08 April 2013

OECD Economic Survey of Slovenia 2013

OECD said that Slovenia is facing a severe banking crisis, driven by excessive risk taking, weak corporate governance of state-owned banks and insufficiently effective supervision tools.

The creation of the Bank Asset Management Company to ring-fence impaired assets is welcome, but lack of transparency and potential political interference pose risks. The main results of new stress tests should be disclosed, followed by the recapitalisation and privatisation of state-owned banks. The corporate sector has a severe debt overhang, which requires an improvement of insolvency procedures, but greater foreign direct investment would also help smooth corporate deleveraging.

The authorities have adopted an ambitious fiscal consolidation path, but the fiscal position is not yet sustainable. The budget deficit rose significantly during the downturn and restoring public finances has proved difficult, despite marked progress in 2012, contributing to tensions in the sovereign bond market. A recent reform of the pension system is a welcome step forward, but bold additional reforms are needed to curtail upcoming ageing costs and stabilise the public debt. To boost credibility, the authorities have adopted an ambitious fiscal consolidation path, which is commendable, but have so far relied too heavily on temporary steps, across-the-board cuts in the public wage bill and reductions in discretionary expenditure. Fiscal consolidation should focus on permanent measures while letting automatic stabilisers operate.

Restructuring welfare spending would help achieve fiscal sustainability. While an increase in social spending is appropriate to cushion the impact of the deep recession, income inequality is already relatively low in Slovenia and there is room to restructure the welfare state without undermining the quality of public services. Despite recent progress in means testing of cash transfers following the introduction of a comprehensive electronic system, the eligibility criteria could be further tightened. Spending on health care is consistent with Slovenia’s economic development level, but there is scope to rationalise its delivery in inpatient care. There is excess capacity in pre-school and compulsory education and the allocation of tertiary education services is regressive. Despite a recent cut in unemployment benefits, high average effective tax rates that are partly driven by generous social transfers hamper the transition of inactive and unemployed persons to the labour market.

Potential growth has fallen significantly since the outset of the crisis. Boosting potential growth requires structural reforms, but the political economy of reform remains difficult, notably because it has been easy to use a referendum to veto a law. The ongoing discussion in Slovenia on ways to introduce stricter criteria on the use of referendums is hence welcome. Competition in the product market is not vibrant enough – notably as state ownership is large and the Competition Authority has been lacking resources – to facilitate economic adjustment. The labour market is not sufficiently flexible although an improvement is expected following the adoption of a recent reform aimed to reduce significantly labour market dualism.

 

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