Republic of Slovenia - Staff Concluding Statement of the 2021 Article IV Mission

March 19, 2021

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Washington, DC: After containing the first wave of COVID-19, Slovenia is being hit hard by the second wave. The key challenge for policymakers remains to contain the pandemic and, in the meantime, to continue to provide ample support to households and firms until widespread vaccination allows for a withdrawal of containment measures enabling a recovery of activity. Subsequently, policy needs to shift from emergency support to fostering an inclusive, smart, and green recovery. We see the following policy priorities:

  • Maintain fiscal support until the recovery is entrenched.
  • Continue to closely monitor and support, as appropriate, nonfinancial corporations and banks exposed to COVID-affected sectors.
  • Facilitate a smooth reallocation of labor across sectors to minimize the economic and social costs of the pandemic.
  • Plan to accelerate the digital transformation and investment in green technologies to boost productivity and competitiveness.

The COVID-19 Crisis and the Policy Responses

The pandemic is inflicting much suffering, which has been met with swift, substantial, and well-coordinated policy responses. The eight packages of stimulus and intervention measures adopted so far include wage subsidies (in case of temporary layoffs or shorter working hours, and to compensate increase in minimum wage), temporary income support to vulnerable groups, basic monthly income for self-employed, a subsidy to cover fixed costs, tax and loan deferrals, health workers bonus, guarantees, and subsidized loans. In addition, the Bank of Slovenia - as part of the Eurosystem - implemented a wide-ranging supervisory, regulatory, and macroprudential measures. It also extended the ECB measures for banks under the single supervisory mechanism to all banks and savings banks in Slovenia to ensure equal treatment.

These policy measures have been instrumental in mitigating the economic and social impact of COVID-19. Although the crisis triggered a sizeable economic contraction in 2020, with real GDP falling by 5.5 percent, policy measures supported employment and averted larger output loss. Notably, wage compensations for temporary lay-offs, subsidies for shorter work hours, and basic monthly incomes preserved jobs and prevented a much more severe downturn in the labor market. The loan moratoria, state guarantees, subsidized loans, and the Bank of Slovenia’s actions have helped avoid a cascading wave of bankruptcies and safeguarded financial stability and ensure liquidity for the economy.

Economic Outlook and Risks

A strong economic recovery is expected as vaccinations help achieve herd immunity later this year, but there are many downside risks. Real GDP is projected to grow by 3.7 percent in 2021 and 4.5 percent in 2022. Consumption and investment would be the main drivers, the latter benefitting from the EU funds and strong recovery in manufacturing on external markets. However, we estimate that, even with the support measures, it will take until some time in 2022 for output to return to its pre-crisis level. Key downside risks include the potential for new variants of the virus to appear, disruption to the vaccination campaign, and turbulence in international financial markets.

Fiscal Policy: Sustainably Supporting the Recovery

Fiscal policy needs to remain strongly supportive until the recovery is entrenched. In this regard, the budget plan for 2021 appropriately maintain support to fight the COVID-19 crisis. The effectiveness of the measures deployed so far should be assessed and adjustments should be made where necessary. Targeting and efficiency will remain key to foster an efficient adaption of the economy and preserve valuable fiscal space.

Once the recovery is entrenched, fiscal support needs to be repurposed toward “building forward better” and re-establishing policy space. Discretionary fiscal measures played a crucial role in combating the consequences of the pandemic, by forestalling a vicious circle of falling activity and escalating debt burdens. When the recovery is entrenched, the emergency relief measures can be phased out and support can switch toward “building a better economy”. At the same time, the large fiscal deficits will need to be brought down gradually over time, so as to rebuild room for fiscal policy maneuver to counteract any future shocks.

We therefore support the ambitious increase in capital outlays in the 2021 budget that is supported by new resources under the Next Generation and Cohesion Policy EU instruments. However, execution risks related to this plan need to be mitigated . To achieve value for money, improving public investment management is critical. Safeguards need to be in place to ensure that decisions are based on robust selection criteria, and procurement, project management and oversight are effective and transparent.

The credibility of the medium-term fiscal framework should continue to be supported by fiscal rules. Fiscal consolidation should not start until after output has broadly recovered to its pre-crisis level and downside risks have abated. But the planning process should begin now. In our view, the phase out of crisis measures alone will not be sufficient to bring the budget deficit back to a level that is consistent with ample room for policy maneuver. Therefore, additional fiscal measures will be needed in the medium term.

Financial Sector Policy: Safeguarding the Financial Stability and Reviving Credit Growth

Banks entered the crisis with comfortable liquidity and capital positions but risks to financial stability have risen. The crisis has exacerbated the trend of declining corporate lending. Overall credit growth has continued to stagnate, as firms have postponed investment decisions due to high uncertainty and households have accumulated precautionary and forced savings. Weak credit activity, together with the low interest rate environment, have dented banks’ profitability. Non-performing loans (NPL) in COVID-sensitive sectors have begun to rise, heightening the risks of cliff effects when the loan moratoria end. Overall, the liquidity and regulatory capital positions of banks have so far hovered comfortably above requirements, but risks have grown.

Continued risk-based monitoring of banks’ asset quality remains critical. Supervisors’ attention should continue to focus on banks with lower capital base and those exposed to COVID-sensitive sectors and SMEs. Although moderate so far, risks in the housing market need to be closely watched, as income support measures and temporary relaxation of macroprudential measures start to be phased out. It is important that banks be required to continually assess borrowers’ creditworthiness until conditions have normalized. In this regard, we also welcome the Bank of Slovenia’s periodic stress tests and enhanced monitoring of NPLs. Ongoing efforts to ensure banks are prepared to tackle high NPL levels should continue.

Frequent reviews of macroprudential measures should continue to ensure the right balance between financial stability and the need for credit in the economy. We welcome the Bank of Slovenia’s enhanced vigilance with respect to the threat that risky, non-collateralized consumer loans posed to financial stability. The relaxation of macroprudential measures due to the COVID-19 crisis struck the right balance. We encourage the Bank of Slovenia to continue its engagement with the banks. Consideration should also be given to requiring high and prompt provisioning of non-collateralized risky loans.

The exit from the support measures for firms and banks will require a careful balancing act. Although bankruptcies in 2020 did not increase compared to 2019, they could start rising with the prolongation of the crisis and expiration of the loan moratoria, posing a significant risk to financial stability. To avoid such cliff-edge effects, existing schemes should be phased out gradually as the recovery proceeds, and eligibility criteria should be tightened to better target, on a temporary basis, viable or potentially viable companies, operating in hard-hit sectors. As the recovery strengthens, prudential standards should be normalized—and clearly communicated—so that problem assets can be dealt with in a timely manner. In the meantime, the insolvency regime should be strengthened to facilitate the swift repair of bank balance sheets.

Structural Policies: Building the Foundation for Inclusive, Smart, and Greener Growth

Ensuring smooth reallocation of labor across, and upskilling within, sectors would minimize the economic and social costs of the pandemic. Wage subsidies and monthly basic income for self-employed are keeping unemployment in check, which is the right response at this stage. As the recovery becomes entrenched and the longer-term consequences of the crisis become clearer, the focus should shift from protecting jobs to facilitating reallocation and upskilling. Active labor market policy should be used to assist the transition of workers between jobs, including through training, job search services, and reducing the hiring costs for firms. These can be supplemented with measures aimed at improving the business environment and strengthening the social safety net to support those unable to return to work.

The authorities have rightly identified digitalization as one of the key areas for investment. The EU Recovery and Resilience Facility (RRF) and EU Cohesion policy funding, provide an opportunity to significantly speed up the digital transformation of the economy and society. In this regard, the authorities are taking important steps, which should be strengthened further. Going forward, efforts should be targeted at improving the digital infrastructure, building human capital through investing in education and skills, and creating an enabling environment through regulations and incentives.

To deliver on its commitments under the Paris Agreement, Slovenia should combine investment in green projects (supported by the RRF), with strengthened taxation of polluting industries, especially transport with significant greenhouse gas impact. Tax exemptions in transportation should be reconsidered in the context of a strategy for transport development as part of a broader transition strategy to a low carbon economy. In this regard, the authorities rightly emphasize sustainable mobility. Efforts to increase the share of clean energy in the energy mix should continue and could be supported by the proceeds from carbon taxation.

An IMF team conducted virtual meetings during March 8-19, 2021. The mission was led by Mr. Bernardin Akitoby and met with Bank of Slovenia Governor Boštjan Vasle, Minister of Finance Andrej Šircelj, President Robert Polnar and members of the parliamentary committee on finance and monetary policy, other senior officials, representatives of the private sector and labor unions. The mission would like to thank the authorities for their exceptional assistance to the mission’s work, the warm hospitality, and the candid and constructive discussions.

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