## cr17125 ## Source details **Canonical URL:** [cr17125](https://www.imf.org/-/media/files/publications/cr/2017/cr17125.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17125.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17125.pdf.json) --- ### From Crisis to Recovery - Recovery summary: - In 2014–16, GDP grew by 8.1 percent cumulatively. - Employment grew by 3.6 percent. - Real wages grew by over 4 percent. - Prior recession: real GDP decline of 11¼ percent from peak to trough. - Drivers of recovery: - Strong partner demand and closer integration in regional supply chains boosted exports. - Remaining challenges: - GDP and employment remain below their 2008 levels. - Recovery weaker than peers with similar pre-crisis credit booms. - SME NPLs remain elevated; bank business models under pressure. - Labor market functioning and privatization need improvement. - Political context: - Three-party center-left coalition; parliamentary elections due in 2018. - Coalition politics sometimes slow reform design and implementation. - Crisis and stabilization (Box 1 key points): - Double-dip recession: severe output contraction in 2009 and a new recession in 2012–13 driven by corporate-sector insolvency and a mostly state-owned banking system nearing insolvency. - Stabilizing policy actions included: state recapitalization of Slovenia’s three largest banks; private placement securing budget funding in late 2013 with “bailing in” of private investors; large NPL transfers to an independent BAMC; multi-creditor corporate debt restructuring assisted by the central bank; fiscal consolidation; insolvency procedure revamp; improved governance of SOEs; first sale of a recapitalized bank (NKBM). - Result: three years of steady output, employment, and wage growth. ### Recent Developments, Outlook, and Risks - 2016 developments: - Real GDP grew by 2½ percent; output gap narrowed to about -1¼ percent. - Private consumption accelerated; public investment nearly halved due to lower EU funds absorption; strong private investment offset some decline. - Unemployment declined to 7.9 percent (still above long-term average). - Consumer price inflation rose to 1.9 percent in March 2017. - 2017 projection: - Staff projects growth of 3 percent in 2017, closing the output gap. - Inflation forecast to rise toward 1¾–2 percent. - Medium-term outlook: - Annual rates converging to estimated potential growth of 1¾–2 percent. - Low potential growth constrained by adverse demographic trends and still low private investment, slowing TFP growth. - A positive output gap projected to open in 2018–20 as growth moderates only gradually. - Risks (tilted to the downside): - External: rise in protectionism; intensified political and policy uncertainty in Europe; weaker than expected global growth. - Domestic: delays in EU funds absorption; slow SME NPL restructuring; lack of further reform-based fiscal consolidation. - Upside: stronger than expected demand in trading partners supporting higher exports, investment, and GDP growth. ### External Position and Vulnerabilities - Current account and valuation: - Current account balance rose from a deficit of 4 percent of GDP in 2007 to a surplus of 6.8 percent of GDP in 2016. - Fund methodology benchmark: expected current account surplus of about 1–3 percent of GDP in 2016, implying a current account gap of 4–6 percent of GDP. - Factors explaining about 1 percentage point of the gap: fiscal policies and a below-average ratio of private sector credit to GDP. - Remaining gap possibly due to low energy prices and temporarily weak consumption and investment; elevated corporate and household savings. - Staff projection: current account surplus declines from 6.8 percent of GDP in 2016 to 3.6 percent of GDP in 2022. - Current account gap translates into an 8–12 percent REER undervaluation at standard elasticities; IMF EBA methodology suggests REER 5 percent stronger than predicted (within model margin of error). - External stocks and exposures: - Net foreign asset (NFA) position: -35 percent of GDP at end-2016. - Gross external debt: 109 percent of GDP at end-2016. - Government external debt increased from 24 to 54 percent of GDP between end-2011 and end-2016. - Banks have significantly reduced external liabilities recently; corporations have started doing so, while government external debt rose. - Annex IV projections and vulnerability tests: - Baseline: gross external debt ratio projected to fall from 109.0 percent of GDP in 2016 to 90.2 percent of GDP in 2022. - External public debt projected: 54.3 percent of GDP in 2016; 56.9 percent of GDP in 2022. - Net international investment position projected to turn positive by 2022 if projected persistent surpluses materialize. - Shock: a growth/interest/current account combination shock would push external debt up by about 10 percentage points to 103 percent of GDP in 2022. - Scenario with key variables at historical averages: external debt-to-GDP would rise above 120 percent in 2022. - Key baseline series (selected): external debt (percent of GDP) 2016 = 109.0; 2017 = 103.0; 2018 = 99.7; 2019 = 96.9; 2020 = 94.5; 2021 = 92.3; 2022 = 90.2. ### Fiscal Policy — recent performance, outlook, and recommendations - Consolidation record and 2016 outturn: - Structural primary balance improved by 4½ percentage points of GDP between 2011 and 2016, reaching a surplus of 1.4 percent of GDP. - 2016 cash budget deficit: -1.8 percent of GDP. - Revenues: strong over-performance of direct taxes and contributions; VAT shortfalls. - Treasury actions: reduced cash buffer by nearly 4 percent of GDP; debt management operations replaced dollar bonds with euro bonds, lowering interest costs. - Authorities’ medium-term consolidation target: - Eliminate the structural deficit by 2020 and maintain that level afterwards; reduce debt below 60 percent of GDP by 2026 and rebuild fiscal buffers. - Staff assessment and required adjustment: - Staff view: current policies fall short of authorities’ 2020 target. - Additional structural adjustment of 1.8 percent of GDP by 2020 needed to eliminate the structural deficit (staff recommendation). - Staff recommended fiscal reforms (selected): - Design a sustainable public wage system with a multi-annual remuneration framework and separate limits for employee numbers and wage bill increases by budget sectors. - Implement further pension reforms, including adopting White Paper proposals to raise retirement age to 67 and auto-adjust it, restrict early retirement, index pensions to inflation only, abolish the pension bonus, eliminate preferential tax treatment of pension income, and support low-income pensioners via social assistance. - Further health and education reforms: expand centralized procurement in health care; optimize the school network; means-test tertiary support; slow expenditure growth below GDP while allowing nominal increases. - Reform real estate tax to yield revenue equal to the OECD average; adjust specific excise tax rates to prevent revenue erosion. - Review capital gains tax to enhance collections from high net-worth individuals. - Staff medium-term budget targets (selected rows, Percent of GDP): - Headline balance (Staff projections baseline): 2016 = -1.8; 2017 = -1.3; 2018 = -1.3; 2019 = -1.5; 2020 = -1.6; 2021 = -1.7; 2022 = -1.8. - Headline balance (Staff recommendations): 2016 = -1.8; 2017 = -1.0; 2018 = -0.2; 2019 = -0.1; 2020 = 0.2; 2021 = 0.1; 2022 = 0.1. - Structural balance (Staff projections baseline): 2016 = -1.3; 2017 = -1.1; 2018 = -1.6; 2019 = -1.7; 2020 = -1.9; 2021 = -1.9; 2022 = -1.9. - Structural balance (Staff recommendations): 2016 = -1.3; 2017 = -0.8; 2018 = -0.5; 2019 = -0.3; 2020 = 0.0; 2021 = 0.0; 2022 = 0.0. - Structural primary balance (Staff projections baseline): 2016 = 1.4; 2017 = 1.1; 2018 = 0.6; 2019 = 0.7; 2020 = 0.6; 2021 = 0.7; 2022 = 0.6. - Structural primary balance (Staff recommendations): 2016 = 1.4; 2017 = 1.4; 2018 = 1.7; 2019 = 2.0; 2020 = 2.3; 2021 = 2.4; 2022 = 2.3. - Public debt (Staff projections baseline): 2016 = 79.7; 2017 = 78.0; 2018 = 77.0; 2019 = 76.5; 2020 = 76.3; 2021 = 76.2; 2022 = 76.1. - Public debt (Staff recommendations): 2016 = 79.7; 2017 = 77.7; 2018 = 75.7; 2019 = 73.9; 2020 = 71.9; 2021 = 70.0; 2022 = 68.3. - 2017 budget assessment and staff advice: - Staff projects a 2017 cash deficit of 1.3 percent of GDP; structural primary balance would worsen by 0.3 percentage points of GDP absent saving the interest windfall. - Staff recommended maintaining the 2017 structural primary balance at its 2016 level, implying additional adjustment of 0.3 percentage point of GDP (e.g., reduce subsidies to 2015–16 level and accelerate tax collection improvements). - Potential fiscal savings by 2020 (in percentage points of GDP): - Revenue: Real estate tax = 0.8; Indexation of excises = 0.2. - Expenditure: Health care 1/ = 0.3; Education 1/ = 0.2; Pensions = 0.8; Transfers and subsidies = 0.2. - Total Savings = 2.5. - Note: 1/ By closing part of the gap to the efficiency frontier of OECD countries; partly reflected in lower wage bill. - Long-term sustainability: - Slovenia faces the largest projected long-run increase in age-related spending in the EU; under the baseline, debt will start growing rapidly after the mid-2020s unless reforms are implemented. - Staff recommended scenario: keep the structural balance at zero until debt falls below 60 percent of GDP, implement pension and health reforms early, then keep the primary balance excluding age-related components constant. ### Financial System — developments, NPLs, and policy recommendations - Banking sector metrics and profitability (2016): - System CAR = 19.2 percent at end-2016. - Net interest income (2016) = 670 (Change -10.1). - Non-interest income (2016) = 457 (Change 11.0). - Gross operating income (2016) = 1,127 (Change -2.6). - Operating costs (2016) = 667 (Change -2.8). - Net asset revaluation costs (2016) = 96 (Change -69.3). - Pre-tax profit (2016) = 364 (Change 129.9). - Net profit (2016) = 332 (Change 188.5). - Return on equity (ROE, 2016) = 8.8 (IMF FSI definition). - Return on assets (ROA, 2016) = 1.1 (IMF FSI definition). - NPL ratio (2016, IMF FSI definition) = 5.1. - NPL provisions/NPLs (Bank of Slovenia definition) = 65. - Credit dynamics: - Since end-2010, stock of credit to the non-financial private sector contracted by 40 percent. - External borrowing accounted for 29 percent of total outstanding non-financial corporate loans at end-2016 (nearly double the 2008 level). - Staff projects moderate credit growth in coming years, led by credit to households. - NPLs and resolution: - System NPLs reduced from peak 18 percent in September 2013 to 5.1 percent at end-2016. - Major measures: BAMC transfers (€5.5 billion) in 2014; MRAs addressing almost €1.9 billion of NPLs; bank sales of NPL packages about €700 million; significant write-offs. - SME NPLs remain elevated: 13.4 percent of total SME loans as of end-2016. - Staff recommendations: resolve remaining NPLs (especially SME NPLs); welcome Bank of Slovenia and Bank Association SME resolution guidelines; enforce time-bound write-offs and nonaccrual of interest for delinquent loans; close supervisory monitoring to prevent “evergreening”. - BAMC role and governance: - BAMC transferred large legacy NPLs and should continue to restructure and sell remaining claims. - Staff recommendation: preserve BAMC independence and avoid transfers of substantial claims from BAMC to SSH. - Late-2015 amendments clarified BAMC operational independence, executive management responsibility, and broad restructuring powers. - BAMC reported cash generated from asset management in 2016 corresponding to 18.3 percent of the transfer value of the assets (legal requirement = at least 10 percent). - Bank business model challenges and supervisory recommendations: - Net interest income expected to fall further as high-interest assets mature and deposit rates near zero. - Limits to raising non-interest income; decline in provisioning is a one-off that will fade. - Staff recommends reassessing bank business models, likely requiring further consolidation, deep operating cost cuts, and new income sources; active dialogue and enhanced supervisory vigilance urged. - Macroprudential and structural measures: - Countercyclical capital buffer and OSI buffer in place since 2015; both currently set at zero, OSI buffer scheduled to increase to 0.25–1.00 percent in 2019. - 2016 non-binding guidelines on loan-to-value (80 percent) and debt service-to-income (50–67 percent) ratios for real estate loans. - Early 2017 launch of an electronic credit register covering private individuals and businesses. - Bank privatization: - Privatization of remaining large state banks important for commercial operations and cost reductions. - After NKBM sale in 2016, authorities preparing to privatize NLB via IPO in 2017; staff supported sale but concerned about restriction that no private investor can have more than the state’s 25 percent stake and encouraged dropping it. - Staff encouraged completing sale of Abanka well before mid-2019 EC deadline. ### Structural Reforms — labor market, SOEs, and growth potential - Labor market findings: - 2013 labor market reform shifted from temporary to open-ended contracts initially, with mixed longer-term effects. - Protection of open-ended contracts still considered excessive due to high layoff costs. - Growth has not become more employment-intensive post-reform; employers prefer overtime rather than hiring during expansions. - Emerging skill mismatches between job vacancies and job seekers; exceptionally low gross flows from inactivity to employment. - Labor market policy recommendations: - Further increase flexibility of open-ended employment contracts. - Provide retraining courses for the unemployed designed with employer input. - Implement an apprenticeship system developed with education and employers (German/Austrian models) to develop technical skills early and raise retention. - Target training and flexible hours to retain older experienced workers. - Review labor taxes to ensure the entry-level net wage is markedly higher than social assistance benefits. - SOEs and privatization: - Progress mixed: out of 15 SOEs slated in 2013, 9 sold; Telecom Slovenia privatization failed when investor withdrew. - Additional 25 SOEs prepared for privatization in 2016; tender process ongoing for 13 of them. - Staff recommendations: prompt sales without onerous conditions; revise SSH classification to reduce “strategic” and “important” designations; allow full private control over more SOEs. - For bank privatizations, drop the restriction that no private investor’s share exceed the state’s 25 percent (context: NLB). - Authorities’ actions and views: - Draft law on vocational training envisaging apprenticeships to be finalized; legal amendments to reactivate unemployed focused on vulnerable groups; policies to reduce elderly unemployment adopted. - Authorities see improving SOE performance in 2016 and agree SOE management strategy needs more flexibility and a reduced state footprint. ### Debt Sustainability and Public-Sector DSA (Annex V highlights) - Baseline public debt dynamics: - Structural primary balance: 1.4 percent of GDP in 2016; just over 1 percent in 2017; ending just above ½ percent by 2022. - Projected debt trajectory under staff baseline: debt ratio falls about 1¾ percentage points in 2017 as Treasury draws down cash buffer; continues declining in 2018–19; stabilizes around 76 percent by 2022. - Vulnerabilities and stress tests: - Under baseline, debt ratio remains below high-risk threshold of 85 percent through medium term. - Negative one-standard deviation GDP growth shock over two years would bring debt ratio to well over 90 percent by 2022. - State guarantees (excluding EFSF and BAMC guarantees) to the nonfinancial sector amount to just over 10 percent of GDP; calling half of guarantees with a transitory spread impact would bring debt ratio to almost 85 percent by 2022. - Combined macro-fiscal shock could yield explosive debt dynamics, with debt close to 100 percent of GDP by end of projection period. - Debt service projected to remain manageable; gross financing needs remain below 20 percent of GDP under standard robustness stress tests. - Policy implications and alternatives: - Active fiscal adjustment of some 1¾ percent of GDP would bring the debt ratio below 70 percent by 2022 and to 60 percent by 2026. - Policy priorities: implement additional structural consolidation (at least 1¾ percent of GDP), pursue reforms to raise growth, reduce contingent liabilities, and maintain credible medium-term fiscal policy. ### Key macroeconomic indicators (selected exact figures presented) - Nominal GDP (EUR millions): 2016 = 39,769; 2017 = 41,247; 2018 = 43,116. - Real GDP (percent change): 2016 = 2.5; 2017 (Staff Proj.) = 3.0; 2018 (Staff Proj.) = 2.3. - Private consumption (percent change): 2016 = 2.8; 2017 = 2.5; 2018 = 2.0. - Exports of goods and services (percent change): 2016 = 5.9; 2017 = 5.3; 2018 = 3.7. - Consumer prices (national definition, period average): 2016 = -0.1; 2017 (Staff Proj.) = 1.7; 2018 (Staff Proj.) = 2.0. - Output gap (percent of potential GDP): 2016 = -1.2; 2017 = 0.0; 2018 = 0.6. - Employment (domestic concept, period average): 2016 = 2.0; 2017 (Staff Proj.) = 1.2; 2018 (Staff Proj.) = 1.2. - Unemployment rate (percent, ILO): 2016 = 7.9; 2017 = 7.0; 2018 = 6.4. - Nominal wages (all sectors): 2016 = 1.8; 2017 = 3.4; 2018 = 3.3. - Real wages (all sectors): 2016 = 1.9; 2017 = 1.7; 2018 = 1.3. - Current account balance (percent of GDP): 2016 = 6.8; 2017 (Proj.) = 5.8; 2018 (Proj.) = 5.5. - Trade balance (goods and services, percent of GDP): 2016 = 9.7; 2017 (Proj.) = 8.4; 2018 (Proj.) = 8.2. - Exports f.o.b. (percent of GDP): 2016 = 62.3; 2017 (Proj.) = 64.0; 2018 (Proj.) = 64.3. - Gross external debt (percent of GDP, end-period): 2016 = 108.8; 2017 (Proj.) = 103.0; 2018 (Proj.) = 99.7. - Net international investment position (percent GDP): 2016 = -34.5; 2017 (Proj.) = -26.9; 2018 (Proj.) = -20.1. - General government (cash basis, percent of GDP): 2016 = -1.8; 2017 (Est./Proj.) = -1.3; 2018 (Proj.) = -1.3. - Structural balance (percent of GDP): 2016 = -1.3; 2017 = -1.1; 2018 = -1.6. - Structural primary balance (percent of GDP): 2016 = 1.4; 2017 = 1.1; 2018 = 0.6. - General government debt (percent of GDP): 2016 = 79.7; 2017 (Proj.) = 78.0; 2018 (Proj.) = 77.0. - Revenue = 39.4 percent of GDP (2016). - Expenditure = 41.2 percent of GDP (2016). - Transfers to individuals and households = 16.3 percent of GDP (2016); pensions = 10.7 percent of GDP (2016). - Interest = 2.8 percent of GDP (2016). ### IMF staff policy priorities (summary) - Adopt a credible reform-based fiscal strategy to reduce high debt and create room to respond to shocks. - Complete repair of bank and corporate balance sheets by resolving SME NPLs and encouraging viable bank business models. - Step up structural reforms: improve labor market functioning, implement retraining and apprenticeship systems, review labor taxation to incentivize work, and accelerate privatization especially of large state banks and SOEs. - Preserve BAMC independence and continue vigorous restructuring and sales of legacy claims. - Maintain public-debt discipline to reduce external vulnerability and sustain improvements in NIIP and gross external debt ratios. *Italic: IMF staff report — Republic of Slovenia: From Crisis to Recovery (chapter summary).* ### 1. From Crisis to Recovery ________________________________________________________________________ 4 ### 1. From Crisis to Recovery ### Background - Slovenia completed three years of steady recovery from the crises in 2008–13. - In 2014–16, GDP grew by 8.1 percent cumulatively. - Employment grew by 3.6 percent. - Real wages grew by over 4 percent. - The prior deep recession saw a real GDP decline of 11¼ percent from peak to trough. - Recovery drivers: strong partner demand and closer integration in regional supply chains boosted exports. - Remaining challenges: GDP and employment remain below their 2008 levels; recovery weaker than peers with similar pre-crisis credit booms. SME NPLs remain elevated, bank business models under pressure, labor market functioning and privatization need improvement. - Political context: three-party center-left coalition; parliamentary elections due in 2018. Coalition politics sometimes slow reform design and implementation. ### From Crisis to Recovery (Box 1 key points) - Double-dip recession following the 2008 global financial crisis: severe output contraction in 2009, then a new recession in 2012–13 driven by corporate-sector insolvency and a mostly state-owned banking system nearing insolvency. - Amplifying features: cross-enterprise ownership structures and pervasive connected lending. - Stabilizing policy actions: - Recapitalization of Slovenia’s three largest banks by the state. - Private placement securing budget funding in late 2013; “bailing in” of private investors as part of recapitalization. - Large NPL transfers to an independent bank asset management company (BAMC). - Multi-creditor restructuring agreements of corporate debt assisted by the central bank. - Fiscal consolidation, insolvency procedure revamp, improved governance of state-owned enterprises, and first sale of a recapitalized bank (NKBM). - Result: three years of steady output, employment, and wage growth. ### Recent Developments, Outlook, and Risks - 2016 developments: - Real GDP grew by 2½ percent; output gap narrowed to about -1¼ percent. - Private consumption accelerated, supported by improved sentiment and sustained wage and employment gains. - Public investment nearly halved due to lower absorption of EU funds at the start of the EU’s new financial framework; strong private investment offset some of the decline. - Unemployment declined but remained higher than its long-term average at 7.9 percent. - Consumer price inflation rose to 1.9 percent in March 2017 due to higher commodity prices. - 2017 projection: - Staff projects growth of 3 percent in 2017, closing the output gap. - Inflation forecast to rise toward 1¾–2 percent, dispelling deflation risks. - Medium-term outlook: - Annual rates converging to estimated potential growth of 1¾–2 percent. - Low potential growth constrained by adverse demographic trends and still low private investment, slowing TFP growth. - A positive output gap projected to open in 2018–20 as growth moderates only gradually. - Risks (tilted to the downside): - External: rise in protectionism/economic isolationism; intensified political and policy uncertainty in Europe; weaker than expected global growth. - Domestic: delays in EU funds absorption; slow progress in restructuring SME NPLs; lack of further reform-based fiscal consolidation reducing capacity to counter shocks. - Upside: stronger than expected demand in trading partners supporting higher exports, investment, and GDP growth. ### External Position and Vulnerabilities - Current account and external balances: - Current account balance rose from a deficit of 4 percent of GDP in 2007 to a surplus of 6.8 percent of GDP in 2016. - Fund methodology suggests a country with Slovenia’s characteristics would have a current account surplus of about 1–3 percent of GDP in 2016, implying a gap of 4–6 percent of GDP. - Factors explaining about 1 percentage point of the gap: fiscal policies in Slovenia and its trading partners and a below-average ratio of private sector credit to GDP. - Remaining gap possibly due to low energy prices and temporarily weak consumption and investment; elevated corporate and household savings amid uncertainty and burdened balance sheets. - As temporary factors fade, investment and savings expected to revert toward historical averages and the current account surplus should decline significantly over the medium term. - The current account gap translates into an 8–12 percent REER undervaluation at standard elasticities. - External stocks and exposures: - Net foreign asset (NFA) position: -35 percent of GDP at end-2016. - Gross external debt: 109 percent of GDP at end-2016. - Government external debt increased from 24 to 54 percent of GDP between end-2011 and end-2016. - Banks have significantly reduced external liabilities recently; corporations have started doing so, while government external debt rose. ### Authorities’ Views - Authorities were more sanguine than staff: - Saw GDP growth accelerating to 3.6 percent in 2017, driven by large turnaround in EU-financed public investment and strong external demand; growth then gradually moderating. - Some officials saw medium-term growth limited by shortages of skilled labor and moderate productivity growth; others expected rising investment, skill-building policies, and intra-EU immigration to raise potential growth. - Authorities viewed the large current account surplus as temporary and expected a significant decline by 2019. - Acknowledged international policy uncertainties, noted upside risks from improving exports to Russia. ### Policy Discussions and Priorities - High-priority goals to achieve faster, broad-based, and sustained growth: - Adopt a credible reform-based fiscal strategy to reduce high debt, create room to respond to shocks, and address demography-related spending increases. - Complete repair of bank and corporate balance sheets by resolving SME NPLs and encouraging viable bank business models to safeguard financial stability. - Step up structural reforms: improve labor market functioning and accelerate privatization. A. Fiscal Policy — recent performance and challenges - Consolidation record: - Structural primary balance improved by 4½ percentage points of GDP between 2011 and 2016, reaching a surplus of 1.4 percent of GDP. - Consolidation achieved via a mix of structural measures (VAT increase, pension reform, debt management operations) and one-off crisis-motivated restraint (wage bill freezes, pension and social transfer indexation freezes, squeeze of non-EU-financed public investment). - 2016 fiscal outturn: - Cash budget deficit: -1.8 percent of GDP (below target). - Revenue: strong over-performance of direct taxes and contributions offset VAT shortfalls. - Expenditure: wage bill and goods and services above budget; public investment cuts offset spending overruns. - Treasury actions: reduced high cash buffer by nearly 4 percent of GDP; replaced high-cost dollar-denominated bonds with euro-denominated bonds at lower interest rates and longer maturities, reducing interest costs and improving amortization profile. - Authorities’ medium-term consolidation target: - Goal: eliminate the structural deficit by 2020 and maintain that level afterwards, reducing debt below 60 percent of GDP by 2026 and rebuilding fiscal buffers. B. Staff assessment and required adjustment - Staff view: on current policies the budget outturns will fall short of the authorities’ 2020 target (baseline). - Additional structural adjustment of 1.8 percent of GDP by 2020 is needed to eliminate the structural deficit (staff recommendation). - Staff recommended reforms (summary): - Design a sustainable public wage system with a multi-annual remuneration framework, separate limits for number of employees and wage bill increases by budget sectors, rewarding performance rather than automatic, seniority-based hikes. - Implement further pension reforms, including: - If adopted, the White Paper proposals to raise the retirement age to 67 and automatically adjust it to demographic trends, and to restrict early retirement further. - Move quickly to index pensions to inflation only. - Abolish the pension bonus. - Eliminate preferential tax treatment of pension income. - Support low-income pensioners through the social assistance system. - Raise labor market participation rates to broaden the pension contribution base. - Put in place further health and education reforms to reduce the distance to the efficiency frontier while maintaining service quality, such as: - Expanding centralized procurement in health care. - Optimizing the school network and means-testing financial support for tertiary students. - Achieve necessary savings by slowing expenditure growth below GDP while allowing nominal increases. - Reform the real estate tax to yield revenue equal to the OECD average and adjust specific excise tax rates as needed to prevent revenue erosion. - Review the capital gains tax to enhance collections from high net-worth individuals. - Intended outcomes of reforms: - Facilitate further sustainable consolidation. - Create room for growth-friendly fiscal policies (expansion of public investment, active labor market policies, cuts in labor tax burden). Key medium-term budget targets (Percent of GDP) — staff projections (baseline) and staff recommendations (selected rows) - Headline balance - Staff projections (baseline): 2016 -1.8; 2017 -1.3; 2018 -1.3; 2019 -1.5; 2020 -1.6; 2021 -1.7; 2022 -1.8 - Staff recommendations: 2016 -1.8; 2017 -1.0; 2018 -0.2; 2019 -0.1; 2020 0.2; 2021 0.1; 2022 0.1 - Structural balance - Staff projections (baseline): 2016 -1.3; 2017 -1.1; 2018 -1.6; 2019 -1.7; 2020 -1.9; 2021 -1.9; 2022 -1.9 - Staff recommendations: 2016 -1.3; 2017 -0.8; 2018 -0.5; 2019 -0.3; 2020 0.0; 2021 0.0; 2022 0.0 - Structural primary balance - Staff projections (baseline): 2016 1.4; 2017 1.1; 2018 0.6; 2019 0.7; 2020 0.6; 2021 0.7; 2022 0.6 - Staff recommendations: 2016 1.4; 2017 1.4; 2018 1.7; 2019 2.0; 2020 2.3; 2021 2.4; 2022 2.3 - Public debt - Staff projections (baseline): 2016 79.7; 2017 78.0; 2018 77.0; 2019 76.5; 2020 76.3; 2021 76.2; 2022 76.1 - Staff recommendations: 2016 79.7; 2017 77.7; 2018 75.7; 2019 73.9; 2020 71.9; 2021 70.0; 2022 68.3 Italic: IMF staff report — Republic of Slovenia: From Crisis to Recovery (chapter summary). ### 14. In this context, the 2017 budget leaves room for improvement despite the ### 14. In this context, the 2017 budget leaves room for improvement despite the ### Fiscal outlook and 2017 budget assessment - Staff projects a 2017 cash deficit of 1.3 percent of GDP, implying a structural improvement of 0.2 percentage points of GDP. - The modest adjustment is entirely due to sizable interest savings, while the structural primary balance would worsen by 0.3 percentage points of GDP. - Budget composition: - Personal income tax cut of ¼ percent of GDP (offset by corporate income tax hike and expected gains from stepped up tax collection enforcement). - Limits on non-pension social transfers. - A wage agreement with public sector unions restores promotion and indexation components over a two-year period, implying a rising wage bill in 2017 and beyond. - Staff recommendation for 2017: - Maintain the 2017 structural primary balance at its 2016 level and save the interest windfall from 2016 debt management operations and the ECB’s continuing QE. - This implies additional adjustment of 0.3 percentage point of GDP, achievable by measures such as reducing budget subsidies to their 2015–16 level and accelerating improvements in tax collection with a focus on risk-based audits. ### Potential fiscal savings by 2020 (in percentage points of GDP) - Revenue - Real estate tax: 0.8 - Indexation of excises: 0.2 - Expenditure - Health care 1/: 0.3 - Education 1/: 0.2 - Pensions: 0.8 - Transfers and subsidies: 0.2 - Total Savings: 2.5 - Note: 1/ By closing part of the gap to the efficiency frontier of OECD countries; partly reflected in lower wage bill. ### Long-term fiscal sustainability and age-related spending - Slovenia faces the largest projected long-run increase in age-related spending in the EU; under the baseline, debt will start growing rapidly after the mid-2020s, or even earlier if growth risks materialize. - Staff’s recommended scenario: - (i) Keep the structural balance at zero until debt falls below 60 percent of GDP, with structural fiscal measures recommended by staff to reduce age-related spending early on. - (ii) Thereafter, keep the primary balance excluding age-related components (pensions and health spending) constant relative to GDP and allow the overall balance and debt to evolve with age-related spending dynamics and the (endogenous) interest bill. - Contingencies: - Staff’s simulations require implementation of recommended pension and health reforms over the next few years; otherwise, a larger structural balance or deeper pension and health spending cuts would be needed. - Key trade-off: Implementing pension and health reforms well ahead of the demographic peak allows for less overall adjustment to maintain long-term fiscal sustainability. ### Authorities’ views on fiscal issues - Authorities broadly agreed with staff diagnostics and policy proposals. - They emphasized commitment to reducing the structural budget deficit and public debt and agreed on the need for pension and health care reforms. - Authorities highlighted the importance of social protection for pensioners and vulnerable groups and high-quality services in health care and education. - For the 2017 budget, authorities noted ongoing efforts to improve tax administration. ### Financial system—overview and key indicators - Banks are well capitalized and reasonably profitable: system CAR was 19.2 percent at end-2016. - Banking system developments: - Declining NPL ratios and comfortable profitability compared with the SSM average, despite sharp reductions in net interest income. - The squeeze on net interest income has been more than offset by higher non-interest income, modest cost reduction, and decline in provisioning for NPLs due to NPL resolution progress. - Selected profit and loss and ratio highlights (annual series ending 2016 where shown): - Net interest income (2016): 670 (Change -10.1) - Non-interest income (2016): 457 (Change 11.0) - Gross operating income (2016): 1,127 (Change -2.6) - Operating costs (2016): 667 (Change -2.8) - Net asset revaluation costs (2016): 96 (Change -69.3) - Pre-tax profit (2016): 364 (Change 129.9) - Net profit (2016): 332 (Change 188.5) - Return on equity (ROE, 2016): 8.8 (IMF FSI definition) - Return on assets (ROA, 2016): 1.1 (IMF FSI definition) - NPL ratio (2016, IMF FSI definition): 5.1 - NPL provisions/NPLs (Bank of Slovenia definition): 65 ### Credit dynamics and outlook - Since end-2010, the stock of credit to the non-financial private sector has contracted by 40 percent. - Factors behind subdued domestic bank credit: - Export sector increased use of cheaper external bank or parent company financing, inter-company trade credit, and bond financing—external borrowing accounted for 29 percent of total outstanding non-financial corporate loans at end-2016, nearly double the 2008 level. - Increased self-financing from retained earnings by profitable corporations. - Banks relaxed credit standards but remain reluctant to lend to SMEs with NPLs; EC constraints on lending by the largest and the third-largest banks appear binding. - Staff projects moderate credit growth in coming years, led by credit to households; from a macrofinancial perspective, demand has shifted away from domestic banks. ### Bank business model challenges and supervisory recommendations - Net interest income is expected to fall further as high-interest assets mature, demand for domestic bank loans grows only modestly, and deposit interest rates are near zero. - Limits to raising non-interest income: low volume of new loans generating commissions and fees; deposit fees risk discouraging households from using banks. - Decline in risk provisioning has a large one-off component that will fade as NPL resolution is completed. - Risks from asset-liability adjustments: shift to fixed-rate long-term loans could create interest rate mismatches as QE unwinds. - Staff recommendations: - Reassess bank business models, likely requiring further bank consolidation, deep cuts in operating costs, and new income sources. - Active dialogue between authorities and banks and enhanced supervisory vigilance for signs of unsustainable operations. ### Nonperforming loans (NPLs) and resolution - System NPLs reduced from a peak of 18 percent in September 2013 to 5.1 percent at end-2016 (IMF FSI definition). - Major measures that reduced NPLs: - Large NPL transfers to BAMC (€5.5 billion) in 2014. - Master restructuring agreements (MRAs) between banks and large debtors addressing almost €1.9 billion of NPLs. - Commercial banks sold NPL packages of about €700 million to outside investors. - Significant write-offs facilitated by high provision coverage and good-quality collateral. - SME NPLs remain elevated: 13.4 percent of total SME loans as of end-2016. - Staff view on resolution: - Resolving remaining NPLs, particularly SME NPLs, would help raise economic growth. - Staff welcomed Bank of Slovenia and Bank Association guidelines for SME resolution: supervisory evaluation of bank NPL strategies, annual NPL reduction targets for 2017–19, and development of restructuring tool kits. - Emphasized need for close supervisory monitoring and safeguards against “evergreening”; enforce time-bound write-off requirements and nonaccrual of interest for delinquent loans. ### Role and governance of BAMC - An independent BAMC is best placed to maximize return on large legacy NPLs due to capabilities in overcoming collective action problems and broad restructuring powers. - Staff recommendation: - BAMC should continue to vigorously restructure and sell remaining claims and avoid transfers of substantial claims from the BAMC to the Slovenian Sovereign Holding (SSH). - Preserve BAMC independence with an appropriate governance framework and avoid frequent changes in senior management. - Late-2015 amendments to the BAMC law (welcomed by staff) clarified: - BAMC operational independence—Ministry of Finance may not issue instructions on individual cases. - Responsibility for management rests with executive directors. - BAMC has broad powers to restructure companies in its portfolio. ### Financial sector policy measures and privatization - Macroprudential and regulatory measures: - Countercyclical capital buffer and OSI buffer in place since 2015; both currently set at zero, with OSI buffer scheduled to increase to 0.25–1.00 percent in 2019. - 2016 central bank non-binding guidelines on loan-to-value (80 percent) and debt service-to-income (50–67 percent) ratios for real estate loans. - Early 2017 launch of an electronic credit register covering private individuals and businesses. - Bank privatization: - Privatization of remaining large state banks is important for commercial operations, expansion, and cost reductions. - After NKBM sale in 2016, authorities preparing to privatize NLB via IPO in 2017; staff supported the sale but expressed concern about a restriction that no private investor can have more than the state’s 25 percent stake. - Staff encouraged dropping the restriction to allow strategic investors to take controlling stakes. - Staff encouraged completing sale of Abanka well before mid-2019 EC deadline to drop state-aid constraints and improve competitiveness and profitability. ### Authorities’ views on financial sector - Authorities highlighted progress in NPL resolution enabled by recapitalization, early NPL transfers to BAMC, and supervisory dialogue. - They monitor implementation of SME NPL restructuring guidelines and expect the process to take time due to granular claims. - Authorities see profitability pressures as calling for further consolidation and specialization, cost reductions, and development of new consumer products. - Authorities intend to privatize NLB in 2017 and start preparations for sale of Abanka in late 2017. ### Structural reforms—labor market and growth potential - Addressing labor market frictions and completing balance sheet clean-up will raise growth potential. - Competitiveness rankings indicate room for improvement; business surveys identify restrictive labor regulations, high labor taxes, and poor access to credit as major obstacles. - Assessment of the 2013 labor market reform: - Reform aimed to enhance flexibility by encouraging open-ended contracts and reducing attractiveness of temporary contracts. - Evidence of mixed impact: - Immediate post-reform shift from temporary to open-ended contracts, but effect tapered off after a year except for young workers (share of open-ended contracts increased from a low level). - Protection of open-ended contracts still considered excessive by employers due to high layoff costs, despite employment protection indicators moving close to the OECD average. - Growth has not become more employment-intensive post-reform; employers still prefer substantial overtime over new hiring during expansions. - Emerging skill mismatches between job vacancies and job seekers. - OECD data show exceptionally low gross flows from inactivity to employment, partly due to inactivity traps. *Source: IMF staff report (chapter text).* ### 29. These findings suggest the need for substantial recalibration of labor market ### cr17125 - 29. These findings suggest the need for substantial recalibration of labor market ### Labor market policies: findings and recommendations - Findings: - The growing economy offers a good opportunity to further increase the flexibility of open-ended employment contracts. - Skill mismatches persist and could be alleviated by better-designed retraining courses for the unemployed with input from employers. - Retaining older experienced workers requires targeted training in new technologies and flexible working hours. - Taxation of low wages should ensure that the entry-level net wage is markedly higher than social assistance benefits. - Policy recommendations: - Further increase the flexibility of open-ended employment contracts. - Provide more retraining courses for the unemployed designed with employer input. - Implement an apprenticeship system developed in cooperation between the education system and employers (similar to those in Germany and Austria) to develop necessary skills early and raise worker retention rates. - Target training and flexible hours to retain older experienced workers in the labor force. - Review labor taxes to ensure the entry-level net wage motivates work (i.e., is markedly higher than social assistance benefits). ### Privatization and state-owned enterprises (SOEs) - Findings: - Progress with privatization has been mixed; an EC analysis found Slovenia’s SOEs less profitable and productive than private-sector peers. - Slovenia underperformed in large-scale privatization relative to other CESEE countries. - Out of 15 SOEs slated for privatization in 2013, 9 have been sold; privatization of the largest, Telecom Slovenia, failed when the prospective investor withdrew. - An additional 25 SOEs were prepared for privatization in 2016, with a tender process currently ongoing for 13 of them. - Staff recommendations: - Prompt sales without onerous conditions to strengthen firm viability and maximize returns to the taxpayer. - Revise the SSH classification to significantly reduce the number of companies classified as “strategic” and “important”, especially in sectors like manufacturing and tourism, allowing full private control over more SOEs. - For bank privatizations, drop the restriction that no private investor’s ownership share can exceed the state’s 25 percent (in the context of NLB). ### Authorities’ views - Agreed points: - Labor market policies should foster lifelong learning and flexible adjustment to changing employment circumstances. - A draft law on vocational training envisaging the introduction of apprenticeships would be finalized in the coming months to build practical skills during secondary education. - Legal amendments are being prepared to re-activate the unemployed with a focus on vulnerable groups (young, older, and low-skill workers). - Authorities noted improving SOE performance in 2016 and agreed the SOE management strategy needed adjustments to be more flexible and reduce the state’s footprint. - Authorities considered Slovenia globally competitive and cited business surveys; they are working to reduce labor costs and expand SME access to finance. ### Staff appraisal: macroeconomic assessment and policy priorities - Macro outcomes and challenges: - Slovenia benefits from effective post-crisis macroeconomic policies, a competitive export sector integrated into European supply chains, and aggressive corporate and bank deleveraging. - Medium-term risks: aging population, tepid investment, high public debt, SME NPLs slowing investment, low potential growth, and the need for banking system adjustments. - Priority policy actions recommended: - (i) Adopt a credible reform-based fiscal strategy. - (ii) Support SME NPL resolution and encourage viable bank models. - (iii) Improve labor market functioning and accelerate privatization. - Fiscal targets and recommendations: - Authorities’ medium-term fiscal consolidation target: eliminate the budget’s structural deficit by 2020 and maintain this level afterwards; this will reduce debt to 60 percent of GDP by 2026. - Staff estimate an additional structural adjustment of 1.8 percent of GDP by 2020 over the current baseline is required to achieve the medium-term target. - Staff recommends a menu of revenue and expenditure reforms to tackle the unfinished fiscal structural agenda with minimal toll on growth. - For the 2017 budget, staff recommends maintaining the 2017 structural primary balance at its 2016 level; the implied additional adjustment of ¼ percentage point of GDP could be achieved by reducing subsidies and improving tax collection. - External position and debt management: - Slovenia’s external position in 2016 assessed as substantially stronger than suggested by fundamentals and desirable policies; the current account surplus is expected to decline significantly as temporary factors reverse. - Steady reduction of public debt over the medium-term (including by privatization and debt management operations) will address vulnerabilities from high external debt. - Banking sector and NPLs: - Advancing privatization of the two large state-owned banks and resolving SME NPLs are important priorities. - Staff welcomes efforts to complete privatization of NLB and start privatization of Abanka; NLB’s prospects would benefit from dropping the restriction that no private investor’s ownership share can exceed the state’s 25 percent. - Guidelines for SME resolution prepared by the Bank of Slovenia and the Bank Association provide a welcome way forward; success requires close dialogue between banks and supervisors and safeguards to prevent “evergreening”. - Only an independent BAMC can effectively fulfil its mandate; BAMC credibility depends on its independence and recent amendments to the BAMC law that provide further safeguards are welcomed. - Necessary adjustments in banks’ business models call for active engagement of bank supervisors because interest income is under pressure and demand for domestic bank loans is modest. - Labor market and privatization as engines of growth: - To raise potential growth, staff recommends deepening labor market reforms and accelerating privatization by: - (i) further increasing the flexibility of open-ended employment contracts; - (ii) retraining the unemployed with input from employers; - (iii) implementing an apprenticeship system to develop needed technical skills early on; and - (iv) reviewing labor taxes to ensure the entry-level net wage motivates work. - To improve company performance, the SOE management strategy should allow full private control over more SOEs than at present and enable prompt sales without onerous conditions. *Source: IMF staff report excerpt (Republic of Slovenia).* ### 43. It is proposed that the next Article IV consultation be held on the 12-month cycle. ### 43. It is proposed that the next Article IV consultation be held on the 12-month cycle. ### Consultation proposal - It is proposed that the next Article IV consultation be held on the 12-month cycle. ### Macroeconomic developments - Recent drivers of GDP growth: private consumption and exports. - Exports expected to remain strong in 2017. - Economic sentiment improving and retail sales rising. - Headline inflation pushed up by commodity price increases; core inflation remains modest despite near historic high in capacity utilization. - Key indicators (Table 1 and Figure 1): - Nominal GDP (EUR millions): 2016 = 39,769; 2017 = 41,247; 2018 = 43,116. - Real GDP (percent change): 2016 = 2.5; 2017 (Staff Proj.) = 3.0; 2018 (Staff Proj.) = 2.3. - Private consumption (percent change): 2016 = 2.8; 2017 = 2.5; 2018 = 2.0. - Exports of goods and services (percent change): 2016 = 5.9; 2017 = 5.3; 2018 = 3.7. - Consumer prices (national definition, period average): 2016 = -0.1; 2017 (Staff Proj.) = 1.7; 2018 (Staff Proj.) = 2.0. - Output gap (in percent of potential GDP): 2016 = -1.2; 2017 = 0.0; 2018 = 0.6. ### Labor market - Employment and unemployment: - Employment (domestic concept, period average): 2016 = 2.0; 2017 (Staff Proj.) = 1.2; 2018 (Staff Proj.) = 1.2. - Unemployment rate (in percent, ILO definition): 2016 = 7.9; 2017 = 7.0; 2018 = 6.4. - Youth unemployment remains elevated despite declines. - Wages: - Nominal wages (all sectors): 2016 = 1.8; 2017 = 3.4; 2018 = 3.3. - Real wages (all sectors): 2016 = 1.9; 2017 = 1.7; 2018 = 1.3. - Public- and private-sector employment growth observed; private-wage growth picking up following public-sector pay increase in 2016-17. ### External sector - Current account and trade: - Current account balance (percent of GDP): 2016 = 6.8; 2017 (Proj.) = 5.8; 2018 (Proj.) = 5.5. - Trade balance (goods and services, percent of GDP): 2016 = 9.7; 2017 (Proj.) = 8.4; 2018 (Proj.) = 8.2. - Exports and market share: - Exports f.o.b. (percent of GDP): 2016 = 62.3; 2017 (Proj.) = 64.0; 2018 (Proj.) = 64.3. - Slovenia’s exports directed mainly toward Germany and neighboring countries; market share in world trade increased (index, 2011Q1 = 100). - External debt and IIP: - Gross external debt (percent of GDP, end-period): 2016 = 108.8; 2017 (Proj.) = 103.0; 2018 (Proj.) = 99.7. - Net international investment position (percent GDP): 2016 = -34.5; 2017 (Proj.) = -26.9; 2018 (Proj.) = -20.1. ### Financial sector developments - Bank sector and credit: - Bank balance sheets have contracted as large companies used alternative financing; capital ratios remain high after 2013 recapitalization. - Overall credit growth turned positive in early 2017. - Credit to the private sector (Table 4, percent change): 2016 = -2.6; 2017 (Proj.) = 3.0; subsequent years = 3.0 (through 2022 in Table 4). - Liquidity and deposits: - System-wide liquidity remains robust; deposits continue to grow steadily. - Nonperforming loans (NPLs): - NPLs have been declining steadily. - Nonperforming loans to total gross loans (Financial Soundness Indicators, 2016) = 5.1. - Selected Financial Soundness Indicators (Table 5, 2016): - Regulatory capital to risk-weighted assets = 19.2. - Regulatory Tier 1 capital to risk-weighted assets = 18.7. - Return on assets = 1.1. - Return on equity = 8.8. - Liquid assets to total assets = 29.4. - Liquid assets to short-term liabilities = 53.5. ### Public finances and fiscal outlook - General government (Table 2 and Table 4): - General government balance (cash basis, percent of GDP): 2016 = -1.8; 2017 (Est./Proj.) = -1.3; 2018 (Proj.) = -1.3. - General government balance excluding bank support (percent of GDP): 2016 = -1.8; 2017 = -1.3; 2018 = -1.3. - Structural balance (percent of GDP): 2016 = -1.3; 2017 = -1.1; 2018 = -1.6. - Structural primary balance (percent of GDP): 2016 = 1.4; 2017 = 1.1; 2018 = 0.6. - General government debt (percent of GDP): 2016 = 79.7; 2017 (Proj.) = 78.0; 2018 (Proj.) = 77.0. - Revenue and expenditure highlights (2016): - Revenue = 39.4 percent of GDP. - Expenditure = 41.2 percent of GDP. - Transfers to individuals and households = 16.3 percent of GDP; pensions = 10.7 percent of GDP. - Interest = 2.8 percent of GDP. ### Balance of payments and projections - Selected balance of payments figures (Table 3): - Current account (percent of GDP): 2016 = 6.8; 2017 (Proj.) = 5.8; 2018 (Proj.) = 5.5. - Financial account, excl. reserves (percent of GDP): 2016 = 3.0; 2017 (Proj.) = 5.8; 2018 (Proj.) = 5.5. - Gross external debt (billions of euros): 2016 = 43.3; 2017 (Proj.) = 42.5; 2018 (Proj.) = 43.0. - Net errors and omissions (2016) = -3.3 (percent of GDP). *Sources: Bank of Slovenia; Eurostat; Ministry of Finance; Statistical Office of Slovenia; Financial Stability Report; Haver Analytics; IMF FSI; Data provided by the Slovenian authorities; IMF staff calculations and projections.* ### Annex I. External Assessment ### Annex I. External Assessment ### Overall Assessment - In 2016, staff assesses Slovenia’s overall external position as substantially stronger than the level consistent with medium term fundamentals and desirable policies. - Main support for the assessment: the large current account surplus; other external sector indicators are in line with fundamentals. - Current account gap: +4–6 percent of GDP. - Implied REER undervaluation from the current account gap: 8–12 percent. - Caveat: the higher-than-expected surplus appears to have been caused by temporary factors not related to the REER, which has been stable over time. - Outlook: Current account surpluses should gradually decline over the medium-term as temporary factors unwind. - Vulnerability: notwithstanding improvements in net assets and liabilities, gross external debt remains high and could make Slovenia vulnerable to changes of sentiment in the financial markets. ### Potential Policy Responses - Expectation: Slovenia’s current account surplus is expected to decline as energy prices rise and investment and consumption shake up the legacy of Slovenia’s crises in 2009-13. - Monetary policy: The Euro Area’s accommodative monetary policies remain appropriate to support the recovery in Slovenia, as the output gap is just closing in 2017. - Main vulnerability: high government external liabilities. - Policy recommendations: - Reduce public debt, including by privatization and debt management operations, to address external vulnerability. ### Foreign Assets and Liabilities - NIIP improvement: due to substantial current account surpluses beginning in 2012, Slovenia’s net international investment position (NIIP) improved rapidly from -50 to -35 percent of GDP from end-2012 to end-2016. - Sources of improvement: - Increase in net assets of banks: 19 percent of GDP. - Increase in net assets of other sectors: 9 percent of GDP. - Private sector’s net asset position is almost to balance. - Government position: decline in the net asset position of government by 16 percent of GDP to -43 percent of GDP at end-2016. - Gross external debt: 109 percent of GDP at end-2016. - Changes since 2012: - Bank external debt liabilities declined by almost two-thirds to 10 percent of GDP. - External liabilities of other sectors declined by a fifth to 36 percent of GDP. - Government external debt increased by 23 percent of GDP to 54 percent of GDP. - Assessment and projection: - Private sector has significantly reduced external liabilities; government liabilities have nearly doubled. - With current account surpluses projected to continue, Slovenia’s NIIP is projected to turn positive in 5-6 years. - Improvement in the net position masks high gross assets and liabilities. - Gross external debt is expected to remain above 90 percent of GDP, sustained by high public debt. - Reductions in public debt over the medium to long-run will help reduce this external vulnerability. ### Current Account - Historical shift: current account balance shifted from -4.1 percent of GDP to an estimated 6.8 percent of GDP between 2007 and 2016. - Drivers: - Both consumption and investment dropped substantially after the global financial crisis; consumption partially recovered while investment remained low. - Improvement driven by a broad-based surge in exports, mainly goods: vehicles and vehicle parts, pharmaceuticals, and electrical equipment contributed the most. - Low prices of imported commodities over 2014–16 also contributed to the surplus. - IMF model benchmark: a country like Slovenia would be expected to have a current account surplus of 1–3 percent of GDP. - Implied current account gap in 2016: actual surplus 6.8 percent of GDP minus expected 1–3 percent = +4–6 percent of GDP. - Attribution of the gap: - About 1 percent of GDP attributable to policies in Slovenia and its trading partners (including a fiscal deficit closer to its desired level than the average of trading partners) and fundamentals like credit to the private sector being below its historical average. - The remainder (3–5 percent of GDP) unexplained by the model, likely due to temporary factors: low energy prices in 2014–16 and weak consumption and investment, legacy of financing disruptions from the global financial crisis and Slovenia’s banking crisis in 2012–13. - Mechanism: uncertainty and burdened balance sheets reduced investment and raised corporate and household savings. - Outlook and projection: - As temporary factors fade with progress in reducing corporate debt and rising business and consumer sentiment, investment and savings should revert toward historical averages and the current account surplus should decline significantly. - Private investment and consumption started growing strongly in 2016. - Staff projection: current account surplus declines from 6.8 percent of GDP in 2016 to 3.6 percent of GDP in 2022. - Projection basis: rebound in gross capital formation to 22.6 percent of GDP and a modest decline in gross national savings to 26.2 percent of GDP by 2022. - Illustration: if gross capital formation and gross national savings revert to their 1995–2016 averages of 25.3 percent of GDP and 25.4 percent of GDP, respectively, the current account surplus would decline by some 6¾ percent of GDP from its 2016 level, eliminating the current account gap. - Staff assessment: current account gap at 4–6 percent of GDP in 2016, caused by temporarily low energy prices, subdued investment, and elevated savings; gap expected to gradually close over the medium-term as commodity prices, savings, and investment revert toward long-term levels. ### Real Exchange Rate - IMF EBA methodology: taking account of different trading partners and economic characteristics, suggests Slovenia’s REER is 5 percent stronger than predicted (within models’ margin of error). - Current account methodology (standard elasticities): implies an undervaluation of 8–12 percent. - Staff assessment: given the current account gap, staff assesses the REER to be undervalued by 8–12 percent. - Observed REER behavior: relatively little movement in the REER over the last 25 years suggests other factors are primarily responsible for the large rise in the current account balance. ### Capital and Financial Accounts - Background: current account surpluses since 2011 led bank and corporate sectors to accumulate assets and substantially reduce portfolio debt and other investment liabilities. - Inward FDI: rebounded from near zero in 2012 to about 2½ percent of GDP in 2016. - Assessment: - Private sector has significantly reduced external liabilities, somewhat offset by accumulation of government external debt. - As demand and imports pick up and Slovenia’s current account surplus declines, net financial outflows should also decline. ### Foreign Exchange Intervention and Reserves - Background and assessment: the euro is a global reserve currency. - Reserves: reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. *Source: Annex I. External Assessment (IMF staff analysis).* ### Annex IV. External Debt Sustainability Analysis ### Annex IV. External Debt Sustainability Analysis ### Baseline projections and debt composition - Gross external debt ratio is projected to fall from 109.0 percent of GDP in 2016 to 90.2 percent of GDP in 2022. - Between end-2015 and end-2016, external debt fell by 8 percentage points of GDP. - Over the medium term: - Private sector external debt is expected to continue to reduce significantly. - Public external debt is projected to rise by about 3 percentage points to 56.9 percent of GDP in 2022 (of which external public debt: 54.3 percent in 2016; 56.9 percent in 2022 as per projections). - Beyond 2022, continued improvement in the external debt-to-GDP ratio will require reductions in external debt of the government. ### Net international investment position and current account - Slovenia’s net international investment position remains negative: -35 percent of GDP at end-2016. - Projected sizable, if declining, current account surpluses over the medium term will close this gap and lead to a balanced position by 2022. ### Vulnerabilities and shock-test results - External debt dynamics show moderate vulnerability to standard shocks. - Interest-rate and exchange-rate sensitivity: - With low interest rates in recent years and most debt euro-denominated, an increase in nominal interest rates or a depreciation is not expected to materially affect the outlook for external debt. - Shock outcomes (selected): - A shock to real GDP growth or a combination of smaller shocks to interest rates, growth, and the current account would push external debt up by about 10 percentage points to 103 percent of GDP in 2022, still below the current level of 109 percent of GDP. - In a scenario with key variables at their historical averages, the external debt-to-GDP would rise above 120 percent in 2022. - Historical debt accumulation was driven by financial institutions ahead of the global financial crisis in 2007 and the government after the GFC and Slovenia’s 2012–13 banking crisis; since 2008, banks have reduced their external debt by 37 percentage points of GDP. - A repeat of the historical scenario is considered unlikely because banks were recapitalized. ### Scenario and bound-test highlights (selected figures) - Baseline external debt (percent of GDP): 2012: 119.1; 2013: 116.6; 2014: 126.8; 2015: 116.6; 2016: 109.0; 2017: 103.0; 2018: 99.7; 2019: 96.9; 2020: 94.5; 2021: 92.3; 2022: 90.2. - Of which: external public debt (percent of GDP): 2012: 30.8; 2013: 43.6; 2014: 63.1; 2015: 60.1; 2016: 54.3; 2017: 53.3; 2018: 53.7; 2019: 54.4; 2020: 55.2; 2021: 56.1; 2022: 56.9. - Change in external debt (percentage points of GDP): 2012: 6.1; 2013: -2.5; 2014: 10.2; 2015: -10.2; 2016: -7.6; 2017: -5.9; 2018: -3.4; 2019: -2.7; 2020: -2.4; 2021: -2.2; 2022: -2.1. - Identified external debt-creating flows (percent of GDP): 2012: -1.3; 2013: -5.0; 2014: -12.6; 2015: -6.6; 2016: -12.6; 2017: -10.6; 2018: -9.3; 2019: -7.9; 2020: -7.2; 2021: -6.2; 2022: -5.8. - Current account deficit, excluding interest payments (percent of GDP): 2012: -5.1; 2013: -7.4; 2014: -9.2; 2015: -8.0; 2016: -9.6; 2017: -8.2; 2018: -8.1; 2019: -7.6; 2020: -7.1; 2021: -6.5; 2022: -6.0. - Exports (percent of GDP): 2012: 73.2; 2013: 75.2; 2014: 76.4; 2015: 77.9; 2016: 79.1; 2017: 81.0; 2018: 81.7; 2019: 82.5; 2020: 83.6; 2021: 84.9; 2022: 86.3. - Imports (percent of GDP): 2012: 69.3; 2013: 68.4; 2014: 68.7; 2015: 68.8; 2016: 69.4; 2017: 72.6; 2018: 73.4; 2019: 74.8; 2020: 76.3; 2021: 78.2; 2022: 80.1. - Net non-debt creating capital inflows (negative, percent of GDP): 2012: -1.5; 2013: -0.1; 2014: -2.0; 2015: -4.1; 2016: -2.3; 2017: -1.6; 2018: -1.5; 2019: -0.9; 2020: -0.8; 2021: -0.5; 2022: -0.5. - Automatic debt dynamics (percent): 2012: 5.3; 2013: 2.4; 2014: -1.5; 2015: 5.4; 2016: -0.7; 2017: -0.7; 2018: 0.2; 2019: 0.6; 2020: 0.7; 2021: 0.8; 2022: 0.8. - Contribution from nominal interest rate (percent): 2012: 2.7; 2013: 2.5; 2014: 3.0; 2015: 3.4; 2016: 2.8; 2017: 2.6; 2018: 2.6; 2019: 2.5; 2020: 2.5; 2021: 2.4; 2022: 2.4. - Contribution from real GDP growth (percent): 2012: 3.4; 2013: 1.3; 2014: -3.5; 2015: -3.4; 2016: -2.8; 2017: -3.3; 2018: -2.3; 2019: -1.9; 2020: -1.7; 2021: -1.7; 2022: -1.6. - Residual, including change in gross foreign assets (percent of GDP): 2012: 7.4; 2013: 2.5; 2014: 22.9; 2015: -3.6; 2016: 5.0; 2017: 4.6; 2018: 5.9; 2019: 5.2; 2020: 4.8; 2021: 4.0; 2022: 3.6. - External debt-to-exports ratio (percent): 2012: 162.6; 2013: 155.0; 2014: 166.0; 2015: 149.5; 2016: 137.8; 2017: 127.2; 2018: 122.0; 2019: 117.5; 2020: 113.1; 2021: 108.8; 2022: 104.5. - Gross external financing need (in billions of US dollars): 2012: 12.1; 2013: 14.1; 2014: 10.3; 2015: 9.7; 2016: 10.3; 2017: 11.0; 2018: 7.5; 2019: 7.5; 2020: 6.7; 2021: 7.4; 2022: 6.8. - Gross external financing need (percent of GDP): 2012: 33.6; 2013: 39.3; 2014: 27.5; 2015: 25.0; 2016: 25.8; 2017: 27.9; 2018: 18.3; 2019: 17.4; 2020: 15.0; 2021: 16.0; 2022: 14.1. ### Key macroeconomic assumptions underlying baseline (selected series as presented) - Real GDP growth (percent): 2012: -2.7; 2013: -1.1; 2014: 3.1; 2015: 2.3; 2016: 2.5; 2017: 0.8; 2018: 4.0; 2019: 3.0; 2020: 2.3; 2021: 2.0; 2022: 1.9; further entries: 1.8; 1.8. - GDP deflator in US dollars (change in percent): 2012: -7.4; 2013: 4.2; 2014: 0.9; 2015: -15.7; 2016: 0.3; 2017: 0.6; 2018: 9.0; 2019: -3.3; 2020: 1.8; 2021: 2.2; 2022: 2.1; further entries: 1.8; 1.5. - Nominal external interest rate (percent): 2012: 2.2; 2013: 2.1; 2014: 2.6; 2015: 2.3; 2016: 2.4; 2017: 2.7; 2018: 1.0; 2019: 2.3; 2020: 2.6; 2021: 2.6; 2022: 2.6; further entries: 2.7; 2.7. - Growth of exports (US dollar terms, percent): 2012: 1.6; 2013: 2.5; 2014: 5.6; 2015: 5.4; 2016: 4.6; 2017: 4.8; 2018: 9.2; 2019: 6.2; 2020: 5.4; 2021: 5.3; 2022: 5.4; further entries: 5.5; 5.7. - Growth of imports (US dollar terms, percent): 2012: -2.3; 2013: -1.5; 2014: 4.4; 2015: 3.5; 2016: 4.0; 2017: 3.7; 2018: 11.3; 2019: 8.5; 2020: 5.6; 2021: 6.1; 2022: 6.1; further entries: 6.4; 6.5. - Current account balance, excluding interest payments (percent of GDP): 2012: 5.1; 2013: 7.4; 2014: 9.2; 2015: 8.0; 2016: 9.6; 2017: 4.4; 2018: 4.0; 2019: 8.2; 2020: 8.1; 2021: 7.6; 2022: 7.1; further: 6.5; 6.0. - Net non-debt creating capital inflows (percent of GDP): 2012: 1.5; 2013: 0.1; 2014: 2.0; 2015: 4.1; 2016: 2.3; 2017: 0.7; 2018: 1.9; 2019: 1.6; 2020: 1.5; 2021: 0.9; 2022: 0.8; further: 0.5; 0.5. ### Key messages for policy and outlook - The projected downward path of gross external debt to 90.2 percent of GDP by 2022 is driven by continued private-sector deleveraging and requires public debt discipline beyond 2022 to sustain improvements. - The negative net international investment position (‑35 percent of GDP at end-2016) is expected to be closed by persistent current account surpluses, reaching a balanced position by 2022. - External debt remains moderately vulnerable to adverse shocks; policymakers should monitor growth, interest rate, and current account developments, but a repeat of past historical debt-accumulation episodes is considered unlikely given bank deleveraging (37 percentage points of GDP reduction since 2008) and recapitalization. *International Monetary Fund staff estimates and projections as presented in Annex IV. External Debt Sustainability Analysis.* ### Annex V. Public-Sector Debt Sustainability Analysis ### Annex V. Public-Sector Debt Sustainability Analysis ### Baseline debt dynamics and fiscal outlook - Fiscal consolidation improved Slovenia’s medium-term public debt dynamics, but vulnerabilities remain in the absence of further adjustment. - Structural primary balance path: - 1.4 percent of GDP in 2016, - just over 1 percent of GDP in 2017, - continuing to decline and ending up just above ½ percent of GDP by 2022. - Staff note that 2016 budget overperformance and savings in debt service from the ECB’s QE and 2016 debt management operations allow for more benign debt dynamics relative to the last Article IV projections. - Projected debt trajectory under staff baseline: - Debt ratio will register a further 1¾ percentage point decline in 2017 as the Treasury draws down its cash buffer, - continue declining at a slower pace in 2018–19, - virtually stabilize thereafter, settling at about 76 percent by 2022. - Historical drivers: 2013–14 dynamics were dominated by bank restructuring (accounting for the large 2013 primary balance forecast error); these are unlikely to recur given banks’ improved health. - Medium-term dynamics reflect the projected end of fiscal adjustment without additional measures, leaving a primary surplus that roughly offsets the effects of the growth–real interest rate differential and below-the-line government lending and equity injections. ### Vulnerabilities and stress-test results - Debt level and risk thresholds: - Under the baseline, the debt ratio remains below the high-risk threshold of 85 percent of GDP throughout the medium term. - The debt ratio would exceed 85 percent under some stress scenarios (especially adverse growth or macro-fiscal shocks). - Sensitivity to shocks: - Standardized macro shocks: A negative one-standard deviation GDP growth shock over two years would bring the debt ratio to well over 90 percent by 2022. - Country-specific contingent liabilities: State guarantees (excluding EFSF and BAMC guarantees that are part of general government debt) to the nonfinancial sector amount to just over 10 percent of GDP; the weak financial position of borrowers raises the probability that a sizeable portion could be called in a downturn. - Illustrative example: Calling of half of the guarantees outstanding, accompanied by a transitory negative confidence impact on Slovenia’s spread, would bring the debt ratio to almost 85 percent by 2022. - Combined macro-fiscal shock (adverse growth, minima of inflation and fiscal revenue, maxima of fiscal expenditure, exchange rate, and interest rate spread) would result in explosive debt dynamics, with debt close to 100 percent of GDP by the end of the projection period. - Stress-test conclusion: Debt service is projected to remain manageable even under stress scenarios; gross financing needs remain below the high-risk threshold of 20 percent of GDP under standard robustness stress tests and scenarios. ### Debt structure, financing needs, and market indicators - Key messages on structure and financing: - Share of short-term debt is moderate. - Share of debt held by non-residents exceeds the relevant threshold, but maturities of these holdings have been significantly lengthened, implying manageable annual rollover needs. - Slovenia’s spreads have fallen steadily to low levels. - Selected baseline indicators presented in the DSA tables (values shown in the source for 2015–2022 unless otherwise indicated): - Nominal gross public debt series: 43.9, 83.1, 79.7, 78.0, 77.0, 76.5, 76.3, 76.2, 76.1 (in percent of GDP for 2015–2022 as displayed). - Public gross financing needs (as displayed): 8.5, 6.0, 10.6, 8.0, 6.3, 6.8, 4.7, 7.8, 6.9 (in percent of GDP for 2015–2022 as displayed). - Real GDP growth (in percent): 1.0, 2.3, 2.5, 3.0, 2.3, 2.0, 1.9, 1.8, 1.8 (2015–2022 as displayed). - Inflation (GDP deflator, in percent): 1.8, 1.0, 0.6, 0.7, 2.1, 2.2, 2.0, 2.0, 2.1 (2015–2022 as displayed). - Nominal GDP growth (in percent): 2.9, 3.3, 3.1, 3.7, 4.5, 4.2, 3.9, 3.9, 3.9 (2015–2022 as displayed). - Effective interest rate (in percent): 4.2, 3.6, 3.5, 2.9, 3.0, 3.1, 3.3, 3.4, 3.6 (2015–2022 as displayed). - Change in gross public sector debt (cumulative shown): 6.1, 2.3, -3.5, -1.7, -0.9, -0.5, -0.2, -0.1, -0.1, -3.5 (as displayed). - Identified debt-creating flows and components are shown in the source DSA tables, including primary deficit, automatic debt dynamics, interest rate/growth differential, exchange rate depreciation contribution, and other identified debt-creating flows. - Benchmarks and heat-map summary: - Debt level benchmark: 85 percent of GDP (upper risk threshold). - Gross financing needs benchmark: 20 percent of GDP (upper risk threshold). - The DSA heat map indicates vulnerabilities primarily from Real GDP Growth Shock and Contingent Liability Shock given Slovenia’s profile (detailed cell colorings and percentile-based comparisons are shown in the source tables and charts). ### Alternative scenarios and policy implications - Active fiscal adjustment scenario: - Adoption of additional structural fiscal measures amounting to some 1¾ percent of GDP over the next few years would: - Bring the debt ratio below 70 percent by 2022, - Bring the debt ratio to 60 percent by 2026 (even allowing for somewhat lower medium-term growth due to fiscal headwinds). - Measures yielding more than this minimum and reallocating extra savings to growth-friendly fiscal policies, together with strengthening private investment, labor market functioning, and productivity, could more than overcome growth headwinds. - Policy priorities implied by the DSA: - Implement additional structural fiscal consolidation (at least 1¾ percent of GDP) to place debt on a firmly downward path. - Pursue reforms to raise and sustain higher growth (to reduce sensitivity to growth shocks). - Reduce state contingent liabilities through corporate restructuring and by lowering the state’s direct and indirect involvement in the economy. - Maintain credible medium-term fiscal policy to avoid combinations of shocks that produce explosive debt dynamics. *Source: IMF staff (Annex V. Public-Sector Debt Sustainability Analysis, as provided in the supplied content).* ### 2014. Both the willingness of banks to lend money and access to public financial support that ### 2014. Both the willingness of banks to lend money and access to public financial support that ### Credit market functioning and access to finance - Willingness of banks to lend money and access to public financial support that include guarantees have improved, and access to finance is no longer seen to be among the main obstacles for the operation of Slovenian micro, small and medium-sized businesses. - Smooth credit market functioning in Slovenia is not yet reflected in the World Bank Doing Business ranking in the category of “getting credit” mainly because of the past credit register deficiencies. - Credit register deficiencies were addressed in January 2017 when Banka Slovenije replaced the old system with a full-fledged credit register. ### Banking sector capitalization and risk coverage - Between 2012 and 2016 the banking sector’s regulatory capital to risk-weighted assets (CAR) increased from 11.4 percent to 19.2 percent due to various measures in addition to the capital increase and cleaning of NPLs, such as restructuring and continuing deleveraging of corporates. - Coverage of nonperforming claims by impairments is high and the banking system’s capital is five times the stock of claims more than 90 days overdue not covered by impairments. - Banks’ recapitalization and revamped insolvency regulation helped reduce the high share of NPLs in total gross claims. ### Nonperforming loans (NPLs) reduction and SME focus - In 2016, the NPL share declined from 10 percent to 5.1 percent following an accelerated process. - Remaining NPLs are largely with SMEs; policy measures have been taken including: - Banka Slovenije and the Banking Association issued NPLs guidelines for SME resolution supporting supervisor evaluation of bank NPL resolution strategies. - Annual NPL reduction targets for 2017–19 and assistance to banks in developing a tool kit for restructuring. - In March 2017, the Handbook for management of nonperforming loans of micro, small and medium-sized companies was issued (result of cooperation of the World Bank and Banka Slovenije in a project financed by European Commission). ### Bank Assets Management Company (BAMC) - BAMC was an important part of the NPL reduction process in 2013 and 2014 and operates well. - Measures taken in late 2015 to shield BAMC’s independence include: - the BAMC is operationally independent, as the Ministry of Finance may not issue instructions to the BAMC for action on individual cases; - management of the BAMC rests with its executive directors; - the BAMC has broad powers to restructure companies in its portfolio. - According to the BAMC’s end-April 2017 information, cash generated from asset management in 2016 corresponded to 18.3 percent of the transfer value of the assets. - This 18.3 percent substantially exceeds the legal requirement of annual liquidation of at least 10 percent of the estimated value of the assets. ### Profitability, consolidation, and supervision - In 2016, return on equity of the Slovenian banking sector doubled to more than 8 percent. - Going forward, bank profitability pressures will require adjustments in the industry; the market-driven consolidation process in the Slovenian banking system may likely continue. - The three systemic banks in Slovenia are supervised by the Single Supervisory Mechanism. - Banking system supervision has undergone improvements, including with the support of 6 rounds of Fund TA provided between 2012 and 2014. - Authorities remain committed to privatize two of the remaining banks which received state aid after having privatized the third one in 2016. ### Macroprudential policy and property market measures - The Financial Stability Board in Slovenia is a fully operational macro-prudential authority and macroprudential policy is proactively pursued. - Given the increasing property prices, in August, 2016, Banka Slovenije issued non-binding guidelines on loan-to-value and debt–to-income guidelines. - The 2015 strategic framework for macroprudential policy for the banking sector and the related guidelines were updated in January 2017. ### External developments - The elevated surplus in Slovenia’s balance of payments’ current transactions reflects export competitiveness gains in the tradable sector, corporate sector deleveraging and the low level of domestic consumption in previous years. - The authorities expect that this and next year the current account surplus will decline to around 4.5 percent of GDP. - In 2017 price factors, mainly deteriorating terms of merchandise trade, would drive the decline. - The lower current account balance, the expected balancing of the international investment position by 2022 and the gradual public debt reduction will further improve macroeconomic stability of Slovenia’s highly open economy. ### Structural reforms and public finance - The 2017-2018 National Reform Program aims at supporting economic growth and public finance stability and sustainability through a comprehensive set of structural measures. - In March 2016, the Parliament adopted a strategic plan for developing the health care system and in December 2016 the new Pharmacies Act was adopted. - The Health Care and Health Insurance Act is in public consultation phase and envisaged for adoption by the Government in July. - Prioritized introduction of the long-term care system aims at sending the needed new regulation for public consultation by the end of July this year. - The 2012 pension reform’s notable positive effects are still supporting the pension system‘s sustainability. - The April 2016 White Paper provides the basis for the next round of adjustments to the pension system; the related consultation period is ending and the necessary regulation should allow new measures to start kicking in in 2020. - Revisions to the Public Finance Act are in the pipeline; following the introduction of a fiscal rule, they refocus budgeting to medium term and strengthen the budget discipline. - Medium- and short-term measures concentrate on improvements in debt management, local communities financing, public sector wage and employment regulation and budget transfers. - A third set of envisaged measures is growth-supporting and spreads across 15 areas, including administrative barriers reduction and investment support measures, improvements in tax collection, public procurement, judicial system, construction and spatial planning regulation and labor market functioning. ### Labor market developments and policies - Slovenia’s unemployment rate is below EU average. - In 2016, there were 8.1 percent fewer persons employed in Slovenia than in 2008. - Compared to EU average, Slovenia has a below average employment rate among the youth and the elderly. - The 2013 labor market reform contributed to better labor outcome; remaining weaknesses are being addressed. - In early 2016 tax relief and exemption from paying social security contributions for employers hiring workers above the age of 55 was introduced. - Forthcoming introduction of vocational training should address youth unemployment and skills mismatch. - In 2016 a policy paper and an action plan were adopted to reduce the problem of elderly unemployment, complementing the White Paper on pensions. - Two additional programs are being prepared to support employment of longer unemployed and elderly, and drafted amendments of three labor market acts aimed at improving its functioning are in process. *Country Report Slovenia 2017; Brussels, 22.2.2017; page 31.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17125.pdf_