Economic Analysis
Slovenia

Slovenia

Population 2.0 million
GDP per capita 20746 US$
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Synthesis

major macro economic indicators

  2014 2015  2016(f) 2017(f)
GDP growth (%) 3.0 2.3 2.2 2.7
Inflation (yearly average) (%) 0.4 -0.7 -0.2 1.2
Budget balance (% GDP) -5.0 -2.9 -2.6 -2.4
Current account balance (% GDP) 7.0 7.3 7.6 7.1
Public debt (% GDP) 81.0 83.2 80.0 80.0

 

(f) Forecast

STRENGTHS

  • Eurozone membership
  • High level of political and social development
  • Diversified economy
  • Integration in the European production chain
  • External accounts in surplus
  • European support through structural funds and ECB facilities 

WEAKNESSES

  • Small domestic market
  • Stagnant and ageing population
  • Dependence on regional economy and automotive industry
  • Weak public accounts
  • Inefficient state-owned companies
  • Convalescing banking sector
  • Slow administrative and judicial procedures 

RISK ASSESSMENT

Growth whose base is broadening 

Growth - moderate in 2016 - could increase in 2017 with the recovery in public investment, European funding having returned to cruising speed. External trade will still make the largest contribution to growth. Exports are bolstered by the strong performance in their main, especially German, markets, as well as by the excellent performance of tourism. Imports are also increasing, though less rapidly, through the recovery in domestic demand.  At the same time, household consumption and private investment will maintain their momentum. Private consumption should benefit from rising employment and wages, both in the private sector and in the public sector. The freeze on hiring, promotions and wages in the public sector has ended. Business investment is expected to recover, thanks to a high rate of production capacity utilisation, as well as the development of domestic and foreign non-bank lending. Stabilisation of credit to businesses after five years of decline would also have a positive impact. Housing investment is also starting to recover, helped by the growth in credit to households and the return of confidence.

 

Public sector restructuring could slow down 

Progress on fiscal consolidation, begun in 2015, is uncertain for 2017 because of dissension within the government coalition and a relaxation of the measures in the run-up to the 2018 elections. Already, the authorities have renounced a two-percentage point increase in VAT. The expected increase in revenues from accelerating domestic demand may not offset the increase in recruitments and remuneration in the public sector, the restoration of pension indexing and the recovery of public investment. The sale of its major state-owned banks, recapitalised at great cost after the 2012-2013 banking crisis, will extend until 2019. Moreover, despite the creation of a "bad bank", they still hold many non-performing loans, which put a burden on their profitability. The management of numerous state-owned enterprises is improving, but their heavy debt burden inherited from the pre-2008 crisis excesses and the lack of funds from the State restricts their investment. Only a minority are to be privatised. The main priority for the authorities will be to keep the overall deficit below 3%, so as not to fall back into the European excessive debt procedure. The debt has significantly increased since the 2008 and 2012-2013 crises, because of the recurring deficit and the bank rescue. It appears, by now, to have stabilised. 80% is denominated in euro, the national currency, and 68% is held by local creditors.

 

Significant current account surplus will remain

The impressive current account surplus is expected to endure. The trade surplus amounts to 7.5% of GDP. Thanks to their integration in the German and Austrian production chain and to their competitiveness, three industries are behind the dynamism and half of all exports: motor vehicles, machines and pharmaceuticals. Other key exports are steel, aluminium, furniture and wood. 90% of exports, which account for 80% of GDP, go to neighbouring countries. Trade in services (5% of GDP) runs a surplus, thanks to tourism and transport. The burden of external debt is considerable (116% of GDP at end 2015), but has been stable since 2008. Bank deleveraging has offset the growing level of debt held by a government obliged to come to the rescue of the banks and finance the recurring public deficit levels. The State share of this debt is currently 56%.

 

A weak government coalition

The early elections in 2014 brought to power the university law professor Miro Cerar and his only just created Modern Centre party, bringing together academics and company executives. This victory reflected voters' frustration with ongoing corruption scandals involving the traditional parties and impatience with fiscal austerity and the recession, which has lasted for several years. Having won only 36 seats out of 90, Miro Cerar entered into an alliance with the Democratic Party of Pensioners of Slovenia "DeSUS" (10 seats) and the Social Democrats (6 seats) to form coalition. The path will be narrow. On the one hand, he has promised to sort out the public finances and the banking sector, to privatise and reform the operations of the state-owned enterprises, characterised by low-productivity, thus reassuring both the European Commission and the markets. But, on the other hand, he needs to take into account the public's attachment to social benefits and the State's prominent place in the economy. Indeed, the prime minister and his party are falling behind in the opinion polls, while the Social Democrats and the more left-wing United Left party (6 seats), are gaining ground. In these conditions, it is uncertain whether the centre-left coalition will be able to hold on until the normal election date in 2018. Despite the reforms undertaken by the Cerar government, the legal system still lacks swiftness and efficiency. Debt restructuring through the courts is slow as are business-to-business payments and the rate for the recovery of unpaid debts is low. 

 

Last update : January 2017

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