 expenditures are reported transparently and audited independently by the Court of Audit. They agreed that the withdrawal of crisis measures should be gradual to support the recovery and avoid cliff-edge effects. The authorities stressed that their ambitious public investment plan is needed to support smart, inclusive, and green recovery and accelerate economic transformation. While acknowledging the absorptive capacity constraints, they emphasized that steps are being taken to expeditiously scale up their administrative capacity in public investment management. In this regard, they welcomed the mission’s presentation on PIMA, including the cross-country experiences.

20. The authorities noted that fiscal consolidation should commence after the crisis has ended. They stressed that, due to the high uncertainty in estimating the output gap, consolidation should start after most containment measures are withdrawn. They agreed that additional measures and structural changes, particularly related to ageing costs, would be needed to bring fiscal policy back on track and reduce the debt-to-GDP ratio to close to the pre-crisis level. They clarified that part of the increase in public debt last year helped improve the risk profile of debt and build cash buffers to cushion the impact of future shocks.

B. Financial Sector Policies: Safeguarding Financial Stability and Reviving Credit Growth

21. Risks to financial stability have risen, although banks entered the crisis with high capital and liquidity positions. The anemic credit activity, together with the low interest rate environment kept bank interest margins thin, thus reducing profits in 2020. Non-performing exposures (NPE) for COVID-sensitive sectors have begun to rise (e.g., 11 percent in accommodation and food service), heightening the risks of cliff-edge effects as the legislative moratoria expired at end-March 2021. Overall, the liquidity and regulatory capital positions have so far hovered comfortably above requirements, but buffers are running lower in a few banks.

Impact of COVID-19 and Policy Responses on Banks’ Capital

Slovenia’s policy response using banking capital took several forms in conjunction with European measures:

Moratoria on legacy loans: At end-March 2020, existing loans could receive moratoria on capital amortization and interest payments up to 12 months; this was opened to firms and households within broad conditions. The Slovenian legislation, adopted before the EBA adopted its rules, introduced comparatively longer eligibility and extended application dates. Later in the year, the second wave of COVID-19 prompted the authorities to renew the moratoria provisions, dovetailing the EBA guidelines. At end-December 2020, banking exposure under moratoria reached €2.7 billion (about 6 percent of total exposures), including €2.2 billion to non-financial corporations.

Public guarantees to support credit growth: The €0.8 billion available to companies and households before the COVID-19 crisis was supplemented with two new public guarantee schemes; a new €2 billion public guarantee scheme for liquidity loans and €0.2 billion guarantee scheme for deferred loans, both open until end-June 2021. The state guarantee for liquidity loans covers 70 percent of the loan principal for large firms and 80 percent for SMEs. At end-December, €70 million had been used. A fraction of the loans under legislative moratoria receive public guarantee—25 percent of deferred instalments for all borrowers and 50 percent for the borrowers directly impacted by the lockdown.

Macroprudential measures were amended to mitigate the impact of COVID-related temporary income shock on the creditworthiness of households. From June 2020, limited conditions allow banks to avoid disqualifying borrowers whose income declined during the crisis. Banks may exclude the months when the borrower’s income was lower due to the pandemic when calculating the debt service to income (DSTI) ratio. The revised income rule added flexibility to the macroprudential toolkit that goes beyond the allowed deviation already admitted under the rule.

Rules on profit distribution. Dividend distribution and share buy-backs by banks were frozen until end-September 2021 and are not to exceed the lower of 15 percent of the bank’s cumulative profit on an individual basis from the 2019 and 2020 financial years, or 0.2 percent of the bank’s common equity Tier 1 capital on an individual basis as of end-2020.

European rules on banking capital:

Slovenia applied the targeted amendments to the Capital Requirement Regulation (CRR “quick fix”) adopted at end-June 2020. These include reducing the impact of marked-to market recognition of identified losses, lessening the cost of lending to SMEs and infrastructure funding, and supporting digitalization in banking.

Under EBA Guidelines, banks could use flexibility in the classification requirements and ex pected loan loss provisioning for non-performing loans. Payment moratoria do not automatically trigger classification as forbearance and distressed restructuring allowing an exposure to remain classified as Stage 1 for reporting.

Monitoring of the banks was strengthened, as ECB’s Single Supervisory Mechanism (SSM) rules were expanded to the whole banking sector.

22. Risks in housing loans appear moderate. Mortgage loans grew at a sustained pace of 4 percent, with only about 10 percent of households carrying a mortgage (compared with 19 percent in the euro area). Meanwhile, residential real estate (RRE) prices have moderated to 4.6 percent in 2020, against an average growth of 6.7 percent during 2016–19. The housing market is not seen as a major source of risks at this junctur e, given appreciating collateral and low non-performing exposure (1.7 percent of gross outstanding loans), but developments should continue to be closely watched.

uA001fig14

Housing Prices

(Index: 2015=100)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: Eurostat.
uA001fig15

Housing Prices to Income

(Index, 2008=100)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: OECD.

23. A regular, risk-based monitoring of banks’ asset quality should continue and measures be taken as needed to avoid cliff effects as the support measures are unwound. Supervisors should continue to focus on banks with lower capital base and those exposed to COVID-sensitive sectors and SMEs. The BoS conducted a stress test and has increased the monitoring of NPE. Since March 2020, banks could fully use regulatory easing under European Banking Authority (EBA) rules, which allowed flexibility in loan classification requirements, expectation on loss provisioning for NPE, and accounting and prudential treatment of the claims under debt moratoria. The exit from loan moratoria has already started, which calls for a close monitoring and coordination to plan the phase-out process and design it in gradual steps to avoid cliff effects. Other support measures (loan guarantees, labor market measures) that remain in place would help cushion the impact of the expiration of moratoria. Intensive supervisory monitoring is necessary until regulatory relief measures (e.g., moratoria, government guarantees) are withdrawn. Supervision should continue to ensure that non-SSM banks are subject to the same extraordinary monitoring applied to the SSM banks and require banks to continually assess borrowers’ creditworthiness. The BoS should continue to collect information from banks on interest income accrued but not received and assess the macro-financial conditions under different scenarios, including through stress testing, to ensure that banks are prepared to tackle high NPL levels.

24. Frequent reviews of macroprudential measures should continue to ensure the right balance between financial stability and the need for credit in the economy. The DSTI provisions from November 2019 sought to cap household lending through strictly binding rules, while loan maturity was capped at seven years for the rapidly growing non-collateralized high-interest consumer loans. In spring 2020, concerns emerged that binding rules could price out a wide range of borrowers, given the acute crisis. This prompted the BoS to revise the calculation formula used for the DSTI by allowing temporarily that income over the 12 previous months could serve to qualify for new lending. The current macroprudential measures and calibration strike an appropriate balance between maintaining financial stability and the need to support credit to the economy. The BoS should continue to undertake a frequent review of the macroprudential measures and use its communication strategy to engage with stakeholders. Consideration should also be given to requiring high and prompt provisioning of non-collateralized risky loans.

25. The exit strategy from the support measures will require a careful balancing act. Although bankruptcies in 2020 have so far remained stable compared to 2019, they could start rising as the moratoria expire, posing a significant risk to financial stability. To avoid this cliff-edge effect, existing schemes should be phased out gradually as the recovery proceeds, and eligibility criteria should be tightened to better target, on a temporary basis, viable or potentially viable companies, operating in hard-hit sectors (e.g., tourism and hospitality). As the recovery strengthens, prudential standards should be normalized—and clearly communicated—so that problem assets can be dealt with in a timely manner. The insolvency regime should be strengthened to facilitate the swift repair of bank balance sheets and prevent the rise of “zombie” firms. If NPLs risk rising to a systemic level, a holistic unwinding strategy to flatten the insolvency curve is warranted and should be informed by a triage of companies (into viable, viable with restructuring, and unviable) to identify the policy trade-offs, given fiscal and financial stability constraints.4 The authorities should expedite the ongoing reform process and complete the transposition of the EU Directive on Preventive Restructuring Frameworks.

Authorities’ Views

26. The authorities agreed with staff’s analysis and advice. They noted that successful financial sector reforms after the 2013 banking crisis have improved banks’ capital and liquidity positions. However, the current crisis has strengthened the trend of declining corporate credit, which is significantly lower than a decade ago and, in real terms, than in the period of stable growth (2003–06) before the global financial crisis. In turn, this has heightened risks to banks’ business models. They stressed that vigorous on-site supervision continues to be in place to ensure timely and proper loan classification and provisioning, given the risks of cliff effects once policy support measures have been withdrawn. They concurred that frequent reviews of macroprudential measures are critical in view of the high uncertainty. They considered the macroprudential framework adequate, with its current calibration responding properly to credit conditions, and remain vigilant on emerging systemic risks. They highlighted that flexibility under the macroprudential rules has been only sparsely used. The authorities stressed that the exit from the financial sector support measures will be gradual, well sequenced, and coordinated. The guarantee scheme will be reviewed to better support, on a temporary basis, viable or potentially viable companies hard-hit by the COVID-19 crisis.

27. The authorities emphasized that efforts are underway to further strengthen their insolvency regime. Investment and upgrades of ICT and sufficient number of insolvency administrators and court staff are necessary to help relieve court congestion and materially speed up insolvency procedures to manage a possible upcoming wave of bankruptcies. Moreover, the transposition of the EU Directive on Preventive Restructuring Frameworks will be accelerated to help SMEs.

C. Structural Policies: Building the Foundation for Sustainable, Inclusive, and Greener Growth

28. The effects from the crisis on the labor market could be long-lasting and uneven. Wage subsidies are keeping unemployment in check, but this is only a near-term solution. Labor reallocation is already taking place and some sectors (trade, transport, hospitality services) could face a permanent fall in demand, leading to long-term unemployment. The loss of jobs and income would affect disproportionally certain segments of the population; in particular, low-skilled workers, women and youth are at risk.

uA001fig16

Change in Employment by Sector, 2019–2020

(Percent)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: ELirostat

29. Ensuring smooth reallocation of labor and upskilling would minimize the economic and social costs of the pandemic. Labor market policy should remain nimble and flexible. As the longer-term consequences of the crisis become clearer, the focus should shift from protecting jobs to facilitating reallocation, while continuing to provide support to the unemployed. Eligibility criteria for support schemes should also be informed by reallocation considerations; other policies, e.g., investment in digital and green technologies (see below) would help in the process. Active labor market policy should be used to assist the transition of workers between jobs, including through training, job search services, and reducing the hiring costs for firms. Programs specifically targeted at youth, low-skilled and older workers would improve employability of these groups and inclusivity. These can be supplemented with measures aimed at improving the business environment and strengthening the social safety net to support those unable to return to work. Specifically, the design and coverage of the guaranteed minimum income benefits could be improved.

uA001fig17

Unemployment Rates for Selected Groups

(Percent of active population)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: Eurostat

30. The authorities have rightly identified digitalization as one of the key areas for investment. Slovenia has achieved substantial progress across a number of dimensions of digitalization in the last few years (access to open data, automation and robotization of manufacturing). The country’s overall score of EU’s Digital Economy and Society Index (DESI) has improved and is close to the EU average, but it lags behind the leaders in areas like the quality of digital public services, digital skills, use of internet services (including in banking), and internet security (Figure 1).

Figure 1.
Figure 1.

Internet Access and Digitalization

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: The Digital Economy and Society Index (DESI).

31. Slovenia should embrace the opportunity presented by the RRF to press ahead with its digitalization agenda. Efforts should be targeted at improving the digital infrastructure and access to internet, building human capital through investing in education, and creating an enabling environment through regulations and incentives. The government’s draft Recovery and Resilience Plan envisages an allocation of about €0.3 billion of grants to projects in digitalization which, if spent well, would help Slovenia close important gaps and have a catalytic effect for private sector investments. Online banking and fintech are among the promising areas, given the high operating costs of financial institutions.

32. To deliver on its commitments under the Paris Agreement, Slovenia could strengthen taxation of polluting industries, especially transport. The yield from environmental taxes is one of the largest in the EU, as tax policy is extensively used to steer environment protection, mainly through the taxation of energy. But the share of greenhouse gases (GHG) covered by taxes is only about a quarter of the total (and the fourth lowest in the EU), including due to tax exemptions in transportation, while the energy intensity in the transport sector is among the highest in the EU. These exemptions should be reconsidered in the context of a broader strategy for transport development. So far, only industry and residential and commercial users pay an excise tax and the CO2 tax. Certain fuels in combined heating are tax exempt. The proceeds from carbon taxation should be used to support the transition to clean energy. Several of the energy-intensive sectors (including thermal power plants, chemical, aluminum, and cement producers) generating a quarter of CO2 emissions in Slovenia participate in the EU free emission allowances (Emission Trading System, ETS). However, the total ETS allowance for Slovenia is not binding given the reduced usage (about 44 percent of the annual free allowance) and the low tax rate per ton (€17.4) for carbon emissions, which is a bout half of the average EU tax rate in 2020.

uA001fig18

Total Environment Taxes

(In percent of GDP)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: EurostatNote: Emission allowances are not included.

33. The National Action Plan on climate is ambitious in its goals and could be better fleshed out. Slovenia has had two competing goals—carbon neutrality by 2050 and securing energy supply. The authorities opted to reach carbon neutrality through a lower use of fossil fuels and sustainable solutions for transport, housing, and industry. However, the measures to reach the goal— which mainly seek efficiency through investment but give sparse attention to reducing mobility-related GHG—could prove insufficient. The EU has raised this issue and a follow-up will be needed in the authorities’ revised strategy. User industries may be reluctant to accept the higher costs due to expansion of the tax bases and limited ability to pass them through to the final customers. Also, the growth of the share of renewable energy is still low in comparison with European peers.

uA001fig19

Renewable Energy

(In share of total (EU-27))

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: Eurostat

Authorities’ Views

34. The authorities agreed that economic transformation will require efficient labor reallocation and upskilling. They believe that during the transition period, employment support measures should be time-bound and phased out gradually to avoid a sudden surge of layoffs, while becoming better adapted to the needs of specific sectors and categories of employees. Firms could also be required to bear some of the costs of support measures. Once conditions normalize, efforts would shift to active and flexible labor market policies to support reallocation and business transformation. Emphasis is put on training to develop competencies and skills for the future (e.g., digital skills). Targeted programs are also being implemented to enhance the employability of youth, elderly and low-skilled workers.

35. The authorities emphasized that digitalization is critical to their smart growth strategy. While pointing out progress in digital inclusion, digital public services, and cybersecurity, they acknowledged that further steps are needed to build digital and innovation ecosystems and invest in the digital transformation of processes. In this regard, they are providing building blocks for different functionalities (data gathering, trust services, platform for e-procedures) and are stepping up the promotion of digital services. They expected to start issuing the first national electronic identity cards for companies by the end of the year. Efforts to support the digital transformation of SMEs, including through the Digital Innovation Hub, are underway.

36. The authorities agreed with staff’s advice and the importance of implementing their strategy for a low-carbon economy. The NECP envisages CO2 tax on all fossil fuel usage for sectors not covered by ETS, namely heating and transport, and proceeds from it are expected to increase gradually as the level of charges approaches the price of ETS allowances, and exemptions are gradually phased out. They noted that Slovenia was an early participant in the ETS and that the proceeds are earmarked for green projects. Regarding transport, the authorities plan to modernize the railway network and promote sustainable mobility. They are also preparing an exit strategy from the usage of coal in electricity production and are seeking to increase the share of renewable sources in the energy mix.

Staff Appraisal

37. The authorities’ swift, substantial, and well-coordinated policy response has been instrumental in mitigating the economic and social impact of COVID-19. Although the crisis triggered a sizeable economic contraction in 2020, policy measures supported employment and averted a larger output loss.

38. A strong economic recovery is expected as vaccinations help achieve herd immunity, but there are many downside risks. Recovery would be driven by a rebound of private consumption, as containment measures are relaxed, and investment is supported by EU funds. Key downside risks include the potential for new variants of the virus to appear, slow vaccination, and unfavorable financial markets conditions . Slovenia’s external position is assessed as substantially stronger than the level implied by fundamentals and desirable policies.

39. Fiscal support should continue until the recovery is entrenched, but the deficit should be reduced over the medium term. The budget for 2021 appropriately maintains support to fight the COVID-19 crisis but it is important to continue to assess the anti-crisis measures and adjust their overall envelope and specific features in line with the evolution of the pandemic. Targeting and efficiency remain key to foster an efficient adaption of the economy and preserve valuable fiscal space. Once the recovery is on a solid footing, the emergency relief should be phased out and support should switch toward building a better economy. Public debt remains sustainable, but the large fiscal deficits will need to be brought down gradually over time, so as to rebuild room for fiscal policy maneuver to counteract any future shocks. EU and national fiscal rules should continue to play an important role in supporting the credibility of fiscal policy.

40. The ambitious increase in capital outlays, supported by EU resources is welcome but execution risks need to be mitigated. To achieve value for money, improving public investment management is critical. Safeguards need to be in place to ensure that decisions are based on robust selection criteria; and procurement, project management and oversight are effective and transparent.

41. Continued risk-based monitoring of banks’ asset quality remains critical. Supervisors’ attention should continue to focus on banks with lower capital base and those exposed to COVID-sensitive sectors and SMEs. Although moderate so far, risks in the housing market need to be closely watched. It is important that banks be required to continually assess borrowers’ creditworthiness until conditions have normalized. Regulatory easing and relaxation of macroprudential measures due to the COVID-19 crisis struck the right balance between financial stability considerations and the need to support credit. The Bank of Slovenia should continue its engagement with banks and other stakeholders.

42. The exit from support measures should be gradual. To avoid cliff-edge effects, existing schemes should be phased out gradually as the recovery proceeds, and eligibility criteria should be tightened to better target, on a temporary basis, viable or potentially viable companies, operating in hard-hit sectors. The insolvency regime should be strengthened to facilitate the swift repair of banks balance sheets.

43. Ensuring smooth reallocation of labor and upskilling would minimize the economic and social costs of the pandemic. Maintaining wage subsidies and monthly basic income for self-employed is appropriate while the pandemic lasts. As the recovery firms up, the focus should shift from protecting jobs to facilitating reallocation and upskilling. Active labor market policy would assist the transition, supplemented with measures to improve the business envir onment, and strengthen the social safety net.

44. Investment in digital and green projects would increase productivity and resilience. The EU funding provides an opportunity to speed up Slovenia’s digital transformation and greening the economy. In digitalization, efforts should be targeted at improving the digital infrastructure, building human capital, and creating an enabling environment through regulations and incentives. Investment in green projects should be combined with strengthened taxation of polluting industries.

45. It is recommended that the next Article IV consultation take place on the regular 12-month cycle.

Figure 2.
Figure 2.

Macroeconomic Developments

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Sources: Bank of Slovenia; Eurostat;and Haver Analytics.
Figure 3.
Figure 3.

Labor Market

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.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 (NACErev. 2).2/ Industry, construction and services except activities of households as employers and extra-territorial organizations and bodies (NACE rev. 2).
Figure 4.
Figure 4.

External Sector Developments

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.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.

Fiscal Developments

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Sources: Bank of Slovenia; Eurostat, IMF staff calculations and Bloomberg
Figure 6.
Figure 6.

Financial Sector Developments

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Sources: Bank of Slovenia; Eurostat; and Haver Analytics.
Table 3.

Slovenia: Balance of Payments, 2018–26

(Percent of GDP, unless indicated otherwise)

article image
Sources: Data provided by the Slovenian authorities; and IMF staff calculations and projections. Note: in 2018, FDI flows benefitted from one significant project whose investment cycle has now come to an end. The increase in currency and deposits could be related to increased confidence and the repatriation of funds held abroad during the crisis, as well as funds moved to Slovenia in anticipation of privatization.
Table 4.

Slovenia: Vulnerability Indicators, 2011–20

(Percent of GDP, unless indicated otherwise)

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

Slovenia: Core Financial Soundness Indicators, 2012–20

(Percent unless indicated otherwise)

article image
Sources: Bank of Slovenia and IMF FSI.

Annex I. Key Measures in Response to COVID-19

uA001tab04
Measure Description Objectives
Healthcare Emergency spending on healthcare, including purchase of protective equipment, medical supplies, COVID-19 tests, and vaccines, as well paying out bonuses to health workers. Ensure an effective response to the COVID-19 crisis and access to health services.
Labor market Two main measures: (i) “temporary lay-offs”, whereby a wage subsidy of 80 percent but no less than the minimum wage is provided to furloughed workers (100 percent under certain conditions since November); (ii) “short-time work” aimed at maintaining employment through temporarily reducing working hours; the wage subsidy depends on the numbers of hours worked per week. Maintain employer-employee relations and protect jobs.
Social security contributions Exemption of payment of social security contributions (SSC) for private sector employees, except those in the finance and insurance sector. The SSC for those workers are covered by the budget. Reduce the cost of firms that remained operational during the pandemic.
Social assistance Approximately 30 different measures, including payment of monthly basic income and social security contributions of farmers, self-employed, religious workers, etc., solidarity bonuses for pensioners, students and recipients of social assistance, coverage of kindergarten fees, provision of meals, etc. A temporary unemployment benefit was introduced for those who were not eligible for the regular benefits. Unemployed who lost their jobs as a result of the epidemic also received a one-time solidarity allowance. Provide support to the vulnerable groups.
Tax deferrals and loan moratoria Deferral of CIT (in April and May 2020) or payment in installments for all taxes for 24 months. Moratorium on bank loan repayments (principal and interest) for 12 months (reduced to 9 months since end-2020). Alleviate liquidity pressures
Tourist vouchers Tourist vouchers to be used domestically in the amount of €200 per adult and €50 per child. Support tourism
Compensation for fixed costs Companies experiencing drop in revenue between 40 and 70 percent can receive 0.6 percent of their annual income per month; the compensation for those with loss of revenue more than 70 percent is 1.2 percent. Cover the fixed costs of companies that cannot operate normally due to the containment measures.
Liquidity support Financing of large companies and SMEs provided through the Slovenian Export and Development Bank to address problems arising from the fall in demand and disruption of supply chains. Address liquidity problems
Public guarantees Public guarantee schemes to banks for (i) loans affected by legislative moratoria (25 percent of deferred installments or 50 percent if borrower’s activity was affected by COVID-19 measures) and (ii) new loan agreements concluded after March 12 (70 percent of the principal for large companies and 80 percent for SMEs and micro firms). Support credit

Annex II. Labor Market Measures and Outcomes

1. Prior to the pandemic, the unemployment rate in Slovenia was on a declining trend. It fell from 10 percent in 2013 to 4.2 percent (seasonally adjusted) in Q1:2020. The lockdown introduced in March 2020 to limit the spread of the coronavirus, however, reversed this trend and put the labor market under considerable strain. Unemployment rose to 5.4 percent in Q2 as companies started to shed labor in response to the shock; it declined by 0.2 percentage points in Q3, after the containment measures were relaxed, and remained broadly unchanged for the rest of the year. In comparison with other EU countries, the pickup in unemployment in Slovenia was relatively moderate as the government adopted quickly comprehensive labor market measures. Based on the historical relationship between real GDP growth and the change in unemployment, without these measures, the unemployment rate would be more than a third higher; however, given the scope and the unprecedented nature of the crisis, this could be an underestimate.

uA001fig20

GDP Growth and Change in Unemployment

(2010–19)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: Haver Analytics, IMF staff calculations

2. The government introduced two main labor market measures aimed at preserving jobs for the duration of the pandemic: (i) temporary lay-offs (furlough); and (ii) short-time work (STW).

  • The furlough scheme was adopted shortly after the COVID-19 outbreak in March 2020 and is targeted primarily at firms which were unable to continue their normal operations due to the lockdown. Eligible firms receive a wage subsidy that covers 80 percent of the salary compensation up to the average wage.1 To be eligible for the wage subsidy, companies need to demonstrate a decline in revenues by more than 20 percent in 2020 relative to 2019 (increased from 10 percent since last September). The measure is open to all employers, except companies with state participation of more than 70 percent and those in the finance and insurance sector. 2 The measure has been extended till end-May 2021, with a possibility to extend it further till June.

  • The purpose of the STW scheme, introduced in June 2020, is to maintain full-time employment by allowing businesses to reduce working hours for their employees. This measure is mostly for businesses that continue to operate during the lockdown but at reduced capacity. Employers receive wage subsidies based on the reduction in the working hours of the employees. The subsidy is set as a fixed amount.3 Eligible are all companies with less than 50 percent state participation if they are unable to provide at least 90 percent of the work to at least 10 percent of the employees in a given month. The measure is in force until end-June 2021, but currently draft legislation is being prepared to make it permanent to ensure a swift policy response to future shocks. It is one of the proposed reforms to be supported by the EU Recovery and Resilience Facility.

Beneficiaries of the Employment Protection Measures and Amount of Subsidies

(as of February, 2021)

article image

3. The job retention programs have attracted considerable interest. About 210 thousand employees (20 percent of the labor force) were covered by the wage subsidies under the furlough and 42 thousand participated in the STW scheme. The number of employees and the sectoral composition of firms participating in the programs reflect broader economic developments. Thus, for example, the STW uptake was relatively strong by firms in manufacturing in the initial months but as the sector recovered from the shock, the number of beneficiaries declined significantly. On the other hand, hospitality services and trade have maintained a relatively large share in both programs.

4. Besides the furlough and STW, the authorities adopted last year a number of measures to support those who could not benefit from the two programs but were also impacted by the crisis. In particular, compensation of up to 100 percent of the wage was offered to employees under quarantine, self-employed received the minimum basic income, and the government covered the payment of social security contributions for all workers in the private sector (except those in finance and insurance). These measures have helped maintain employment by reducing the pressure on firms operating at reduced capacity. For employees who lost their jobs due to COVID-19 and were not eligible for regular unemployment benefits, the government introduced a temporary unemployment benefit.

uA001fig21

Number of Recipients of the Employment Support Measures

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Sources: Employment Service of Slovenia, Ministry of Labor, Family, Social Affairs and Equal Opportunities.
uA001fig22

Furlough: Number of Benefciaries by Economic Activity

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: Employment Service of Slovenia, Ministry of Labor, Family, Social Affairs and Equal Opportunities
uA001fig23

Short-Time Work: Number of Benefciaries by Economic Activity

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: Employment Service of Slovenia, Ministry of Labor, Family, Social Affairs and Equal Opportunities

5. In parallel to the job retention schemes, the authorities have been regularly reviewing and adjusting their active labor market programs (ALMPs) to align them better with the needs of the labor market during and after the COVID-19 pandemic. The Ministry of Labor, Family, Social Affairs and Equal Opportunities (MoLFSAEO) operates an array of ALMPs, targeted at different segments of the labor market and addressing specific needs. These include, among others, programs to increase employability of older workers and delay retirement (ASI), increase competencies and skills among vulnerable groups (non-formal education and training), improve human resource development (KOC), providing education and training for employees at risk of losing their jobs (SPIN) and hiring subsidies for employers (Employ.me 2020 and Incentive for Sustainable Youth Employment). Some of these programs have been adapted to the crisis situation (Employ.me 2020 and Non-formal education and training) and are achieving good results in promoting employment. In December 2020, the Employment Service of Slovenia issued two calls for public works programs to activate long-term unemployed; an estimated 3,000 long-term unemployed would be hired under these programs.

6. Looking beyond the pandemic, the authorities plan to develop ALMPs further with a view to supporting labor reallocation in the transition to a “new normal”. The main focus will be on training and education to respond to the needs of the labor market; specifically, to reduce the skills mismatch, with an emphasis on the skills for the future, e.g., digital skills. A new project is being prepared by MoLFSAEO in cooperation with relevant stakeholders—Skills Forecasting Platform—to develop a system to forecast future knowledge/skills needs and identify gaps in competences, as well as to connect stakeholders to ensure that the labor market responds to the changing economic conditions.

Annex III. Risk Assessment Matrix

article image
article image

Annex IV. External Sector Assessment

article image

Annex V. External Debt Sustainability Analysis

1. Slovenia’s external debt declined in recent years but is expected to remain high over the forecast horizon due to the gradual normalization after the COVID-19 crisis. From 2014 to 2019, the external debt ratio fell by over 30 percentage points, reaching 90.5 percent of GDP in 2019. This was mainly due to bank deleveraging following the 2013 banking crisis and the decline in public debt. However, in 2020 the external debt ratio rose again to 104.1 percent, mainly on account of higher public external borrowing and a decline in GDP. Over the medium term, external debt is expected to gradually decline as percent of GDP to below 90 percent.

2. The net international investment position (NIIP) remains negative and is expected to gradually decline in the medium term. The corporate sector deleveraged in recent years, while FDI inflows in Slovenia created a strong export-oriented industrial sector, benefiting from tight association with European global supply chains (e.g., automobiles and pharmaceutical products). More recently, private savings increased on the back of withheld consumption and precautionary savings, resulting in a widening current account surplus. 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 IV).

3. External debt remains sustainable under a range of standard shocks. The context of COVID-19 has made the external assessment considerably more delicate and complex. Slovenia was confronted with an unprecedented real shock, disruptions in external markets, and stalling financial flows, amid large uncertainties. In staff’s analysis, Slovenia’s external debt is mainly vulnerable to a real depreciation by 30 per cent, which would substantially increase the debt ratio. Other standard shocks would yield more manageable debt levels, within a 10-percentage point range (Figure).

Table 1.

Slovenia: External Debt Sustainability Framework, 2016–26

(Percent of GDP, unless otherwise indicated)

article image

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.

Figure 1.
Figure 1.

Slovenia: External Debt Sustainability: Bound Tests1/ 2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.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/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.4/ One-time real depreciation of 30 percent occurs in 2021.

Annex VI. Public Sector Debt Sustainability Analysis

Slovenia’s public debt increased sharply in 2020 due to the authorities’ policy response to the COVID-19 outbreak. The public debt-to-GDP ratio rose from 65.6 percent in 2019 to 80.8 percent in 2020. Debt remains sustainable and is projected to decline gradually as percent of GDP over the medium term. Combined macro-fiscal shocks and shocks to contingent liabilities pose major risks to the baseline scenario. They could push up public debt to over 90 percent of GDP and put it on a rising trajectory. This calls for active measures to mitigate pressures on the debt ratio after the pandemic is over and the recovery is well-established. To rebuild room for fiscal policy maneuver, fiscal policy will need to move toward fiscal balance over the medium term and structural reforms need to support sustained growth.

1. Fiscal consolidation and robust growth helped Slovenia to reduce public debt significantly during 2016–19, but the debt ratio rose steeply in 2020 due to COVID-19. The authorities’ recapitalization of banks following the 2013 banking sector crisis resulted in a spike in public debt to close to 83 percent of GDP in 2015. Decisive fiscal consolidation measures and strong growth underpinned a steady decline of the debt ratio to 65.6 percent of GDP in 2019. However, the trend was abruptly reversed in 2020 when the combination of a sharp contraction of economic activity and the authorities’ policy response to the coronavirus pandemic caused debt to jump by about 15 percent of GDP to 80.8 percent. The authorities are taking advantage of the favorable market conditions and are issuing more debt than implied by the government’s financing needs. Pre-financing executed in 2020 amounted to €3.5 billion; in January 2021 they issued a €1.75 billion 10-year bond with a negative yield (-0.1 percent) and a €500 million 60-year bond at 0.7 percent. They are implementing active liability management and are building cash buffers. Nevertheless, in the absence of active consolidation policies, staff projects the debt ratio to remain elevated in the medium term, mitigated by debt service that would be relatively low.

2. The baseline scenario assumes a gradual recovery and withdrawal of stimulus measures. It is based on the following assumptions:

  • Economic activity is expected to remain weak in Q1:2021 due to the continuing lockdown, and real GDP growth for this year is projected at 3.9 percent. The recovery would gather speed in 2022 when growth accelerates to 4.5 percent, before returning gradually to close to potential. Domestic demand would be the main driver of growth, especially investment which would benefit from the NGEU funds. Inflation is expected to converge to 2 percent in the medium term.

  • With most of the COVID-19 containment measures still in place, support to the economy would continue at least into Q2 which, in combination with the authorities’ plans for significantly stepping up public investment, would keep the fiscal deficit at an elevated level this year. There is still some uncertainty regarding the application of the fiscal rules beyond 2021, and the authorities currently are focusing on responding to the crisis. Staff’s projections are based on the assumption that over time, most revenue and expenditure categories would move toward their pre-crisis levels relative to GDP.

  • The baseline projections are underpinned by realistic assumptions. Over 2011–19, staff projections of the main macroeconomic variables were close to or more conservative than the median, except for the crisis period around 2012–13. In the recent years before the COVID-19 outbreak, growth and fiscal outturns have exceeded projections on average. In addition, the projected fiscal adjustments are close to the median of those achieved in comparator countries.

3. Slovenia’s public debt remains sustainable but the debt dynamics are vulnerable to specific shocks as suggested by stress tests:

  • A shock to GDP growth would worsen the debt ratio significantly. A negative one-standard deviation growth shock over two years would push the debt-to-GDP ratio to 92 percent by 2023. This illustrates the sensitivity of debt dynamics to the assumptions about the pace and strength of the economic recovery and underscores the need to carefully calibrate the fiscal policy actions.

  • Contingent fiscal liabilities are a potential source of vulnerability. The total amount of government guarantees outstanding as of 2020 was €5.1 billion (11 percent of GDP), which includes €2.2 billion in loan guarantees provided as part of the COVID-19 policy response. A specific contingent liability shock could create a rising trajectory of public debt, which would approach 100 percent of GDP by 2026.

  • A combined macro-fiscal shock would result in high and persistent public debt. The combination includes shocks to GDP growth, inflation, fiscal balance, exchange rate, and interest rate spread. In such an adverse scenario the debt ratio would rise to 93 percent of GDP and remain at this level throughout the projection period. This underscores the importance of a credible fiscal policy and measures to boost productivity in the medium term.

4. While the debt level remains high and vulnerable to shocks, there are mitigating factors. The share of foreign currency debt is very small (less than 4 percent of total) and it is fully hedged. Over 30 percent of the central government debt has residual maturity of more than 10 years and 99 percent is at fixed interest rates. In addition, the government has sizeable cash holdings which can be used to cushion adverse market developments.

Figure 1.
Figure 1.

Slovenia: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(in percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: IMF staff.1/ Public sector is defined as general government.2/ Based on available data.3/ Long-term bond spread over German bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r – π(1 +g) – g + ae(1 +r)]/(1 +g+π+g-π)) times previous period debt ratio, with r – interest rate; π – growth rate of GDP deflator; g – real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r – π (1 +g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1 +r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ 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.
Figure 2.
Figure 2.

Slovenia: Public DSA—Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: IMF staff.
Figure 3.
Figure 3.

Slovenia: Public DSA—Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: IMF Staff.1/ Plotted distribution includes all countries, percentile rank refers to all countries.2/ Projections made in the spring WEO vintage of the preceding year.3/ Not applicable for Slovenia, as it meets neither the positive output gap criterion nor the private credit growth criterion.4/ Data cover annual obervations from 1 990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.
Figure 4.
Figure 4.

Slovenia: Public DSA—Stress Tests

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: IMF staff.
uA001fig24

Slovenia: Public DSA—Risk Assessment

Citation: IMF Staff Country Reports 2021, 094; 10.5089/9781513573007.002.A001

Source: IMF staff.1/ The cell is highlighted in green if debt burden benchmark of 85% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.2/ The cell is highlighted in green if gross financing needs benchmark of 20% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 400 and 600 basis points for bond spreads; 17 and 25 percent of GDP for external financing requirement; 1 and 1.5 percent for change in the share of short-term debt; 30 and 45 percent for the public debt held by non-residents.4/ Long-term bond spread over German bonds, an average over the last 3 months, 05-Jan-21 through 05-Apr-21.5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.
1

Absent loan moratoria on interest and capital, which kept outstanding loans at a higher level, the decline in credit would have been larger.

2

In 2020, the temporary lockdown due to COVID-19 caused forced savings resulting from constrained consumption. High uncertainty depressed investment, and reduced mobility led to a drop in oil imports (about 2 percent of GDP).

3

See IMF Country Report No. 19/58.

4

The government would be expected to be involved in the triage in the cases where government support is under consideration, and banks would do the assessment of creditworthiness of their borrowers.

1

With the latest change from February 2021, the reference point is the October average wage; previously it was the average wage, and prior to November 2020, the maximum amount of the unemployment benefit. Also from November, employers can claim 100 percent reimbursement of the salary compensation if the total amount of state aid does not exceed €1.8 million (previously €0.8 million) per company.

2

Other exceptions include foreign diplomatic missions and consulates, international organizations, missions of international organizations and institutions, bodies and agencies of the European Union in the Republic of Slovenia.

3

The amounts vary as follows: (i) €448 per month per worker for part-time work from 20 to 24 hours per week; (ii) €336 for 25 to 29 hours per week; (iii) €224 for 30 to 34 hours per week; and (iv) €112 for 35 hours per week. The subsidy is reduced in the case of absence of work (such as sick leave or annual leave).

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Republic of Slovenia: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Slovenia
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2021: Issue 094
Publisher:
International Monetary Fund
ISBN:
9781513573007
ISSN:
1934-7685
Pages:
62
DOI:
https://doi.org/10.5089/9781513573007.002

COVID-19: Cumulative Reported Cases

(7-day moving average, per 100,000 residents, as of April 23)

Covid-19 Administered Vaccine Doses

(Cumulative vaccine shots per 100 people; population weighted averages)

COVID-19 Government Response Stringency Index

(Index: 100=most restrictive)

Sectoral Real GVA Change, 2019–2020

(Percent)

EU-27: Fiscal Response to COVID-19 Pandemic

(Percent of GDP)

Change in the Debt-to-GDP ratio (2019–2020)

(Percent Y-on-Y)

Change in Non-Performing Loans, 2019 Q3 – 2020 Q3 1/

(Percentage points)

Change in the Unemployment Rate

(2020–2019, Q1-Q3 average, in ppt)

Decline in GDP, 2020

(Percent change)

Current Account and Net IIP

(Percent of GDP)

Real Effective Exchange Rate

(Index, 2015= 100)

Breakdown of RRF Grants Use by Project Area

RRF Grants

(percent of 2020 GDP)

Housing Prices

(Index: 2015=100)

Housing Prices to Income

(Index, 2008=100)

Change in Employment by Sector, 2019–2020

(Percent)

Unemployment Rates for Selected Groups

(Percent of active population)
Figure 1.

Internet Access and Digitalization

Total Environment Taxes

(In percent of GDP)

Renewable Energy

(In share of total (EU-27))
Figure 2.

Macroeconomic Developments
Figure 3.

Labor Market
Figure 4.

External Sector Developments
Figure 5.

Fiscal Developments
Figure 6.

Financial Sector Developments

GDP Growth and Change in Unemployment

(2010–19)

Number of Recipients of the Employment Support Measures

Furlough: Number of Benefciaries by Economic Activity

Short-Time Work: Number of Benefciaries by Economic Activity
Figure 1.

Slovenia: External Debt Sustainability: Bound Tests1/ 2/

(External debt in percent of GDP)
Figure 1.

Slovenia: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(in percent of GDP unless otherwise indicated)
Figure 2.

Slovenia: Public DSA—Composition of Public Debt and Alternative Scenarios
Figure 3.

Slovenia: Public DSA—Realism of Baseline Assumptions
Figure 4.

Slovenia: Public DSA—Stress Tests

Slovenia: Public DSA—Risk Assessment