Press Release No. 16/221

Press Release: IMF Executive Board Concludes 2016 Article IV Consultation with Slovenia

May 16, 2016

On May 9, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Slovenia and considered and endorsed the staff appraisal without a meeting.²

Slovenia saw reasonable economic growth in 2014–15, buoyed by rising exports and a spike in public investment. The external position strengthened, reflecting robust exports and strong tourism but also lackluster domestic demand and falling commodity prices. Financial stability returned, following the 2013–14 public sector bailout of state-owned banks. Headline inflation remains negative, but should turn positive as oil prices stabilize.

Going forward, growth is projected to taper this year as EU financing for public investment declines. Over the medium term, further substantial investment- and productivity-enhancing reforms will be needed to resume the steady convergence of Slovenia’s per capita income toward levels enjoyed in the richer parts of the European Union.

Reforms continue as a lot has to be done. Non-performing loans have been reduced, but the process remains work in progress, especially for small and medium enterprises. The performance of state-owned enterprises needs to be decisively strengthened and state control over large swathes of the economy reduced. The budget deficit (ESA definition) fell below 3 percent of GDP in 2015 and a fiscal rule targeting a zero structural fiscal balance in the medium term was approved. However, significant consolidation measures are needed to reach this objective.

Executive Board Assessment

In concluding the 2016 Article IV consultation with the Slovenia, Executive Directors endorsed the staff’s appraisal as follows:

While growth has returned, Slovenia could grow faster and more sustainably. To sustain the reasonable growth rates from 2014–15 given the expected drop in public investment, private investment needs to play a much stronger role than at present. This would buttress capital formation and productivity, strengthening actual and potential growth over the medium term. Moreover, important fiscal and financial vulnerabilities need to be addressed.

Swift policy actions are needed to stimulate private investment and reduce vulnerabilities. There are four key priorities: (i) move NPLs off state-owned banks books and encourage SME balance sheets repair; (ii) divest state-owned banks and nudge banks to rethink their business models; (iii) put in place a comprehensive fiscal adjustment package underpinned by structural measures; and (iv) reform and privatize more SOEs, and address key bottlenecks in the business environment.

It is time to decisively deal with bank NPLs and SME debt. Lingering non-performing loans and excess corporate debt, particularly on SME books, impair the credit channel for investment. The new guidelines for SME NPL resolution are an important step to address NPLs of viable SMEs. A privately-funded entity (SPV) to bundle and sell non-performing SME loans, established with the state’s support, would help resolve NPLs even more quickly.

Continued state control of banks creates risks of interference in their lending decisions. Business decisions in the state-owned banks should continue to be based on commercial principles, maintaining an arms-length relationship with the state. To improve the chances for successful bank sales, the authorities should reconsider their plan to limit the stakes of potential investors. And the planned sale of Abanka only by July 2019 is an unnecessary delay that would miss an opportunity to restore a fully competitive market for bank services and may negatively affect the bank’s performance.

BAMC’s operational independence should be respected. This will allow BAMC’s management to carry out its mandate to maximize the value of its claims, thereby lowering the final cost of the 2013 bank bailout.

Bank business models need considerable adjustment to profitably weather a prolonged period of low interest rates. Low bank profits pose risks to bank capital and thus financial stability in the event of an adverse shock. To thrive sustainably, banks need to proactively and substantially reconsider their cost structures and revenue sources. At the same time, banks should maintain adequate lending standards to avoid a resurgence of NPLs.

The narrowing of the budget deficit over the last two years is only the first step to putting the fiscal house in order. The planned adjustment in 2016 is also welcome. But the deficit and debt will start rising again in 2017 under current policies. Barring large adverse shocks, we recommend an annual structural adjustment effort of 0.6 percent of GDP in primary terms until the overall structural balance reaches zero. Afterwards, the structural balance should be held at zero until debt falls below 60 percent of GDP.

The needed fiscal adjustment should be achieved through a comprehensive package of structural reforms to strengthen policy credibility. A key element in such a strategy would be a multi-year agreement with labor unions that keeps the wage bill affordable. In addition, efficiency-improving reforms can save money in the health and education sectors without undermining the quality of service. Pension reforms, such as further extending the retirement age and indexing pensions to consumer price inflation, are also critical in view of the deteriorating demographics. Growth-friendly revenue measures, such as the introduction of a real estate tax, would help as well. A revenue-neutral reduction in labor taxes would support employment creation.

Aggressive SOE reform, coupled with further improvements in the business environment, could boost potential growth. The number of companies where the state plans to retain control should be significantly reduced. Performance criteria set for SOE managers should aim at performance comparable to that of private companies and should encourage disposal of the non-core assets owned by the SOEs. Moreover, changes to facilitate greater equity financing and reduce the job-skills mismatch would also invigorate employment and investment.