Public Information Notice (PIN) No. 09/65
May 22, 2009
On May 13, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Slovenia.1
Background
After a period of overheating following the adoption of the euro in 2007, the global crisis hit Slovenia in the fall of 2008. Manufacturing and trade, and later investment, decelerated sharply, while private consumption growth moderated. While wage growth continued to accelerate as wage agreements were implemented, the labor market cooled in the fall with unemployment increasing to 5.1 percent in the first quarter of 2009. Reflecting a strong pass-through of fuel and food prices, inflation stood at 5.5 percent in 2008, which was significantly above euro-area inflation, but came down to 2.1 in February 2009. The current account continued to deteriorate owing to the overheating economy, reaching 5.5 percent of GDP in 2008, as did Slovenia’s competitive position. Consequently, Slovenia’s net external debt rose to 25.4 percent of GDP by the end of 2008.
Output is expected to contract by 2.7 percent in 2009. The main factors driving the downturn are the deceleration of exports as the Eurozone is in recession, and of investment as credit conditions tighten and exports decelerate. Private consumption should be more resilient because of the recent wage increases and the strong net asset position of the households. Inflation and the current account deficit are expected to moderate. The main downward risks to growth are lower-than-projected growth in Europe, and a credit crunch in the event that foreign financing of domestic banks dries up.
The government budget was broadly balanced in 2008 with a positive fiscal impulse. In reaction to the crisis, the authorities have adopted a fiscal stimulus package of 2.1 percent of GDP to attenuate the drop in aggregate demand and to alleviate distress of the most vulnerable groups. The fiscal deficit is expected to deteriorate to 4.2 percent of GDP in 2009, reflecting both automatic stabilizers and a fiscal stimulus package. The government indicated its intention to contain the fiscal deficit to 5 percent of GDP in 2009, possibly cutting public investment in case the deficit exceeds this threshold. Going forward, the authorities aim to reduce the fiscal deficit to below 4 percent of GDP in 2010. A rapidly aging population and current policies pose a challenge for long-term fiscal sustainability. As a solution, the government is considering greater incentives for a longer working life and private pension savings and active aging policies aimed at increasing labor participation especially among older workers.
Banks weathered relatively well the first impact of the crisis thanks to their limited exposure to the U.S. financial system, the low level of households’ indebtedness, and the financial stability measures promptly put in place by the authorities. Nevertheless, the financial sector is increasingly affected by the global crisis. The international credit squeeze has considerably increased the banks’ vulnerability on the liability side, given their high reliance on foreign financing. On the asset side, rapid credit growth in the past few years and the severe economic downturn have also increased banks’ credit risk. The authorities have put in place a contingency plan which should help solve banks’ short run funding needs, and recommended banks to retain profits and raise provisions against risky exposures.
In the medium term, the main challenge is that the economy needs to emerge from the global crisis on a sustainable growth path. As the crisis subsides, Slovenia will face new challenges from tighter international credit conditions, lower potential growth, and neighboring countries with competitive exchange rates. To address these challenges, comprehensive reforms in labor, product, and financial markets are required.
Executive Board Assessment
The Executive Directors noted that, after a long period of strong economic performance that allowed a rapid catch-up to EU levels, Slovenia, as a small open economy, is now severely affected by the global economic crisis. They commended the authorities for their swift and decisive policy responses to slower growth and financial sector strains. Looking ahead, Directors stressed that it will be important to press ahead with broad-ranging reforms aimed at raising the economy’s growth potential, bolstering competitiveness, and ensuring fiscal sustainability, especially in light of the challenges posed by an aging population.
Directors recognized that the authorities need to strike the right balance between supporting domestic demand and preserving fiscal sustainability. They welcomed the authorities’ intention to ensure that the fiscal stimulus measures are temporary, well-diversified, and targeted to protect the most vulnerable groups. Directors encouraged the authorities to maintain public investment in infrastructure, while avoiding generalized increases in public sector wages and wage subsidies to companies for shorter working hours. Directors suggested that, as recovery takes hold, the fiscal position should revert to a more prudent stance anchored by the Stability and Growth Pact. They also supported the authorities’ intentions to tackle longer-term challenges, such as the fiscal liabilities of the pension system and contingent liabilities owing to the extensive government guarantees. They recommended systemic changes to the pension system, and encouraged the authorities to consider bolder reforms, including raising the retirement age and lowering the pension-to-wages ratio.
Executive Directors noted that the banking sector has so far been relatively resilient, and welcomed the authorities’ swift measures to respond to the crisis. However, they cautioned that vulnerabilities have increased, and emphasized that efforts should continue to ensure that the banks have enough funding in case of a further international credit squeeze, especially at longer maturities. Updated stress tests should be performed including in a coordinated manner at the EU level, and the authorities should be ready to inject public capital into undercapitalized banks, accompanied by measures to restructure the nonperforming assets and the operation of the affected banks. Directors advised that the allocation of state guarantees on new loans to nonfinancial enterprises should be transparent, to limit banks’ moral hazard and avoid unduly targeting specific sectors.
Directors stressed that structural reforms in the labor, product, and financial markets are imperative to improve external competitiveness and bolster potential growth. In this connection, they noted the staff’s estimate of a modest external competitiveness gap, owing to rising unit labor costs and depreciations in the currencies of neighboring countries. Addressing this gap will require greater labor participation and flexibility, along with wage moderation as well as other reforms aimed at boosting productivity. Directors endorsed the government’s program to simplify the regulatory burden, strengthen judicial enforcement, enhance the business climate, and revive the privatization program once the crisis subdues.
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Projections |
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2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
| |
| |
(Annual percentage change) |
|
Real GDP |
4.3 |
5.9 |
6.8 |
3.5 |
-2.7 |
1.4 |
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Domestic demand |
2.1 |
5.7 |
8.0 |
3.7 |
-2.0 |
1.6 |
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Consumer prices |
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Period average |
2.5 |
2.5 |
3.6 |
5.7 |
0.5 |
1.5 |
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Real wages (all sectors) |
2.3 |
2.3 |
2.2 |
2.5 |
1.8 |
2.0 |
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Average unemployment rate (in percent, ILO definition |
6.5 |
6.0 |
4.9 |
4.4 |
6.2 |
6.1 |
| |
(In percent of GDP) |
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Public finance |
|
|
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General government balance 1/ |
-1.0 |
-0.8 |
0.3 |
-0.3 |
-4.2 |
-3.7 |
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General government debt |
27.0 |
26.7 |
23.4 |
22.7 |
26.9 |
30.0 |
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(Percentage change, end-period) |
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Money and credit |
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|
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Credit to Private Sector |
23.7 |
26.5 |
34.1 |
18.0 |
… |
… |
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Government bond yield (3 year, in percent) |
3.1 |
3.7 |
4.3 |
4.2 |
… |
… |
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Balance of payments |
(In percent of GDP) |
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Trade balance (goods) |
-3.6 |
-3.7 |
-4.8 |
-7.1 |
-5.6 |
-6.4 |
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Current account balance |
-1.7 |
-2.5 |
-4.2 |
-5.5 |
-4.0 |
-5.0 |
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External debt (percent of GDP, end-period) |
71.4 |
77.6 |
100.8 |
105.3 |
112.6 |
118.5 |
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Exchange rate |
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Exchange regime |
Member of EMU |
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Nominal effective exchange rate (1995=100,
period average) |
65.0 |
65.1 |
66.2 |
68.2 |
… |
… |
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Real effective exchange rate |
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(CPI based, 1995=100, period average) |
100.7 |
100.8 |
103.0 |
113.2 |
… |
… |
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(ULC based, 1995=100, period average) |
97.1 |
96.7 |
97.9 |
100.5 |
… |
… |
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Sources: Data provided by the Slovene authorities; and IMF staff calculations and projections.
1/ Revenue and expenditure exclude social security contributions paid for government employees. 2007–08 projections correspond to the budget, but exclude VAT revenues of 0.4 percent of GDP in 2008. Additional deficit from railways of 0.4 and 0.5 percent of GDP in 2007 and 2008 are excluded. |
Slovenia: Selected Economic Indicators, 2005–10
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Projections |
| |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
| |
| |
(Annual percentage change) |
|
Real GDP |
4.3 |
5.9 |
6.8 |
3.5 |
-2.7 |
1.4 |
|
Domestic demand |
2.1 |
5.7 |
8.0 |
3.7 |
-2.0 |
1.6 |
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Consumer prices |
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Period average |
2.5 |
2.5 |
3.6 |
5.7 |
0.5 |
1.5 |
|
Real wages (all sectors) |
2.3 |
2.3 |
2.2 |
2.5 |
1.8 |
2.0 |
|
Average unemployment rate (in percent, ILO definition |
6.5 |
6.0 |
4.9 |
4.4 |
6.2 |
6.1 |
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(In percent of GDP) |
|
Public finance |
|
|
|
|
|
|
|
General government balance 1/ |
-1.0 |
-0.8 |
0.3 |
-0.3 |
-4.2 |
-3.7 |
|
General government debt |
27.0 |
26.7 |
23.4 |
22.7 |
26.9 |
30.0 |
| |
(Percentage change, end-period) |
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Money and credit |
|
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|
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Credit to Private Sector |
23.7 |
26.5 |
34.1 |
18.0 |
… |
… |
|
Government bond yield (3 year, in percent) |
3.1 |
3.7 |
4.3 |
4.2 |
… |
… |
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Balance of payments |
(In percent of GDP) |
|
Trade balance (goods) |
-3.6 |
-3.7 |
-4.8 |
-7.1 |
-5.6 |
-6.4 |
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Current account balance |
-1.7 |
-2.5 |
-4.2 |
-5.5 |
-4.0 |
-5.0 |
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External debt (percent of GDP, end-period) |
71.4 |
77.6 |
100.8 |
105.3 |
112.6 |
118.5 |
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Exchange rate |
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|
|
|
|
|
|
Exchange regime |
Member of EMU |
|
Nominal effective exchange rate (1995=100,
period average) |
65.0 |
65.1 |
66.2 |
68.2 |
… |
… |
|
Real effective exchange rate |
|
|
|
|
|
|
|
(CPI based, 1995=100, period average) |
100.7 |
100.8 |
103.0 |
113.2 |
… |
… |
|
(ULC based, 1995=100, period average) |
97.1 |
96.7 |
97.9 |
100.5 |
… |
… |
| |
|
Sources: Data provided by the Slovene authorities; and IMF staff calculations and projections.
1/ Revenue and expenditure exclude social security contributions paid for government employees. 2007–08 projections correspond to the budget, but exclude VAT revenues of 0.4 percent of GDP in 2008. Additional deficit from railways of 0.4 and 0.5 percent of GDP in 2007 and 2008 are excluded. |
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.
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