Slovenia

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Highlights

• The recession deepened in 2013. The economy contracted by 3.2 per cent in the first half of the year. Slovenia has suffered the second deepest output fall in the European Union (EU) since the 2008-09 financial crisis. Consequently, corporate finances and bank non-performing loans (NPLs) continue to deteriorate.
  
• The new government has persevered with a reform programme. Given the credibility established through early reform implementation, and despite adverse judgements from international rating agencies, the government was able to issue bonds on international capital markets.
  
• Measures have been taken to rehabilitate the banking sector. The establishment of a Bank Asset Management Company (BAMC), which can draw on international expertise, and the independent assessment of loan quality conducted in the summer of 2013, are important positive steps in this regard.

Key priorities for 2014

• Bank restructuring measures should be intensified and their timing accelerated. The transfers of non-performing assets out of banks should swiftly lead to active restructuring efforts that would help revive key enterprises that have viable business models.
• Privatisation of state-owned companies should be carried out openly and transparently. The announcement of an initial list of 15 state-owned enterprises designated for privatisation is a significant positive step. Privatisations should be open to all investors, and carried out based on appropriate market valuations. State ownership rights should be exercised effectively, through the new Slovenia Sovereign Holding, which would consolidate all state funds. A strategy for limiting and managing the remaining state stakes should be announced.  
• Restructuring corporate finances is essential, and should be supported through effective procedures for insolvency and out-of-court restructuring. This restructuring is urgent, given that corporate finances are very weak, as the recession has further undermined operational performance and banks continue to deleverage and repair their balance sheets. 

Macroeconomic performance

The economy continues to contract. Slovenia experienced a deep recession in 2009, followed by a weak recovery, and then entered a second recession in mid-2011. The contraction in GDP, by 2.5 per cent, in 2012 was the worst in the EBRD region. GDP figures for the first half of 2013 suggested the pace of contraction – at over 3 per cent in annual terms – was accelerating, underlining renewed weak domestic demand. Exports are suffering as a result of recessions or stagnation in principal markets, such as Italy and the Western Balkans. All indicators of economic activity remain well below pre-crisis levels. The contraction in capital formation shows no signs of abating; the level of capital formation is almost half of that seen before the crisis. Slovenia has experienced one of the largest volumes in cross-border deleveraging of banks in the EBRD region, while credit in the Slovenian economy continues to contract.

Slovenia’s cost competitiveness has not improved significantly over the past decade. A substantial rise in the minimum wage in 2010 was passed on to the general wage structure. Competitors elsewhere in central Europe have gained world market shares more rapidly. In 2012 export volume fell slightly, following a sizeable increase in 2011.

The fiscal position has come under pressure from bank recapitalisation after consolidation in 2012. The government under former Prime Minister Jansa initiated fiscal consolidation in 2012, importantly resulting in the adoption of the crucial pension reform, while the government deficit declined to 3.8 per cent of GDP, notwithstanding the ongoing recession. However, the 2013 budget, which was revised in July 2013, envisages a deficit of 7.9 per cent of GDP this year, which is the highest such ratio in the EU. In addition to falling tax receipts amid a deepening recession, the size of the deficit is largely due to an expected additional cost of €1.2 billion for bank recapitalisation. More recent assessments point to potentially higher final recapitalisation costs, which are primarily attributable to delays in transferring bad assets to the BAMC. The budget already included further cuts in the public sector wage bill, as well as increases in value-added tax and a number of other taxes. Government debt has risen rapidly, to about 55 per cent of GDP in mid-2013, while substantial contingent liabilities in the banking sector and the write-down of equity stakes and other claims in the corporate sector are key concerns for sovereign credit quality.

Slovenia successfully accessed international debt markets in October 2012 and May 2013 with two substantial issues. Nevertheless, the downgrade of sovereign credit quality to speculative grade by Moody’s, the international rating agency, in May 2013, underlines that refinancing in the markets is not assured, particularly as markets have become more discriminatory ahead of the pending change in the policy of quantitative easing by the US Federal Reserve System.

Non-performing loans in Slovenia’s banking sector continue to accumulate. They reached 14.5 per cent in February 2013, according to national definitions. Banking sector NPLs are concentrated in the exposures that the three principal state-controlled banks have to the corporate sector. While, initially, loan delinquencies were concentrated among real estate companies and financial holdings, as the recession continued in mid-2013 NPL levels were still rising, which impacted other sectors. NLB, the country’s largest bank, has been recapitalised by the state, while NKBM, the country’s second-largest bank, has been identified for privatisation. Corporate credit continues to contract at a rate consistent with the previous year, at around 9 per cent annually.

Major structural reform developments

The protracted economic crisis appears to have re-energised structural reforms. Traditionally, referendums, and the fragmentation of the political landscape, have frustrated many reform initiatives in Slovenia (for instance, in the case of pension reforms in 2011). However, in late 2012 the Constitutional Court ruled that two referendums that were designed to reverse planned reforms were inadmissible, given the key economic imbalances these measures were designed to address. In May 2013, parliament passed constitutional amendments that considerably restrict options for defeating legislation in referendums, in particular regarding implementation of the budget.

The previous government passed a much-needed pension law. Under the new law, which was approved by parliament in December 2012, the retirement age for both men and women will rise. Given the rapid ageing of the population, and the extensive entitlements liability this entails, this was a much-needed step. Slovenia has one of the most adverse demographic dynamics in the EU, with the dependency ratio (of retired people and children, relative to the economically active population) projected to deteriorate, from 55 per cent currently to 100 per cent over the next 40 years.

The new government presented a National Reform Programme (NRP) to the European Commission in early May 2013. The NRP addresses key areas, such as bank restructuring, reform of insolvency and restructuring rules, and privatisation. As Slovenia was identified by the EC as suffering from “excessive macroeconomic imbalances” (one of only two countries that were identified in this way), the implementation of this programme will now be closely scrutinised by the Commission. A key element of this reform programme is the rehabilitation of the banking sector. Slovenia’s banking and corporate sectors require far-reaching financial restructuring to correct the excessive leverage built up over the years of abundant funding leading up to the 2008-09 financial crisis.

A Bank Asset Management Company became operational in March 2013. Experience in other countries with systemic banking crises has demonstrated that such entities can be effective in cleansing the banking sector of non-performing assets, thereby facilitating recapitalisation. The Slovenian BAMC is empowered to purchase up to €4 billion in delinquent assets from banks that are deemed unable to meet capital requirements, and that are systemically important. The BAMC has special restructuring powers, and is tasked with maximising values to be recovered. Once banks are cleansed of NPLs, bank management should be able to focus on new business, and regain market confidence for fresh funding. In mid-2013 the BAMC was about to begin an exchange of assets with two banks, however the process was delayed by an EU requirement for a system-wide asset quality assessment and bank stress tests. A first bank, NKBM, has been identified for privatisation. However, the future of state involvement in NLB, Slovenia’s largest bank, is unclear.

State influence in the economy remains pervasive, which explains the significance of the May 2013 privatisation list. Approximately 80 companies are subject to either direct or indirect state ownership, with numerous stakes held through one of the five state holdings. A recent attempt by the state to exercise stronger control over these companies through a consolidated holding failed. The NRP envisages a new holding company for state assets – the Slovenia Sovereign Holding (SSH) – which would have the current state restitution fund (SOD) at its core. However, in October 2013 this crucial step had yet to be implemented. The privatisation programme, which was adopted into law in May 2013, is therefore promising. Fifteen enterprises are to be sold, including NKBM, the state telecoms operator and the national airline, and in October 2013 a first sale was close to conclusion.

The private corporate sector continues to suffer from excessive leverage, poor corporate governance and complex ownership structures, which have discouraged foreign investment. This has prevented the injection of fresh capital and operational restructuring, and has deprived the economy of better management practices and technology. In May 2013 insolvency legislation was reformed, and new rules on out-of-court restructuring, as well as more efficient rules governing creditor-led restructuring, are under preparation.

A number of measures have been designed to ease the costs of doing business in an attempt to attract fresh outside capital. For instance, a labour market reform was passed in early 2013, through which the costs of hiring and lay-offs are reduced. The Competition Protection Agency is set to become fully independent from the government. However, implementation of these changes has been delayed, and inadequate funding of the agency is a constraint. Also, a law is under preparation to improve judicial efficiency, including through setting a time limit on judicial proceedings.

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