20140923-NATIXIS-Slovenia_is_back_on_the_growth_path,_but_the_overall_situation_remains_fragile_15页_427kb

Summary of FLASH ECONOMICS ECONOMIC RESEARCH - September 23, 2014 - No. 714

Core Content

Slovenia is showing signs of recovery from a financial crisis, but the overall economic situation remains fragile. The country has managed to restore its banking sector without seeking international financial assistance, but this has led to fiscal tightening and political instability.

Main Points

• Banking Sector Recovery:

  • Non-performing loans (NPLs) in Q3 2013 were 18% of total loans, with the three largest banks (NLB, NKBM, Abanka) having a higher ratio of 21.6%.
  • A EUR 3 billion recapitalisation plan was launched in December 2013, using budgetary resources (2.1 billion) and bond issuance (0.9 billion).
  • EUR 2.8 billion was transferred by the end of 2013, significantly increasing the fiscal deficit.
  • The bail-in rules were applied, requiring shareholders and junior creditors to absorb EUR 441 million in losses.
  • A bad bank, BAMC, was established to buy non-performing loans, with EUR 3.3 billion transferred from NLB and NKBM to BAMC.
  • NPLs fell to 13.3% in 2013 but rose slightly to 14.6% in Q1 2014.
  • The government plans to privatise Abanka and NKBM, with the latter already in the privatisation process.
  • The privatisation of Telekom Slovenije and Ljubljana airport is controversial, with Miro Cerar opposing it initially but reconsidering due to budgetary needs.

• Economic Growth:

  • Despite weak private domestic demand, growth is expected to be higher than 2% in 2014, driven by public construction projects and improved macroeconomic conditions.
  • The upward revision of national accounts in early 2014 contributed to this positive outlook.
  • The government's fiscal consolidation and structural reforms are seen as critical for sustainable growth.

• Political Instability:

  • The previous government faced a political crisis due to fiscal tightening, leading to the resignation of the Prime Minister in May 2014.
  • Early general elections were held in July 2014, with Miro Cerar forming a new coalition government.
  • His programme remains vague, particularly regarding privatisation, which could lead to social unrest or political instability.

• Public Finances:

  • The fiscal deficit in 2013 was 14.7% of GDP (4.4% excluding recapitalisations), exceeding the target of 3.8%.
  • The government expects a deficit of 4.1% in 2014, with 0.9% attributed to bank recapitalisations.
  • The goal is to reduce the deficit to 2.4% of GDP by 2015, but this is considered challenging due to political and economic uncertainties.
  • The privatisation programme is a key source of revenue for fiscal consolidation.

• Market Reaction:

  • The measures taken were well received by investors, reflected by a decline in 10-year sovereign interest rates.
  • However, the impact on public finances is significant, and the government is under pressure to balance its budget.

• Private Banks and Companies:

  • Five private banks were given until June 2014 to strengthen their capital, with three completing the process.
  • Gorenjska Banka received an extension, while Banka Celje was absorbed by Abanka.
  • Two smaller banks (Probanka and Factor Banka) were recapitalised with EUR 445 million.
  • The privatisation of public companies is seen as essential for long-term economic reform and reducing the state's role in the economy.

• Economic Components:

  • Investment growth in 2013 was positive (+1.8%) due to public construction projects.
  • Private investment remains moderate, and the upturn in investment is expected to be gradual.
  • Private consumption fell by 4.0% in 2013 due to higher tax burdens and reduced welfare transfers, but showed slight recovery in early 2014.
  • The labour market remains under pressure, limiting employees' bargaining power and wage growth.
  • Inflation has slowed, which supports household purchasing power, but is expected to rise slightly in 2014 and 2015.

• Foreign Trade:

  • Foreign trade remains the main growth engine, especially with European partners.
  • The competitiveness gains from reduced unit labour costs and the modest share of agri-food exports to Russia limit the impact of geopolitical tensions on Slovenian exports.

Key Information

• Fiscal Deficit:

  • 2013: 14.7% of GDP (4.4% excluding recapitalisations)
  • 2014: Expected to be 4.1% of GDP
  • 2015: Target is 2.4% of GDP

• Bank Recapitalisation:

  • Total: EUR 3 billion
  • Public resources: EUR 2.1 billion
  • Bond issuance: EUR 0.9 billion
  • Bail-in: EUR 441 million

• Non-Performing Loans:

  • Q3 2013: 18% of total loans
  • End of 2013: Reduced to 13.3%
  • Q1 2014: Rose to 14.6%

• Privatisation Plan:

  • 15 companies are scheduled for privatisation, including major banks and state-owned enterprises.
  • Revenue from these sales is expected to be significant, with Telekom Slovenije potentially raising EUR 750 million.

• Political Uncertainty:

  • The new government under Miro Cerar faces challenges in forming a stable coalition and implementing structural reforms.
  • There is a risk of social unrest if privatisation plans are opposed or if new austerity measures are introduced.

• Economic Outlook:

  • Growth in 2014 is expected to be higher than 2%, but the recovery remains fragile.
  • The European Commission is cautious about Slovenia's ability to meet deficit targets and exit the excessive deficit procedure in 2015.

Conclusion

Slovenia is on a path to recovery, but the process is marked by fiscal and political challenges. The banking sector has seen significant improvements, but the sustainability of these gains depends on the continuation of structural reforms. The privatisation programme is a key tool for fiscal consolidation, but its implementation is politically sensitive. Economic growth is expected to be driven by foreign trade and public construction, but private demand and investment remain weak. The country's ability to meet its fiscal targets and maintain stability is under scrutiny, with potential risks from both political and social unrest.