Sluggish in Slovenia

By bne IntelliNews March 22, 2011

Kester Eddy in Ljubljana -

At the entrance of Tezno Zone industrial park, two German-registered artic lorries, snorting power, heave their loads towards the nearby motorway and their ultimate destination, a car plant in the German state of Baden Wurttemberg.

An everyday sight, perhaps, but one that Gorazd Bende, director of the Zone, in Maribor, Slovenia's second city, never takes for granted. "When the economic crisis hit in 2008, orders for auto components in particular collapsed overnight. It hit many manufacturers here, and around the country, very hard," he says.

As a result, the park, which had hosted almost 3,700 jobs that summer, rapidly shed 400 work places, and many that remained were reduced to temporary status.

Since the nadir of 2009, job numbers have inched up to around 3,450, and a dozen new companies established - although the majority are small or micro operations. Redundancies, however, are far from over; the construction sector in particular is still in turmoil - according to the EU statistical office Eurostat, output in January was down 17% year on year - and the recovery remains patchy and fragile, Bende cautions. In particular, many companies are facing liquidity problems due to debt queuing, he says.

The majority of Tezno Zone tenant companies are in engineering and manufacturing - and mostly private to boot. Despite this rather restricted profile, the Zone in many respects is a mirror of the Slovene economy, which, after more than a decade of consistent growth, contracted by a massive 8.1% in 2009, one of the hardest hit of all the countries in the CEE region.

As in the Zone, the broader economy has experienced only a limited recovery. "Growth was below [the EU] average in 2010, as GDP expanded by only 0.8%. This year it should pick up to somewhere around 2%, but this is a result of our exports being tied to western Europe, particularly Germany," says Saso Stanovnik, head of research at Alta Invest, a Ljubljana-based investment house.

Yet data released on March 16 revealed unemployment nationwide at 12.3% in January, with 115,000 out of work - 5,000 more than in December and the worst jobs figure for a decade.

Given that the economy expanded by more than 4.0% annually for 10 years prior to the crisis, providing Slovenes with the most affluent lifestyles of any in the former Socialist bloc, why is the recovery - now under the control of a left-leaning coalition led by Prime Minister Borut Pahor - so sluggish?

State interference

In many ways, the global crisis only hastened what would have been an inevitable correction in what was an unsustainable economic model, most particularly in the form of state ownership of large parts of the economy.

"Slovenia is a case study of [the downside] of government involvement in big companies, with too many managers appointed because of political ties," , says Stanovnik. "This clearly shows up in bad corporate governance, avoidance of cost rationalisation and cost management, strategies that never get carried through, and too many business decisions [for political reasons] that are not economically justified."

Slovenia also suffers from what he terms a "relatively bad entrepreneurial culture," in which new businesses, eager for growth, struggle with generous labour laws while supporting a large, expensive public sector. Meanwhile, smaller growth companies are largely ignored by the banks, which focus primarily on big corporations, while government is all too often preoccupied with distressed companies and industries. "So while economic downturns logically mean the end of some companies, new companies are only slowly being created. Any solution needs reforms and, even more, changes in peoples' mentality," he says.

Stanovnik is far from alone in harbouring such criticisms. In its economic survey of Slovenia, published in February, the Organisation for Economic Co-operation and Development (OECD) voiced much the same concerns and more, urging, amongst other things, the government to quickly address growing macro imbalances, reform of the education system and trim further what it sees as a far-too-generous pension system, even if proposed reforms are implemented.

In addition, the survey stressed the need to improve economic competitiveness, primarily by making transparent, if not privatising, the state interests in the banking and commercial sectors, and more actively encouraging foreign investment. "The state's ownership share is one of the highest in the OECD and it indirectly controls many of the country's largest listed companies. Moreover, the state also has not always been an effective shareholder. These features have inhibited productivity growth and foreign investment in the sectors the state most heavily influences," the survey notes.

Meanwhile, in 2009 the stock of foreign direct investment (FDI) stood at only 20% of GDP, compared with around 55% of GDP in Hungary and the Czech Republic. And though Slovenia is open to foreign investment in theory, in practice numerous factors discourage inward flows - which is reflected in less-than-ideal productivity rates in many sectors - the survey notes.

Whether the OECD recommendations will have any impact is an open question.

Tezno Zone's Bende, while personally keen on foreign investment, says most Slovenians are not enthusiastic. "We know that companies with FDI generally perform better, but Slovenians do not really like foreign investors. While I know there are good examples, such as Renault [the French auto maker], there have been some controversial cases, such as Lafarge [the French cement maker], and the public remember these," he says.

Alta's Stanovik is similarly sceptical, noting that the current effort by Pivovarna Lasko, the Slovenian brewery and food group, to sell a stake in Mercator, Slovenia's largest retailer, has attracted some classical old-style thinking. "It seems politicians against [genuine privatisation] are back. They went even so far to suggest a state fund should bid for this stake, thereby increasing the state's interest in yet another blue chip - directly contradicting the OECD recommendations."

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