Slovenia and the EU at a crossroad –

the changes needed to update the economic model

Ljubljana, 5 June 2015

Martin LöfflerDirectorate-General for Economic and Financial Affairs

Unprepared for the crisis, Slovenia suffered more than peers

…. and investment dropped by 40%

2

75

80

85

90

95

100

105

110

115

02 03 04 05 06 07 08 09 10 11 12 13 14

Rea

l GD

P, 2

008=

100

EA SI V4

Source: Eurostat

55

60

65

70

75

80

85

90

95

100

105

02 03 04 05 06 07 08 09 10 11 12 13 14

Rea

l GF

CF

, 200

8=10

0

EA SI V4

Source: Eurostat

Slovenia's output still 7% below peak level…

From boom to bust to sustainable growth?

3

Slovenia's economic development since the end of the transition

0%

20%

40%

60%

80%

100%

120%

140%

04 05 06 07 08 09 10 11 12 13 14

% (

cum

. sin

ce D

ece

mbe

r 2

004)

Total liabalities

Source: Bank of Slovenia

Burst of bubbles implied high costs for state and economy…

90

100

110

120

130

140

150

160

170

03 04 05 06 07 08 09 10 11 12 13 14

Housing Price Index

Source: Eurostat

House prices plunged

60

80

100

120

140

160

180

200

220

240

260

280

300

03 04 05 06 07 08 09 10 11 12 13 14Slovenian Stock Exchange

Source: DataInsight

The stock index crashed

Int. funding withdrawn

4

…represented a threat to maintaining market access…

5

Increase of refinancing costs

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

09 10 11 12 13

Sov

erei

gn 1

0 ye

ar y

ield

Slovenia Italy

Source: DataInsight

… and brought Slovenia at the verge of requiring a programme

6

The next domino? Markets fret that little Slovenia could be next. (13 April 2013)

Is Slovenia another Spain? The next few months will determine whether Slovenia will be the next EU country to request an international bailout. (7 October 2013)

Stalled reform and poor governance fuel Slovenia bailout talk (25 April 2013)

After Cyprus, is Slovenia next euro zone domino?(10 April 2013)

Slovenia Totters Toward Euro-Crisis Brink(10 April 2013)

Is Slovenia the next Eurozone domino to fall?(5 April 2013)

Excessive credit growth, weak corporate governance and lack of early corrective measures underpin the imbalances

Increasing corporate sector

leverage and distress

High state involvement in the

economy and weak

corporate governance

Large increase in public debt and unsustainability

of debt

Lack of private investment and growth

7

Illustration emerging imbalances

8

Situation stabilised, economy adjusting……but action plan not yet completed (1)

SOE management

Fiscal

• Banking sector profitability improved• NPLs started to decrease (but remain

relatively high)

• Financing cost decreased considerably.• Public debt stabilised (but remains

elevated).• Long-term sustainability improved

marginally.

• 8 companies recently privatised - 5 from list of 15 + 3 others

• Successful privatisation stories attract strategic foreign investors

Progress achieved Adjustments observed

• AQR / stress test completed in Dec 2013 • 5 major domestic banks recapitalised and

restructuring on track• BAMC established and fully operational• Privatisation of NKBM in final phase• Bank regulatory framework reviewed

• Correction of the excessive deficit projected for 2015• Fiscal Rules Act in consultation• 2013 pension reform –white book• Expenditure review in the healthcare sector• Health care/long-term care reform in 2016

• Management and ownership of state owned assets centralised in SSH

• List of 15 SOEs approved by parliament• Asset Management Strategy• New corporate governance code

9

Situation stabilised, economy adjusting……but action plan not yet completed (2)

• Corporate leverage decreased.• Export orientated companies are

performing well.

• Cost and price competitiveness improved.

• Slovenia gained export market shares in 2013 and 2014.

• FDI resumed in 2014.

Progress achieved Adjustments observed

• New insolvency legislation adopted in 2013.• Efficiency of the Courts improved.• Restructuring master plan was set up.• Corporate restructuring task force established.• Restructuring of the most urgent cases and large

corporates well progressed.

• Wage restraint and increased productivity.• Social agreement concluded in Jan 2015.• 2013 labour market reform.• Student work regulation amended in 2014.• Youth guarantee program on track.• Scholarships awarded based on 2014 Scholarship Act.

• 25% of measures in Single document to reduce administrative burden were implemented.

• The number of regulated professions decreased from 323 to 242.

Corporate restructuring

Business environment

2015 Recommendation reflect the outstanding challenges

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BankingEnsure a durable correction of the excessive deficit in 2015, and achieve a fiscal adjustment of 0.6% of GDP towards the medium-term objective in 2016. Adopt the Fiscal Rule Act and revise the Public Finance Act.

Fiscal policy

Healthcare and pension reform

Labour market

Corporate restructuring, SOEs

Judicial

Continue corporate restructuring and maintain strong corporate governance in the BAMC. Take measures to improve access to finance for SMEs and micro companies. Adopt a strategy for the SSH with a clear classif. of assets, implement an annual asset management plan and apply performance criteria.

Ensure that the reforms adopted to improve the efficiency of civil justice help reduce the length of proceedings.

Advance long-term reform of the pension system. By end of 2015 adopt a healthcare and long-term care reform.

Review the mechanism for setting the minimum wage in light of the impact on in-work poverty, job creation and competitiveness. Increase the employability of low skilled and older workers. Provide adequate incentives to extend working lives.

Bring down the level of non-performing loans in banks by introducing specific targets. Improve credit risk monitoring capacity in banks.

Banking and corporate restructuring to be completed

Cash flow capacity and profitability not improving Lending to the real economy remains constrained

11

-1%

1%

3%

5%

7%

9%

11%

07 08 09 10 11 12 13

ROE Net profit margin EBITDA margin (lhs.)

Source: AJPES

-16

-13

-10

-7

-4

-1

2

janv. 12 juil. 12 janv. 13 juil. 13 janv. 14 juil. 14General government HouseholdsCorporates Total loans

y-o-

y %

ch.

and

pps.

Source: Bank of Slovenia

Fiscal challenges remain

Slovenia targets balanced budget in medium-term

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Debt to remain elevated and above 60 % threshold

20

30

40

50

60

70

80

90

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

% o

f G

DP

General government debt

Source: AMECO, Stability Program 2015

forecast

-16

-14

-12

-10

-8

-6

-4

-2

0

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

% o

f G

DP

General government balance

Source: AMECO, Stability Program 2015

forecast

Exit of EDP only first step on journey to fiscal sustainability

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EDP (<3% headline)

MTO (0% SB)

Fiscal sustainability

Pat

h towar

ds fisc

al su

stain

abilit

y

Year

SB targets -2.2% -2.5% -2.4% -1.8% -1.2% -0.6% 0% 0%

2013 2014 2019 ? 2015 2016 2017 2018

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Hvala!