Slove­nia's fi­nan­cial sta­bil­ity im­prov­ing: IMF

The Pak Banker - - COMPANIES/BOSS -

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.

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