Andrew MacDowall in Ljubljana -

Slovenia’s recovery from its banking crisis just three years ago has been remarkable, on paper at least. In an interview in Ljubljana, Finance Minister Dusan Mramor told bne IntelliNews that the country’s quiet but effective programme of reform, privatisation and fiscal consolidation would continue, despite the political ructions that have seen three successive governments fall before their terms were up. But hold-ups in the sale of the state telecommunications company and political pressures have raised concerns that progress may be slowing.

“I would say very clearly, yes, there were changes, very quick ones,” Mramor said. “However, if you look at the course, it was pretty straightforward. The course was the same all the time – fiscal consolidation, recapitalisation of banks, structural reforms. When the government ran out of steam, a new one came in and continued the same course, and it’s the same with our government – we didn’t stop anything, we just pushed, continued and upgraded.”

Mramor is widely seen as the brains and driving force behind the current Slovenian government, headed by fellow academic Miro Cerar, which came to power in September 2014 after a snap election following the collapse of the administration headed by Alenka Bratusek. Positioning himself as a technocrat with little interest in politics, Mramor served as finance minister previously, between 2002 and 2004.

Little Switzerland

Not too long ago, Slovenia was touted as a “Little Switzerland”, not only for its stunning Alpine scenery, but its relative economic success as the country not just in the former Yugoslavia, but in the wider region. Its citizens had a reputation as doughty and hard working. In 2003, the Economist described “the richest and primmest country" in the region.

But the export-oriented economy was knocked sideways by the global economic crisis. A savage recession in 2009 saw the economy shrink by more than 8%, and was followed by further retreats in 2012 and 2013. In 2013, the country was hit by a serious banking crisis that particularly beset the three largest state-owned lenders: the government’s dominance of the sector (with a 60% share in 2013) is a throwback to Yugoslav times. Rather than Switzerland, the country came to be compared to Cyprus and was heavily touted as being the next Eurozone country to require a international bailout. "There are three kinds of banking – Anglo-Saxon, Islamic and Slovenian," Central Bank governor Bostjan Jazbec said in an interview during the crisis.

But in December 2013, the government announced that Slovenia would finance the €4.8bn banking bailout itself, without recourse to the funds – and policy straitjacket – of the troika of the International Monetary Fund, European Central bank and European Commission. For Mramor, this was particularly significant – Slovenia retained the confidence of the international markets, which has been confirmed several times since by successful bond issues. The economy has rebounded strongly: growth in 2014 was a striking 2.6%, which is almost four points higher than forecast, as Mramor notes.

Meanwhile, the government has continued the programme of fiscal tightening started by the government of Janez Jansa in 2012. “In 2014 our budget deficit including so-called ‘one-offs’ for recapitalising banks was 4.9% of GDP, and without one-offs it was 3.3%, just 0.1 point higher than what was expected. For 2015, we expect to have below 3% of GDP, within the Maastricht criteria.”

The aim is to bring the structural deficit down to zero by 2020. In order to do so, the government has lined up a raft of measures, primarily de-indexisation of public sector wages and spending commitments. The changes introduced in the supplementary budget adopted in February put a strong emphasis on lowering spending rather than hiking taxes: for every unit of increased revenue, it commits to six units of reduced expenditure.

In all, 57 measures were adopted, which Mramor defines as “horizontal” or “vertical”. Horizontal measures cut across the public sector, including rationalisation of management, the procurement process, and office space use. Vertical reforms included the requirement that each government department find areas of waste and “irrationalities” and eliminate them. Other measures included the elimination of tax breaks on student work, which had led both to lower revenues and workforce segmentation.

For 2016 and onwards, Mramor’s goal is to make short-term measures adopted in response to the crises permanent – and where they are not, find savings or revenue-raising measures with the same fiscal impact. Health and long-term care, pension, and educational reform are other areas to be grappled with. “Slovenia has the problem that we retire first, and get into the labour force last,” says the minister.

Then of course there is privatisation in an economy in which the state still plays a remarkably active role. In 2013, before the €4.8bn bailout was announced, the Bratusek government announced the privatisation of 15 companies to help plug the budget gap, including NKBM (the second-largest bank), Ljubljana’s airport, food company Zito – all now sold – and jewel-in-the-crown Telekom Slovenije.

Much attention has focused on this list, but Mramor points out that the country has actually conducted a wide-ranging review of 91 state-owned enterprises for potential privatisation, part-privatisation or restructuring. Some 47 were marked for sale without restrictions, 20 can be part-privatised on the condition that the government retains a 25%-plus-one-share stake and remains the largest shareholder. For the remaining 24, classified “strategic” and concentrated in the energy sector, the government must retain a minimum 50%-plus-one-share stake. As well as the companies being directly sold off by the sovereign holding company (SDH), others once part-owned by state banks have been sold via sales by Slovenia’s bad bank, including retailer Mercator and brewer Lasko.

Doubts creep in

For all the progress made thus far, Mramor’s is a substantial to-do list, and sceptics question whether the government can achieve all it aims to do. Ivan Drazetic, a trader at regional brokerage InterCapital Securities, points out that the 2015-16 reform programme puts a strong emphasis on consensus with trade unions, which are starting to grumble about long-term austerity. There are also downside risks to the fiscal outlook both from GDP growth – expected to trim this year as exports slow and EU funding that has buoyed the economy tapers – and hurdles to privatisation.

On August 4, the SDH announced that it was closing the process of the sale of 72.75% of Telekom Slovenije after the sole bidder, UK-based private equity fund Cinven, pulled out, citing regulatory issues. The holding company said that it would now reassess the management of Telekom’s assets.

Hrvoje Stojic, chief economist covering the region at Hypo Alpe Adria, says that other sell-offs could also face challenges due to the government’s insistence on retaining the largest stake in some companies, including NLB, the largest bank.

Drazetic warns that last year’s above-expectation growth “could be interpreted as a smoke screen trying to cover true structural imbalances – such as lack of private investment”. “The private sector is under-capitalized from the lack of foreign direct investment and in the process of deleveraging,” he tells bne IntelliNews. “Recent growth in investment expenditure was driven by public investment, ie. infrastructure projects financed by EU funds. Low corporate investment translates into lack of productivity growth and lower competitiveness.”

Mramor, inevitably, is more upbeat. He says that private-sector deleveraging and capacity usage has now reached a point that will trigger new investment, while EU funds can be much more efficiently absorbed; even as the cash flow slows, Slovenia can get the same effect for less.

Mramor’s wide-ranging reform package is admirably clear and comprehensive, and the Cerar government seems fairly secure for the time being. The latest resolutions on the Greek crisis – albeit probably temporary – are also upsides. But there is still a long way to go before Slovenia has a balanced budget, a slimmed-down state, and a more competitive, resurgent private sector.