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Saturday, April 13, 2024

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Slovenia

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GDP: USD62.1bn (World ranking 85)
Population: 2.1mn (World ranking 147)
Form of state: Parliamentary Republic
Head of government: Robert Golob (PM)
Next elections: 2026, Legislative

Strengths

  • Good regional and international relations, EU and NATO membership
  • Eurozone membership provides for low transfer and convertibility risk
  • Favorable annual current account balances since 2012 (either surpluses or moderate deficits)
  •   Favorable business environment

Weaknesses

  • Elevated public debt
  • High gross external debt
  • High export dependence on EU business cycle
  • • Significant exposure to tourism inflows

Economic overview

Growth slowdown and elevated inflation

The economic outlook for Slovenia has deteriorated because of the war in Ukraine but the economy has proven more resilient than most peers among the EU member states in Central and Eastern Europe (CEE). Following a strong post-Covid-19 rebound with +8.2% real GDP growth in 2021, economic activity began to cool in H2 2022 amid elevated inflation, rising interest rates, softening external demand and declining business confidence. Full-year growth came in at +2.5% in 2022, however, a recession was avoided. We estimate growth to have come in at about +1.5% in 2023, supported by a strong increase in fixed investment and net exports. Solid tourism activity kept real exports almost stable while real imports plunged, reflecting weak domestic consumption and declining inventories. Looking ahead, growth is forecast at an annual average of +2.5% or so in 2024-2025 on the back of a mild recovery of domestic consumption and continued investment activity, supported by EU funding. External trade activity should also resume, but with import expansion matching exports, the contribution of net trade to overall growth is set to remain small.

Inflationary pressures have been milder than in peer CEE countries but will nonetheless remain on the cards in 2024- 2025. Consumer price inflation rose to a peak of 11.0% in July 2022 and hovered around the 10% mark until March 2023 before falling to 4.2% y/y in December. Owing to strengthening price pressures for recreation, the disinflation path may face some hurdles going forward. We forecast annual average inflation to moderate from 7.5% in 2023 to around 3.8% in 2024 and 3% in 2025, i.e., remaining above the ECB’s 2.0% target for some time. Potential energy price spikes and flood-related adverse effects pose some upside risks to our forecasts.

Robust public and external finances

The Slovenian government’s bailout of the three major banks following the domestic banking sector crisis in 2013 led to a sharp deterioration in public finances. Large fiscal deficits in 2013-2015 pushed up total public debt to 83% of GDP in 2015. But rapid fiscal consolidation and solid GDP growth thereafter brought the debt-to-GDP ratio down to 65% in 2019.

The Covid-19 crisis reversed the positive trend. The government implemented strong fiscal stimulus measures, resulting in fiscal deficits of -7.6% of GDP in 2020 and -4.6% in 2021, followed by a more adequate -3% of GDP in 2022. In 2023, however, the shortfall is estimated to have increased again to almost -4% on the back of increased government spending to tackle the economic fallout from the war in Ukraine and EU sanctions on Russia. Looking forward, the annual deficit is forecast to fall below -3% of GDP in 2024- 2025, thanks to some fiscal consolidation and strong nominal GDP growth. Meanwhile, total public debt has fallen from a temporary peak of 80% of GDP in 2020 to slightly below 70% and is projected to continue to decline moderately in the next few years. This ratio is below the Eurozone average. Moreover, as a member of the EU and the Eurozone, Slovenia benefits from the “Next Generation EU” package.

Gross external debt fell from a peak of EUR47bn (124% of GDP) in 2014 to EUR44bn (92% of GDP) in 2019 but has since risen steadily to EUR57bn as of end-2023 (approximately 92% of GDP) in the wake of the subsequent crises (Covid-19, war in Ukraine). Moreover, the share of public sector external debt stands at just below 60%. However, there are several facts that mitigate concerns about the external debt position: First, only 36% of it is short-term debt. Second, Slovenia became a net external creditor in 2021 and since external assets have continued to rise more strongly than liabilities, the former exceeded the latter by EUR6.7bn at end-2023. Third, the external debt-to-GDP ratio is comparatively low for an advanced economy and, being a Eurozone member, Slovenia can be considered as such. Fourth, external debt of the Slovenian banking sector accounts only for 9% of gross external debt, which is very low for an advanced economy.

Slovenia’s external current account posted a deficit in 2022, after 10 consecutive years of large surpluses, because imports rose much faster than exports as a result of the sharp increase in global food and energy prices in that year. Yet, the annual external shortfall was small at -1% of GDP and has given way to successive and rising monthly surpluses in the first eleven months of 2023, since energy prices have moderated. We forecast annual current account surpluses between +2% and +4.5% of GDP in 2023-2025.

Favorable business environment and low political risk

The business environment for corporates in Slovenia is strong. The World Bank’s annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are business-friendly and the level of corruption is low. The Heritage Foundation’s Index of Economic Freedom survey 2023 assigns the country rank 37 out of some 180 economies (up from rank 48 in 2021), reflecting strong scores with regard to property rights, judicial effectiveness, trade freedom, investment freedom and business freedom. However, weaknesses remain with regard to the tax burden and financial freedom. Concerning environmental sustainability, Slovenia scores less favorably, owing to a low level of renewable electricity output, a moderate recycling rate and a high vulnerability to climate change. However, it does well regarding energy intensity, CO2 emissions and water stress. Overall, Slovenia ranks 84th out of 210 economies in our proprietary Environmental Sustainability Index.

Overall systemic political risk is low. Slovenia is a well[1]established democracy and has good international relations, reflected in its EU, OECD and NATO membership. Broad policy continuity can be expected after national elections. Slovenia’s sovereign creditworthiness is not at risk as all major political parties support fiscal discipline. Lastly, Eurozone membership provides for moderate transfer and convertibility risk in Slovenia.

 

CEOWORLD magazine - Insights - Slovenia