Slovenia's financial stability improving: IMF
The IMF Staff Mission during an Article IV Consultation with Slovenia's Govt said export-led economic recovery in 2014-15 raised employment and private consumption and strengthened Slovenia's external position. Financial stability has improved.
However, decisive policy action is required to address significant constraints to growth and mitigate important vulnerabilities. In particular, further measures to repair balance sheets of small and medium enterprises (SME) would help stimulate private investment.
A comprehensive fiscal adjustment package is needed to reduce public debt, create room to absorb potential adverse shocks, and prepare for coming demographic challenges. Additionally, faster privatization, further strengthening of the governance of state-owned enterprises (SOEs), and an improved business environment would raise potential growth.
Crisis legacies continue to weigh on Slovenia's economy. In the boom years prior to the 2008 global crisis, state banks had imprudently made a number of risky loans.
When the crisis hit, Slovenia's highly leveraged corporations found it difficult to service their debts¸ and banks access to external funding was abruptly cut. Nonperforming loans (NPLs) accumulated on bank books, credit contracted, investment fell sharply, and bank losses mounted.
These effects led to a second recession and a sovereign debt crisis in 2012-13. The authorities subsequently recapitalized major state-owned banks and moved some of their NPLs to a bank asset management company (BAMC).
The bank recapitalization, alongside restored sovereign market access, stabilized the financial system and enabled an economic recovery.
However, still debt-laden company balance sheets, particularly in the SME sector, coupled with extensive state ownership, limit growth opportunities. As a result, Slovenia's GDP and employment remain below preglobal crisis levels, in contrast with its Central European neighbors, whose recoveries have generally been much stronger.
Strong demand in trading partners and large European Union (EU) structural fund transfers buoyed growth in 2014-15, but the outlook is less reassuring.
Rising exports, a spike in public investment financed by EU funds, and a pick-up in private consumption propelled GDP growth to 3.0 percent in 2014 and 2.9 percent in 2015.
While exports and private consumption should continue to be supportive of growth, public investment is likely to fall significantly this year and remain low going forward as EU structural funds are reduced.
The financial and external positions have improved in the last year. Bank capital ratios have strengthened and liquidity is abundant, while profitability turned positive in 2015.