10 April 2013

Macro-economic Imbalance Procedure in-depth review for Slovenia

The levels of total private debt are below the euro area average and the alert thresholds of the scoreboard, but many corporates remain over-indebted, leading to further rises in non-performing loans. 23.7 per cent of this segment of bank credit is now in arrears of 90 days or over.

The size of the Slovenian banking sector is relatively small and less than half the euro area average, but major domestic banks face continued deterioration of their credit portfolios, which puts sustained pressure on capital buffers, which remain low in regional comparison. Further recapitalisations are likely to be needed.

Credit is contracting and the interaction between weak banks and the sovereign has intensified. The nominal stock of bank credit to the private, non-banking sector is shrinking at an annual rate of more than 5 per cent. The state has de facto become the main source of capital and remains a sizeable, though declining, source of deposits for the banking sector. At the same time, the state itself has to consolidate and yields on government bonds remain elevated. Public debt amounted to 54 per cent of GDP in 2012 and is forecast to exceed the 60 per cent-of-GDP threshold by 2014.

The deleveraging challenge is accentuated by a double-dip recession and growth forecasts have been revised downwards. Real GDP is now 8 per cent below the peak reached in 2008 and this situation is forecast to persist through to 2014. Economic contraction hinders corporate balance sheet repair and makes it difficult for new firms to grow, inevitably leaving banks increasingly exposed to legacy portfolios.

Net external debt is relatively contained and the current account has turned into surplus. However, this is due to reduced imports from lower economic activity and employment, while cost-competitiveness losses have not been reversed. Export market shares have been lost and export performance is substantially weaker than in peer countries.

Policies to address the limited adjustment capacity of the economy have yet to fully develop. Important positive steps have been the enactment of a partial pension reform in the final weeks of 2012 as well as the labour market reform adopted early March.

The complex nexus of state ownership limits adjustment and distorts resource allocation, especially as regards new investment. It also seems to keep foreign-direct investment lower than in peer countries. State-controlled funds and enterprises also impact public finances through the interaction of elevated debt levels, recapitalisation needs and significant government guarantees.

Framework legislation for bank restructuring and privatisation was passed but still needs to be implemented effectively. Periods of policy uncertainty and legal obstacles to reforms have prevented Slovenia from addressing its imbalances adequately and enhancing its adjustment capacity, thus increasing its vulnerability at a time of heightened sovereign funding stress in Europe.

A comprehensive reform strategy accompanied by a credible implementation path would stabilise the financial sector, unleash Slovenia´s growth potential and increase employment. The IDR also discusses the policy challenges stemming from these developments and possible policy responses. A number of elements can be considered:

• the credible repair of the banking system through a balanced set of measures and maintenance of financial stability through prudent supervision and improved governance structures, including the eventual privatisation of state-owned banks;
• a sounder financing of the net international investment positions (NIIP) and growth through foreign direct investment (FDI) facilitated by an improvement of the business environment;
• cost-competitiveness developments supportive of adjustment and helping to avoid the re-emergence of external imbalances through continued public sector wage restraint, adaptation of minimum wage setting and a set of labour market reforms;
• the enhancement of adjustment capacity at the micro-economic level, particularly in relation to state-ownership and labour market institutions.

Full review

See also: Statement by President Barroso following his meeting with Ms Alenka Bratušek, Prime Minister of Slovenia, 9.4.13

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