Estudos Económicos
Slovenia

Slovenia

Population 2.1 million
GDP 23,654 US$
A3
Country risk assessment
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Synthesis

major macro economic indicators

 

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) 3.1 4.9 4.3 3.3
Inflation (yearly average, %) -0.2 1.6 2.0 2.3
Budget balance (% GDP) -1.9 0.1 0.5 0.1
Current account balance (% GDP) 5.4 7.1 7.5 7.1
Public debt (% GDP) 78.7 74.1 70.2 66.7

(e): Estimate. (f): Forecast.

STRENGTHS

  • Eurozone member
  • High level of political and social development
  • Diversified economy
  • Integrated in the European production chain
  • External accounts in surplus

WEAKNESSES

  • Small domestic market
  • Ageing population and demographic growth at a standstill, leading to a labour shortage
  • Dependent on regional economic conditions and auto industry
  • Heavy public debt burden
  • Inefficient state-owned companies
  • Convalescing banking sector
  • Slow administrative and judicial procedures
  • Fragile coalition at the head of the government

RISK ASSESSMENT

Slower growth in connection with external trade

Growth will continue to slow in 2019, while remaining significant, driven by domestic demand. Consumption is expected to rebound on strong employment performances (unemployment rate of 5.2% in the second quarter of 2018) and a sizable increase in real wages. In addition, improved credit conditions, owing to the gradual debt reduction and rock-bottom interest rates, will encourage consumption by households, who will also be able to draw on the pool built up thanks to their high savings rate (13.9% of gross disposable income in 2017). In parallel, investment will continue to grow in order to meet supply constraints affecting equipment and manpower. Private investment is expected to be driven by the construction and consumer goods sectors, which will be the main beneficiaries of vigorous domestic demand. Public investment should also go up, thanks to increased use of European funding. Conversely, exports will be hit by lost competitiveness linked to higher wages and by cooler growth within Slovenia’s main partners, namely Germany, Italy, Croatia, and Austria. At the same time, with imports increasing faster in response to domestic demand, the positive contribution of external trade will fall sharply, accounting for the slower pace of growth.

 

Reducing the fiscal and current account surpluses

Although a new centre-left coalition took office in September 2018, the budget accounts are expected to remain in surplus in 2019, but only just. In line with its election promises, the coalition is set to ease fiscal austerity from 2019, notably by increasing civil servants' salaries and social benefits. However, the increase in revenues made possible by brisk activity levels should enable the new government to stick to the balanced budget rule contained in the Constitution. In addition, low interest rates and efforts to restructure the public debt in recent years will reduce the interest burden. Public debt will therefore continue its downward trend, while remaining above the target of 60% of GDP. While over 60% of this debt is held by non-residents, it is mainly denominated in euros (89% in 2017) and long-term (62% of the total matures in over five years).

In addition, following the 2012/13 banking crisis, the authorities carried out major recapitalisations and restructuring measures to clean up the sector, 45% of whose assets were still state-owned at the beginning of 2018. The creation of a bad bank in 2013 cut the ratio of non-performing loans to 5.8% by June 2018, compared with 17% three years earlier. After several postponements, the government has promised the EU that it will sell 75% of the shares of NLB, the country's leading bank, by the end of 2019.

As regards the external accounts, the country enjoys a large trade surplus based on European demand and tourism. Exports of goods and services, which represent 85% of GDP, are 90% directed to neighbouring countries. Integration within German and Austrian production chains – thanks to competitiveness in the automotive, electrical and electronic equipment, pharmaceutical products, and household appliances sectors – accounts for half of exports. In 2019, the goods surplus will decline as imports outpace exports. At the same time, the balance of services will continue to post a large surplus, driven by transport and especially by tourism. Contrariwise, the income balance is in deficit due to the repatriation of dividends generated by foreign investments in the country. Although declining, the current account balance will again show a sizeable surplus. The country’s elevated external debt (95% of GDP in June 2018, half of which is attributable to private commitments) will continue to decline.

 

A fragile centre-left government coalition

Janez Janša's Conservative Party, which came out on top in the June 2018 parliamentary elections, failed to form a governing coalition. Subsequently, Marjan Šarec, a pro-European independent and former comedian, was sworn in as Prime Minister in September 2018 by a coalition of five centre-left parties, with 43 seats out of 90 and the non-participating support of the left-wing Levica Party (nine seats). The coalition’s shaky foundations were exposed after only two months, as the Minister of Development and European Funds, a member of the centrist SAB Party, was forced to resign after interfering in local elections. Following this episode, Alenka Bratusek, a former prime minister and leader of the SAB, was highly critical of Prime Minister Šarec. The fragility of the coalition, which is cobbled together from parties of different political persuasions, will make it difficult to carry out any large-scale reforms. However, strong economic growth will work in the government's favour. In addition, the country enjoys the advantage of being in both the European Union and the eurozone, which guarantees fiscal and economic stability in the event of political instability. Prime Minister Šarec has also reaffirmed his intention to be part of the “hard core of the European Union”, while indicating that one of his priorities is to improve border control in response to the influx of migrants.

 

Last update : February 2019

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