OECD urges Slovenia to accelerate reform

By bne IntelliNews May 4, 2015

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Slovenia managed to achieve 2.6% growth in 2014 and recover from a two-year recession, but the country still needs to implement more reforms in the banking, corporate and fiscal sectors in order to make this growth sustainable, according to a report published by the Organisation for Economic Co-operation and Development (OECD) on May 4.

Slovenia's surprising GDP increase last year was mainly a result of higher public spending on projects financed by the European Union as the government hurries to use up all available funding from the 2007-2013 period before the end-2015 deadline.

In this respect, the OECD report says last year’s expansion could be temporary, unless the government makes further efforts to restructure the banking and corporate sectors, considering the still high volume of non-performing loans (NPLs) and falling credit to enterprises.

"Slovenia’s corporate sector remains highly indebted and the cost of bank lending to corporates is significantly higher than in the euro area on average," the OECD notes.

At the same time, the report acknowledges the progress Slovenia has made since late 2013 when the country narrowly escaped an international bailout after recapitalising its banks by an amount equivalent to 11% of GDP.

The government has also created a national bad bank - the Bank Asset Management Company (BAMC) - which helped clean the banking sector of its toxic assets. The OECD now urges Slovenia to enhance the role of the BAMC as part of the ongoing financial and corporate sector restructuring by transferring more NPLs to the BAMC, and at the same time safeguarding its independence.

The report says that Slovenia needs further fiscal consolidation to bring down public debt after it climbed to over 80% of GDP at end-2014 from just 22% of GDP in 2008. Moreover, longer-term expenditure control remains challenging since the fiscal consolidation has so far relied mostly on one-off measures instead of structural reforms.

"The rapid rise in age-related public expenditure from pensions, health care and long-term care is further complicating future consolidation," the report underlined, adding Slovenia is aging faster than many other OECD countries and therefore needs deeper pension reforms. Otherwise, the aging population will put pressure on the health system, which is also in urgent need of reform.

The OECD pointed out that it is crucial for Slovenia to continue with structural and business environment reforms since unemployment, especially among the young, remains a major concern.

In order to address the above weaknesses, the report urged the government to focus on reforms in education, public administration and local government in order to improve cost efficiency. The government should also invest more in active labour market policies, targeting the long-term unemployed and the low-skilled. It needs to address the regulatory burden and step up its efforts to privatise state-owned firms in order to improve the business environment.

                     Slovenia macroeconomic indicators and projections
growth rates 2014 2015 2016
GDP 2,6 1,8 1,9
Private consumption 0,3 0,3 1,3
Govt consumption -0,5 -0,3 -0,2
Gross fixed capital formation 4,8 2,3 -0,4
Total domestic demand 0,8 0,5 0,6
Exports of goods, services 6,3 5,2 5,5
Imports of goods, services 4,1 3,1 4,4
Potential GDP 1,0 1,3 1,6
Output gap (% of potential GDP) -3,7 -3,2 -2,9
Employment 1,2 0,5 0,4
Unemployment rate 9,7 9,4 9,1
CPI 0,4 -0,4 0,7
Trade balance (% of GDP) 8,1 10,5 11,1
C/A balance (% of GDP) 5,9 7,9 7,8
General govt financial balance (% of GDP) -4,9 -2,9 -2,4
Gross govt debt (% of GDP) 80,9 83,2 85,2
General govt net debt (% of GDP) 23,2 25,5 27,5
Ten-year govt bond yield, average 3,3 1,2 1,1
Source: OECD Economic Outlook, April 2015

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