Ljubljana, Slovenia (jaime.silva, CC BY-NC-ND)
The Organization for Economic Cooperation and Development (OECD) said the government should press on with reform of the pension system and increase investment in skills and training. Slovenia introduced pension reform in 2013, with the retirement age being raised to 65 by 2020, but OECD said the retirement age should be raised to 67 for both men and women, from 63 and 61, respectively. “The primary focus of Slovenia’s efforts should be on increasing both the statutory, as well as the effective pension ages,” OECD Secretary-General Angel Gurría said.
The OECD also said Slovenia must improve management of state-owned enterprises and narrow the group of state firms considered as strategic. The government controls about 50 per cent of the economy and 44 per cent of the banking sector. “The budget deficit and public debt have declined as a share of economic output and are on a downward trajectory, but spending pressures will keep rising in the long term if no action is taken,” the OECD said.
Labor market improves
The country’s economic climate began to improve in 2014, after several years of crisis, while the employment rate is increasing. In February 2017, the number of economically active people was 826,206, 0.4 per cent more than in January and 3.0 per cent more than in February 2016. At the end of March 2017, the number of registered unemployed was 95,189, 6.1 per cent less than in February and 13.6 per cent less than in March 2016. The unemployment rate has been falling year-on-year since July 2014. In February 2017, the national registered unemployment rate was 10.9 per cent, 1.7 percentage points fewer than in February 2016.
According to internationally comparable figures from the Labor Force Survey, Slovenia’s unemployment rate in the Q4’16 was 8.1 per cent.
Fitch gives Slovenia bill of health
In late August, Fitch Ratings said it had affirmed Slovenia’s long-term foreign- and local-currency issuer default ratings (IDRs) at ‚A-‚ with a stable outlook. „Slovenia’s ‚A-‚ ratings are supported by a high value-added economy and high GDP per capita relative to the ‚A’ peer median,” Fitch said in a statement. The ratings agency noted it has also raised its expectation of real GDP growth in Slovenia to 3.4 per cent in 2017 and 3.1 per cent in 2018.
The ratings are constrained by a high level of government debt (78 per cent of GDP in 2017 vs. 49 per cent for the ‚A’ peer median), Fitch said. Net external debt of 17 per cent of GDP in 2017 is also higher than the ‚A’ peer median of 2 per cent, but is declining quickly due to strong current account surpluses (5.3 per cent of GDP in 2016).
The acceleration in GDP growth from 2.5 per cent in 2016 will be driven by higher investment, supported by a ramp up in EU funds’ disbursements and a recovery in banks’ lending to corporates after several years of debt deleveraging, Fitch said. Growth will also benefit from a mutually reinforcing improvement in the labor market.
Fitch expects the government deficit will decline to 1.1 per cent of GDP in 2017 from 1.8 per cent in 2016 as the budget benefits from strong growth in revenues related to the improved macro environment.
“The upcoming 2018 general election poses some risk of fiscal slippage. The agency believes this risk is mitigated by the recent appointment of an independent fiscal council, which should contribute to increased compliance with the national fiscal rules. Fitch expects the deficit will remain around 1 per cent of GDP through 2019,” Fitch said.
Fitch expects government debt to decline to 73 per cent of GDP by 2019 from 79.7 per cent in 2016 primarily thanks to tighter deficits. Based on Fitch’s long-term projections, debt will decline to 68.0 per cent by 2026.
Banks’ shock resistance improves
The average capital ratio of Slovenian banks was 20.7 per cent in March 2017. Non-performing loans were down to 7.7 per cent in May from 8.5 per cent at end-2016 and 14.2 per cent in June 2015.
After a long period of debt deleveraging, banks’ credit to the non-financial corporate sector is growing again, at +5.8 per cent y/y in June, although longer term loan growth prospects remain uncertain, Fitch said.
Slovenia has recorded strong current account surpluses in recent years, primarily reflecting sharp debt deleveraging and the associated fall in investment level as well as stronger exports supported by a fall in unit labor cost.
Fitch said it expects the coalition government to hold until the June 2018 general election and that major structural reform, including of pensions, is unlikely in the run-up to the election.