1. EXECUTIVE SUMMARY

Political outlook 

There is pressure for early elections after the coalition between Prime Minster Janez Jansa’s right-wing Slovenian Democratic Party (SDS) and several small centre-right parties split. A no-confidence vote was only averted by coronavirus cases among MPs. Jansa faces protests and international criticism over recent efforts to extend the government’s grip on the media. 

Macroeconomic outlook 

A recovery is projected for 2021 and the economy is expected to return to its end-2019 level in 2022. Priorities for Jansa’s government are to win the fight against the coronavirus epidemic and revive the economy after the deep contraction in 2020.

Budget and debt outlook 

Lost revenues and measures taken to support the economy caused a substantial deficit in Slovenia’s public finances. The situation will improve over 2021 and 2022. The EU stimulus plan will also contribute to high public sector consumption and investment over the projection period. 

Real economy outlook 

Export-oriented sectors are expected to benefit from stronger EU demand from 2021, but the outlook is highly uncertain.

Government support for households and businesses most affected by the crisis, in particular the tourism and entertainment sectors, should continue. 

Markets outlook 

The outlook for 2021 is uncertain but the emergence from the pandemic should cause a revival in Slovenian stock prices. 

 

2. POLITICAL OUTLOOK 

There is growing popular opposition to Prime Minister Janez Jansa’s government, fuelled by what critics see as creeping authoritarianism. 

On December 17, the smaller coalition partner, Pensioners' Party (DeSUS), part of the four-party government, decided to leave the cabinet. DeSUS’ decision left the Jansa government with three coalition partners and 46 MPs, giving it a wafer-thin majority in the 90-member parliament.

The opposition, led by DeSUS, sought to force a confidence vote in January but this was temporarily shelved when several MPs fell ill with coronavirus. 

The government’s primary focus has been and remains fighting the coronavirus pandemic. Slovenia was the first country to declare itself “corona-free” in May, but it experienced a strong and deadly second wave of the virus from October.

Since the outbreak of the pandemic, Slovenia, a country of just over 2mn people, had registered over 93,000 positive cases and around 2,000 deaths as of December 11. Vaccination started in the second half of December and will continue in the new year. 

The current government led by Jansa came to power in March 2020, following the resignation of Marjan Sarec.

After DeSUS left the government in December, the 16-member cabinet now is composed of Jansa’s Slovenian Democratic Party (SDS), the Modern Centre Party (SMC) and New Slovenia (NSi).This is Slovenia’s 14th government since its independence from former Yugoslavia in 1991, and the third led by 61-year-old Jansa, a divisive figure in Slovenian politics.

The opposition launched peaceful protests immediately after the installation of the new government, which are held every Friday in the capital Ljubljana and have spread to other cities. 

They started during the first lockdown when people were protesting from their balconies, then took to the streets as restrictions were lifted from the end of April. Protestors are seeking snap elections and the resignation of Jansa, whom they accuse of corruption, mismanagement of the coronavirus pandemic, lack of media freedom, increased army spending, tax reforms and “Orbanisation” of the country — Jansa is a close ally of Hungary’s authoritarian Prime Minister Viktor Orban. 

In June and November protests turned violent and demonstrators clashed with the police. On November 5, the police used water cannon for the first time since 2012 to disperse the protestors. Ten people were arrested and several were injured.

Numbers at the protests are not huge, but they are sending a clear sign that part of the population favours snap elections. The next regular general elections are due in 2022.

According to the latest poll conducted in November 2020 by Mediana, the SDS is leading with 16.5% support, followed by the opposition Social Democrats (SD) on 11% and the List of Marjan Sarec on 10.8%.

Controversial media reforms initiated by the government have added to public dissatisfaction, and the debate will continue into 2021. 

The reforms foresee major financial cuts for state-run broadcaster RTV Slovenija and news agency STA, and more government control over the media. They drew strong criticism from local media, the European Broadcasting Union (EBU) and trade unions, and also sparked street protests. STA said that its operations have been endangered after the government suspended funding.

The International Press Institute (IPI) said in September that a swift downturn in press and media freedom has been observed in Slovenia since the new government came to power.

In November, MEPs held a debate on Hungarian media financing in Slovenia and North Macedonia, and asked the European Commission to take concrete measures against this practice.

Slovenian MEP Irena Joveva accused the government of seeking to turn Slovenia into an illiberal society without public support. The government is endangering the media and forming parallel structures funded by Orban to undermine the fundamental values of the EU, Joveva claimed. 

 

3. MACROECONOMIC OUTLOOK 

In the first nine months of 2020, Slovenia’s GDP fell by 6% compared to the same period last year, while the European Commission is projecting a 7.1% GDP contraction for the whole of 2020.

A recovery is projected for 2021 and the economy is expected to return to its end-2019 level in 2022. Public finances are forecast to be in deficit in 2020, due to lost revenues and the measures taken to support the economy, but to improve over 2021 and 2022 together with the recovering economy, according to the European Commission.

Government spending and household consumption will maintain the recovery until the end of 2021, with sustained government transfers and confidence strengthening assuming an effective vaccine rollout. 

The EU stimulus plan will also contribute to high public consumption and investment over the projection period. As the economy is highly integrated into EU value chains, the export-oriented sectors will benefit from stronger EU demand from 2021. 

Following a projected economic contraction of 7.1% in 2020 — mainly due to the imposition of virus containment measures and disruptions in global supply chains — the European Commission expects Slovenia’s economy to recover from the second quarter of 2021 and continue into 2022, with the economy growing by 5% and 3.8%, respectively. 

However, the outlook is highly uncertain. A further significant deterioration of the health situation could lead to prolonged restrictions that would stall the economic recovery. Continued weak external demand remains another key risk for growth. On the other hand, a bolder recovery in Europe thanks to a rapid rollout of an effective vaccine would lift growth prospects.

As a small, open economy, Slovenia is highly exposed to economic developments in its key trading partners, particularly the large economies in the Eurozone.

Investment and exports will be the main engines of growth thanks to higher demand in trading partner countries amid improvements in the epidemiological situation.

Harmonised index of consumer prices (HICP) inflation is seen at 0.9% in 2021.

Slovenia is expected to post a surplus in the current account balance of 4.4% of GDP in 2021 compared to 5% of GDP in 2020.

Private consumption in Slovenia is projected to be strong, although the household saving rate is expected to remain elevated in 2021 and slightly above its pre-crisis level even in 2022. Public consumption growth is seen at 5.4% in 2021 compared to the 7.8% contraction in 2020.

Investment growth will support the large public investments and the recovery of private investment, particularly in machinery and equipment. 

Net exports are expected to contribute positively to the GDP growth in 2021. Exports are seen rising 7.6% in 2021 after the estimated 13.1% contraction in 2020, while imports are projected to grow 7.9% in 2021, compared to a 12.4% drop in 2020.

Public investment growth presents a positive risk to the projection, should new EU resources be used faster than expected, whereas uncertainties related to the evolution of the pandemic constitute a negative risk, according to the European Commission.

Moody’s noted significant and lasting improvements to the health and functioning of Slovenia's banking system. These improvements are reflected in the significant reduction of non-performing loans (NPLs) in the Slovenian banking system, which were the main legacy of the previous financial crisis. 

According to data from the European Banking Authority, the system-wide NPL ratio declined from 13.3% in June 2017 to 3.5% in March 2020, following a series of loan repayments, NPL sales and write-offs. 

The capitalisation levels of the Slovenian banking system have remained above the EU average, although the excess capital in the country's largest banks has been reduced owing to recent acquisitions. 

However, the coronavirus crisis has also led to a deterioration of the banks' operating environment. As a result, the banking sector's profitability has declined, owing to higher forward-looking loan loss provisions.  Moody's expects that asset quality deterioration will only materialise into 2021, once the economic and employment consequences of the pandemic become visible and the statutory loan moratorium ends. However, the rated banks' overall credit profiles should be resilient against the background of a deteriorating operating environment.

 

4. BUDGET AND DEBT OUTLOOK 

Slovenia’s budget deficit for 2021 is planned to reach €2.75bn, equal to 5.6% of the country’s GDP. In the draft budget for 2021, Slovenia plans revenues of €10.72bn, down by 3.5% from the previous budget.

Expenditures for 2021 are planned to reach approximately €13.47bn or 28.8% more than in the previously adopted budget. The government said that the budget was prepared in unpredictable circumstances, and is development-oriented, while at the same time maintaining concern for the wellbeing of the population.

Once the pandemic subsides, the government will need to consider reforms to tackle spending pressures on public finances from population ageing.

Moody’s expects the government debt ratio to resume its downward trend in 2021. In the four years preceding the outbreak of the coronavirus pandemic, Slovenia recorded the fastest reduction of its government debt burden of any EU member state bar Ireland.

Slovenia’s general government deficit is set to decrease to around 6.4% of GDP in 2021 from 8.7% in 2020. Around 0.2 of a percentage point of the deficit in 2021 is expected to be eventually financed by the Recovery and Resilience Facility.

Due to a large general government deficit in 2020, a severe drop in GDP and the impact of the pre-financing needed for bond redemptions at the beginning of 2021, the debt-to-GDP ratio is expected to fall to 80.2% in 2021 from 82.2% in 2020.

 

5. REAL ECONOMY OUTLOOK 

Export-oriented sectors are expected to benefit from stronger EU demand from 2021, but the outlook is highly uncertain, as a further significant deterioration of the health situation could lead to prolonged restrictions that would stall the economic recovery, according to the OECD. Funding from the EU's Next Generation EU instrument will provide a boost to investment rates and growth potential over the medium term.

The country retains a competitive and diversified goods export base in areas such as pharmaceuticals, automotive and electrical appliances which Moody's expects will not be structurally weakened by the current crisis. 

Despite the pandemic, several major companies in Slovenia are investing. In the manufacturing sector, Slovenian household appliances maker Gorenje, owned by China’s Hisense, plans to open a new TV factory in January 2021. This will create around 350 new jobs, employing many of the workers laid off from other Gorenje businesses in a round of restructuring in 2020. 

Following a bond issue in November, Slovenia’s largest steelmaker Slovenska Industrija Jekla (SIJ) is planning long-term investments in production technology, including environmental protection and energy efficiency technology. 

Glass maker Steklarna Hrastnik also plans to launch a new investment cycle, which was postponed due to the coronavirus pandemic, and is aimed at introducing additional automation, digitisation and robotics in the next two years.

Government support to households and businesses most affected by the crisis, in particular in the tourism and entertainment sectors, should continue. However, the governance of state-owned enterprises should be improved to increase value for public money.

Prolonged wage support is needed in the tourism and entertainment sectors. Slovenia's tourism industry will continue to suffer from weak external demand during the pandemic. 

Still, as tourists return to the region, the new passenger terminal at Ljubljana airport will be ready for use in summer 2021. The construction of the new terminal, which started in mid-July 2019, represents a strategic investment worth more than €20mn and is seen as crucial for the long-term development of the airport. 

Investments are also underway in the retail sector. In 2020, Austrian real estate developer Supernova launched construction works worth €70mn to expand its Supernova Ljubljana Rudnik shopping centre in the Slovenian capital. With the expansion, the mall will become the largest in Slovenia. Swedish furniture giant Ikea is expected to open its first store in the Slovenia in early 2021, a slight delay on earlier plans to launch in 2020. 

In the energy sector, Slovenia and neighbouring Croatia, which share the Krsko nuclear power plant, are still mulling options for the plant’s future. 

Slovenia has been a strong proponent of environmental protection. Petrol Group has developed or is developing 200 MW of wind and solar energy projects to provide clean energy for 100,000 households. It will put a 30-MW wind park in neighbouring Croatia into operation in April. GEN-I, the local operation of the regional power group, will allow households and firms to buy power produced only from carbon-free sources from January.

Meanwhile, investment by London-listed oil and gas company Ascent Resources at the Petisovci gas field has stalled after the Slovenian authorities refused to grant a permit for the use of hydraulic fracturing (fracking) to boost production at the field. Ascent launched a lawsuit against Slovenia in September 2020.

In 2021, employment in Slovenia is projected to increase only slightly, by 0.5%, following a 0.9% decline in 2020, as firms first increase the hours worked of retained workers. The jobless rate is forecast to fall to 4.8% in 2021 from 5% in 2020, according to the European Commission. 

According to Slovenian statistics office data, the net wage in Slovenia totalled €1,169 in September, up by a real 6.1% y/y. Slovenia’s jobless rate increased by 1 pp from a year earlier to 5.2% in the second quarter of 2020.

 

6. MARKETS OUTLOOK 

The Slovenian blue-chip index SBITOP decreased 3.6% since the end of 2019 standing at 893.01 on December 4. The index was moving up above 900 points in the first two months of 2020, reaching 983.96 on February 19, the record high last year, just to start falling rapidly since March 11 with the coronavirus outbreak.

In 2020, the index recorded the lowest level on March 23, falling to 685.52 points. However the biggest turnover was registered in March and April 2020 of €8.7mn and €4.2mn respectively.

In line with developments on international markets, the index rallied in November as news of successful vaccine trials broke. Movement should be broadly positive once the post-pandemic recovery gets underway.