EUROPEAN COMMISSION Brussels,7.3.2018 SWD(2018) 222 final COMMISSION STAFF WORKING DOCUMENT Country Report Slovenia 2018

Including an In-Depth Review on the prevention and correction of macroeconomic imbalances

Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2018) 120 final}





Contents Executive summary 1.Economic situation and outlook 2.Progress with country-specific recommendations 3.Summary of the main findings from the Macroeconomic Imbalance Procedure In-Depth Review 4.Reform priorities 4.1.Public finances and taxation 4.2.Financial sector 4.3.Labour market, education and social policies 4.4. Investment Annex A: Overview Table Annex B: Macroeconomic Imbalance Procedure Scoreboard Annex C: Standard Tables References LIST OF Tables Table 1.1:Key Economic Indicators Table 2.1:Summary Table in 2017 CSR assessment Table 3.1:Macroeconomic Imbalance Procedure assessment matrix

Table 4.2.1:Financial soundness indicators, all banks in Slovenia Table 4.4.1:Construction is expensive Table B.1:The Macroeconomic Imbalance Procedure scoreboard for Slovenia (AMR 2018) Table C.1:Financial market indicators Table C.2:Headline Social Scoreboard indicators Table C.3:Labour market and education indicators Table C.4:Social inclusion and health indicators Table C.5:Product market performance and policy indicators Table C.6:Green growth LIST OF Graphs Graph 1.1: Contributions to GDP growth Graph 1.2: Development of public and private investment Graph 1.3: Investment by type Graph 1.4: Contribution to potential growth Graph 1.5: Export market shares change with contributions Graph 1.6: Real effective exchange rate based on unit labour costs Graph 1.7: Net international investment position - by sector Graph 1.8: Debt decomposition Graph 1.9: House price developments

Graph 2.1: Overall multiannual implementation of 2011-2017 CSRs to date Graph 3.1: Non-performing exposure of domestic banks (including foreign-controlled subsidiaries and branches) Graph 3.2: Arrears developments Graph 4.1.1: Gross debt - DSA Graph 4.1.2: Alcohol, overweight and obesity problems are greater in Slovenia than in most other EU countries Graph 4.2.1: Year-on-year credit growth, adjusted for sales and securitisation Graph 4.2.2: Trends in non-performing loans, including BAMC assets Graph 4.2.3: Share of forborne loans that are performing (end-June 2017) Graph 4.2.4: Annual value of private equity investments in selected Central and Eastern European countries in 2013 to 2016 (million euros) Graph 4.3.1: Activity, employment and unemployment rates (annual) Graph 4.3.2: Decomposition of rate of change of unit labour costs Graph 4.4.1: Labour productivity in Slovenia and the euro area, 1999-2016 Graph 4.4.2: Labour productivity in 2010 and its average annual growth (2008-2016) Graph 4.4.3: Value added per employee, in EUR 1000, Manufacturing sector Graph 4.4.4: Value added per employee, in EUR 1000, Services Graph 4.4.5: Annual TFP for small, medium and large firms Graph 4.4.6: Annual TFP for zombie v.non-zombie firms Graph 4.4.7: Education and literacy skills Graph 4.4.8: Business environment Graph 4.4.9: Innovation and R&D

Graph 4.4.10: Business and public R&D intensities in Slovenia (% of GDP), 2007 – 2015 Graph 4.4.11: Impact on labour productivity in manufacturing of tackling restrictions in the service sector (measured by using the Service Trade Restrictiveness Index (SRRI) LIST OF Boxes Box 2.1: Tangible results delivered through EU support to structural change in Slovenia Box 4.2.2: Policy highlight: improving the access to finance Box 4.3.3: Monitoring performance in light of the European Pillar of Social Rights Box 4.4.4: Investment challenges and reforms in Slovenia Box 4.4.5: Drivers of productivity growth at firm level Executive summary Slovenia's successful rebalancing sets the ground for addressing medium and long-term challenges. The sources of imbalances that led to the deep crisis of 2012-2013 have rapidly receded, also due to sustained policy action. The economy is now growing robustly. Addressing remaining weaknesses in the banking and corporate sector, unleashing investment and productivity growth and reforming the pension, health and long-term care systems remain key priorities to put the economy on a dynamic and sustainable growth path. () Slovenia is getting on a balanced growth path. In 2012-2014, the country suffered from serious problems in the banking sector and embarked on a painful corporate deleveraging process. The economy rebalanced rapidly afterwards, also helped by the well-designed policy measures, and since 2016 it has enjoyed sustained growth. Slovenia has maintained its price-competitiveness and the improving external environment is clearly reflected in the growth of exports. The expected account surplus is 5.9 % of GDP in 2017 and the net international investment position improved. The labour market is strengthening. Employment continued to rise, unemployment further decreased and labour shortages increased. The tightening labour market is putting some upward pressure on wages, but wage growth remains moderate and in line with productivity developments. Due to positive economic developments the rate of people at risk of poverty and social exclusion continued to decrease. The sources of imbalances have been reduced in a sustainable manner. The banking sector is improving due to better solvency, profitability and asset quality. Non-performing loans declined by almost a third in 2017 compared to 2016. Credit growth has turned positive and investments are expected to drive Slovenia’s economic growth in 2018 and 2019. Government finances are expected to be in balance in 2018. Public debt continues to decline and is expected to reach 72 % of GDP in 2019, 10 percentage points below its peak in 2015. This positive outlook opens up opportunities to increase the growth potential of the economy. Labour productivity growth in Slovenia has fallen over the past 15 years as a result of both cyclical and structural factors. Due to ageing, the labour force is shrinking. Investment and technological progress will therefore be crucial to the country’s future growth. There remain major long-term challenges linked to the ageing of the society. Expenditure on public pensions, health care and long-term care puts large pressure on the public finances in the long term. Slovenia has made some ( ) progress in addressing the 2017 country-specific recommendations. Political consensus, including with social partners, regarding the path towards pension reform has been reached. Some laws on reforms to the healthcare sector have been adopted while the key legislation (Health care and health insurance Act) has not been adopted yet. A proposal for reforming the long-term care has been publicly consulted but not yet put forward. Aggregated procurement is being used more widely in the healthcare sector. Some measures to increase employment of older and low-skilled workers were adopted. Significant work has been done to achieve the durable resolution of non-performing loans. The new legislative package to improve the planning and building process will also be in force from mid-2018. Supported by EU funds and the European Fund for Strategic Investments, new alternative financing sources have been developed recently. Regarding progress in reaching the national targets under the Europe 2020, Slovenia has already achieved or is well on track to achieving its national targets for early school leaving rates, tertiary educational attainment, energy efficiency and greenhouse gas emissions. The employment rate (ages 20-64) increased by 1 percentage point to 70.1 % in 2016, moving closer to the 75 % target. The number of people at risk of poverty and social exclusion declined further in 2016, but it is still above the 2008 level. On the negative side, Slovenia moved further away from its R&D intensity target.

Slovenia performs relatively well on the indicators of the Social Scoreboard supporting the European Pillar of Social Rights. Income inequalities are low. The risk of poverty and social exclusion has decreased over the last years. However, old-age poverty still prevails. Despite improvements in labour market outcomes, the employment rates of older workers and low-skilled remain low. Outcomes are strong on education and training. The main findings of the in-depth review contained in this report, and the related policy challenges, are as follows: ·The banking sector has been strengthened. The non-performing loans ratio declined by almost a third in 2017. Banks are profitable, well capitalised and have a favourable funding structure. The reserves put in place by the banks to cover the potential losses on the remaining non-performing loans are increasing. In March 2017, a toolkit to prevent, identify and manage non-performing loans was issued by Bank of Slovenia. Remaining challenges are the continued monitoring of the restructured loans (the re-default rate was 27 % in March 2017) and the long-term profitability of banks given the current low interest environment. Privatising the NLB remains essential to prevent possible future credit misallocation and ensure its long-term viability. ·Deleveraging in the corporate sector appears to have been completed and investment is growing. Since its peak at 115 % of GDP in 2010, private sector debt decreased to 81.4 % in 2016. Household and corporate credit is now growing robustly. Private investment growth accelerated to 5% in 2016, supported by an increase in inward foreign direct investment. Nevertheless, the level of private investment, including foreign direct investment in Slovenia remains relatively low compared to peer countries. It therefore continues to pose a challenge for the economy. ·Public debt decreased to 78.5 % of GDP in 2016. The debt ratio is declining on the back of strong nominal GDP growth and a reduction in the general government deficit. However, long-term sustainability remains a major challenge, as an ageing population is set to put considerable pressure on public finances. The legislation concerning pensions, the stable financing of the healthcare system and the reform of the long-term care system, which would address these problems, have not yet been adopted. Other key economic issues analysed in this report which point to particular challenges facing Slovenia’s economy are as follows: ·The labour market continues to face challenges. The activity and employment rates of older workers remain among the lowest in the EU. Adult learning, although still slightly above the EU average, has been falling for the last seven years. Evaluation of active labour market policies shows that the majority of programmes are performing well. However, the participation rate of unemployed in the programmes is low. ·The healthcare system needs stable funding and its efficiency needs to be improved. The healthcare system provides good outcomes but the ageing population is putting it and the longterm care system under strain. Therefore, increasing efficiency, including by aggregated procurement, is important to ensure the long-term sustainability of public finances and continue providing high-quality care. If adopted, the Healthcare and Health Insurance Act would help achieve this objective. ·The business environment and access to finance have improved but challenges remain. While useful new funding instruments have been devised, alternative sources of financing for start-ups, small businesses and scale-ups have only started to develop. Legislation to ease the planning and building processes has been adopted but administrative burden and restrictive product and service market regulation remain obstacles to growth and investment. There is room to enhance competition, professionalization and independent oversight in public procurement. Certain anti-corruption reforms are still pending. Efficiency in public research is hindered by difficulties to attract domestic and foreign talent and a lack of performance-based funding.. 1. Economic situation and outlook GDP growth Slovenia’s economy has recovered from the crisis and is now growing faster than the EU average. In 2014–2016 growth averaged 2.8 % and is set to accelerate in 2017 to 4.9 % based on the winter 2018 forecast (Graph 1.1). Real GDP in 2016 was 6.5 % higher than in the pre-crisis peak year of 2008. The economy is rebalancing rapidly and the legacy of the crisis is being prudently dealt with. The country has taken advantage of the improving external conditions, as it has kept its competitive position strong and managed to increase its export market shares by 9 % over 2014 -2016. In addition to the positive growth contribution from net exports, private consumption has been increasing. Growth was held back by investment which, mainly due to slow progress in projects supported by the EU funds, had a negative contribution in 2015 and 2016. Graph 1.1:Contributions to GDP growth Source: European Commission, winter 2018 forecast Besides export, investment became the main growth driver in 2017. Over the first three quarters of 2017, investment was up 9.1 % compared to the same period in 2016. The biggest component is non-residential construction which is growing at 16.1 %, but investments into machinery and equipment are also up 8.6 %. Residential construction investments have increased by 7.5 %. Private consumption grew by 3.3 % in 2017, boosted by growing disposable income and high consumer confidence. Export growth remained strong and outpaced import growth, further contributing to the current account surplus. Graph 1.2:Development of public and private investment Source: European Commission Graph 1.3:Investment by type Source: European Commission Due to the sharp fall during the crisis, investment in the private sector, as a share of GDP, remains lower than the euro area average. However, in terms of volume, investment is still at levels reached at the turn of the century. As a share of GDP, investments in 2016 were around 18 % (Graph 1.2) whereas it was 26.5 % on average in 1998-2006. While public investment has fallen, it still remains above the euro area average. However, the large fall in total investment is attributable to the fall in private investment which is now below the euro area average level. In addition to construction, investment into machinery and equipment has become much lower than before the crisis (Graph 1.3). Investment into intellectual property products has been rather stable over the years, but investment into information and communication technology has fallen markedly. Slovenia used to have low foreign investment inflows but the situation has improved since 2014. In the last 3 years foreign direct investment inflows averaged 4 % of GDP annually. Net reinvested earnings, which remained low in the post-crisis years, have helped increase foreign direct investment inflows in the last two years. Section 4.2 discusses the developments in banking sector and alternative sources of financing. Section 4.4 analyses barriers to investment and productivity developments. GDP growth is forecast to reach 4.2 % in 2018 and 3.5 % in 2019. Growth is projected to be driven mainly by domestic demand, as private consumption is forecast to remain strong over the forecast horizon. Consumption is supported by growing employment, wages and bank lending. Similarly, investment is projected to grow at a high rate due to the combination of strong external and domestic demand with improving financing conditions and stronger corporate balance sheets. Capacity utilisation has reached a high level, industrial production is growing and export markets are expanding so additional investment is becoming necessary. In the public sector, investments are projected to be supported by the improved take-up of EU funds, including the first infrastructure project backed by the European Fund for Strategic Investments (EFSI) guarantee in November 2017. Export performance is expected to remain robust, supported by stable unit labour costs and continued gains in price competitiveness. Imports are forecast to grow in line with domestic demand, gradually neutralising the growth contribution of net exports. The current account surplus is expected to decrease moderately in 2018- 2019. The growth potential is recovering. Before 2008, the rate of potential growth was calculated at around 3.5 % per year. The contribution of total factor productivity growth was declining, but it was more than offset by growing contribution from investment. The contribution from capital accumulation declined significantly in 2009 to 2011 and turned negative in 2012, causing the potential growth rate to become negative in 2012 and 2013 (Graph 1.4). From 2014 to 2017 the recovery was driven by growing contribution of total factor productivity, as the economy regained efficiency. The contribution from capital accumulation is expected to turn positive only in 2018. The labour contribution remains modest, which is to be expected in an ageing society. The potential growth rate is expected to stabilise at around 2.5 % to 3 % over the next 5 years (see Section 4.4 for more details on productivity).

Risks to the growth outlook are tilted to the upside. As a small open economy, Slovenia remains open to the economic developments in its export markets but also to the increases in the prices of oil and raw materials. In the domestic economy, improving economic sentiment and better access to credit could further support investment, particularly in residential properties. Graph 1.4:Contribution to potential growth Source: European Commission autumn 2017 forecast Inflation Inflation remains moderate. Slovenia was experiencing deflation in 2015 and 2016. This was caused by the fall in global energy prices and by on-going deleveraging. Low core inflation also reflected relatively weak domestic demand. Inflation accelerated towards 2 % (y-o-y) in the first quarter of 2017 but slowed thereafter, largely driven by base effects. Overall, consumer prices increased by 1.6 % in 2017. Both headline and core inflation are expected to remain moderate over the forecast horizon. Harmonised index of consumer prices is forecast to grow by 1.8 % in 2018 and by 2.0 % in 2019. Labour market Labour market performance has continued to improve on the back of strong economic growth. The rise in employment and the decrease in unemployment, which have been going on since 2014, continued throughout 2017. In 2017, unemployment (ages 15-74) fell from 8.0 % to 6.8 % on an annual basis. Between the third quarter of 2016 and the third quarter of 2017, the employment rate (ages 20-64) increased from 70.4 % to 74.1 %, while (for the same period), the activity rate (ages 20-64) increased from 76 % to 79 %, surpassing the pre-crisis level. Moreover, the share of marginally attached and discouraged workers has decreased in recent years and is now lower than before the crisis. Employment is expected to continue to grow by 1 %-2 % annually over the forecast horizon. Growth is set to decelerate as labour shortages increase in the tightening labour market. As a result, the unemployment rate is expected to fall from 6.8 % in 2017 to 5.2 % in 2019. Nevertheless, structural labour market challenges remain. Long-term unemployment still accounts for over half of total unemployment and, despite improvements in recent years, the employment rates of older and low-skilled workers remain below the EU average and their participation in active labour market policies remains low. The tightening labour market is putting some upward pressure on wages. Nominal compensation per employee increased by 2.8 % in 2017 and is projected to continue growing by around 3.2 % in 2018 and 2019. Real wages increased by 1.1 % in 2017 and are expected to increase by 1.5 % over the forecast horizon, remaining below productivity growth. Nominal unit labour costs increased by 0.4 % in 2017 and are expected to continue growing at a rate of 0.9 % in 2018 and 2019. Social developments The rate of people at risk of poverty and social exclusion has decreased, but remains high for the elderly. The at-risk-of-poverty-and-social-exclusion rate for people over 65 was 19.9 % in 2016, which is above the EU average of 17.7 %. Almost 13.8 % of these people are at a persistent risk of poverty ( ). This is among the highest rates in the EU(see Section 4.3). In December 2016, almost half of pensioners received a pension below the poverty line. In the future, pension adequacy problems can be expected for workers with shorter careers (see Section 4.1.4). Income inequality continued to decrease and remains among the lowest in the EU. The Gini coefficient of equivalised ( ) disposable income declined slightly from 24.5 in 2015 to 24.4 in 2016. This is well below the EU average of 30.8 in 2016, albeit still above the pre-crisis levels (23.2 in 2007), and echoed in a relatively low income quintile share ratio (80/20) ( ). Slovenia also displays a relatively low gender employment gap. There are significant differences in the income levels of the different regions. GDP per capita in Eastern Slovenia is 70 % of that in Western Slovenia, which includes the capital. Based on the composite indicator of regional prosperity, all of the NUTS 3 regions in the west have scored better than all NUTS 3 regions in the east, except one (Pecar, 2017). Competitiveness Graph 1.5:Export market shares change with contributions Source: European Commission Sloveniaʼs competitiveness continued to improve in 2016. After a small export market share loss in 2015, Sloveniaʼs export market share increased by 6.7 % in 2016 (Graph 1.5). This increase was driven by gains in the export of goods as well as services. Real effective exchange rates deflated by nominal unit labour costs (Graph 1.6) have been on a downward path since 2013. Competitiveness has improved thanks to both productivity gains and continued wage moderation. Graph 1.6:Real effective exchange rate based on unit labour costs Source: European Commission calculation External position Graph 1.7:Net international investment position - by sector Source: European Commission Sloveniaʼs current account has been in surplus since 2011, peaking at 5.8 % in 2014. While both goods and services balances are in surplus, the surplus in services is especially strong. The trade balance reached 9.2 % in 2016. With companies returning to profitability, the primary income balance is becoming increasingly negative as dividends are paid to the foreign owners of the exporting companies. Sloveniaʼs current account surplus is higher than could be expected based on the fundamentals. The surplus is expected to decline over the medium term, as investment and consumption increase and fuel prices rise.

The high current account surplus has contributed to the improvement of the net international investment position. The banking sector and non-financial corporations have lowered their liabilities whereas the liabilities of the general government sector have increased (Graph 1.6). Financial sector The situation of the Slovenian banking sector has further improved. All financial institutions are well capitalised. Their average capital adequacy ratio remained broadly stable over the last year (18.7 % in June 2017). Banks have access to sufficient liquidity. Their profitability has improved, with a return on equity soaring from 3.5 % in 2016 to 7.8 % in 2017 thanks to significantly lower impairments. However, maintaining this level of return on equity will be challenging because of the current low interest rate environment and the impairments that are likely to arise from the new loans issued. Credit lending is picking up strongly, with households and corporate credit growing respectively by 7.9 % and 7.1 % year-on-year in September 2017. The rapid reduction in the non-performing loans (NPL) ratio continued in 2017. The NPL ratio for the banking sector was 10.8 % in the first quarter of 2017, down from 14.8 % a year earlier (Bank of Slovenia data – see Section 4.2). Sales continue to account for most of the NPL reduction while write-offs have slowed. The share of corporate NPLs has continued to decline to reach 23.9 % at end-June 2017, down from 31.3 % a year earlier, and is projected to decline further. The coverage ratio for NPLs has increased to 60.5 %. The overall performance of master restructuring agreements is improving, but a sizeable proportion remains unsuccessful. More generally, the durability of the restructured loans needs to be monitored due to the continuously increasing re-default rate, which had reached 27 % by March 2017. Private debt The household debt burden is small and non-financial corporations have deleveraged significantly. Since the indebtedness ratio peaked in 2010 (115 % of GDP), private sector debt decreased to 80.5 % of GDP in 2016. Private sector debt is now below both prudential and fundamental benchmarks ( ), indicating that the private sector in aggregate has no further need to deleverage (Graph 1.7). High leverage remains concentrated in a handful of large companies and among SMEs. Graph 1.8:Debt decomposition Source: European Commission Deleveraging process appears to have been completed. The credit flow from banks to the domestic economy has become positive. Both profits and wages are on the increase, domestic and export demand are forecast to grow and credit remains relatively inexpensive. Housing market House prices bottomed out in 2014 and have since increased at a relatively modest pace. The price level remains significantly lower than before the crisis and analytical models (e.g., pricetoincome, pricetorent) do not indicate significant over-valuation (Graph 1.9). This modest growth has taken place despite rather restrictive lending conditions. Loans for house purchases, as a share of GDP, have been in decline since 2013. The supply of new housing has been rather limited, as investment in housing construction is low. The market still has some inventory from the past, but this appears to be running low. Conditions appear ripe for further price growth in the housing market. Household real incomes are on the rise, credit is again becoming more easily available for households while construction activity is currently modest. Under these conditions, price increases could be much steeper than seen in the recent past. This is also confirmed by the housing market data for the first half of 2017 published by the Surveying and Mapping Authority (GURS, 2017) which show that the total number of transactions has reached its highest level since the start of systematic surveying in 2007. The situation would be eased if supply could be more easily increased. It remains to be seen whether the new planning and building legislation, applicable from mid-2018, will allow the developers to respond to increased demand more easily. Graph 1.9:House price developments Source: European Commission, ECB

Public finances indicators The general government headline deficit has declined in the recent years. In 2016, the general government deficit decreased to 1.9 % of GDP from 2.9 % in 2015, mainly due to higher revenues and a drop in public investment linked to the end of the previous EU funding period. In 2017, the government deficit is expected to decline further to 0.8 % of GDP as a result of strong tax revenues and social contributions. Public investment is expected to increase after a plunge of nearly 30 % in 2016. Both the compensation of public employees and pensions are expected to continue rising. In 2018, the general government finances are expected to be in balance. Tax revenues and social contributions continue to grow strongly and interest expenditure is expected to decrease significantly. At the same time, the compensation of public employees and expenditure on social benefits are projected to increase further due to wage increases and an extraordinary indexation of pensions. Public investment is expected to grow in line with the dynamics of the current EU multiannual financial framework. Assuming no policy change, the general government balance is expected to record a surplus of 0.4 % of GDP in 2019, mainly due to economic growth and improved labour market conditions. In structural terms, Slovenia’s fiscal position is expected to be broadly unchanged between 2016 and 2018, and to improve slightly in 2019. The debt-to-GDP ratio peaked at 82.6 % in 2015, and declined in 78.5 % in 2016. Supported by the economic recovery and reduced precautionary cash buffers, public debt is forecast to decline steadily to 72.0 % of GDP in 2019. Nevertheless, the long-term perspectives are more challenging, as the expenditure of the government is forecast to increase over the longer horizon, as pension, health care and long-term care related expenditure will increase due to the ageing of the population (see Section 4.1.1). Table 1.1:Key Economic Indicators (1) NIIP excluding direct investment and portfolio equity shares. (2) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU foreign-controlled branches. Source: Eurostat and ECB as of 30 Jan 2018, where available; European Commission for forecast figures (Winter forecast 2018 for real GDP and HICP, Autumn forecast 2017 otherwise) 2. Progress with country-specific recommendations

Progress with implementation of the recommendations addressed to Slovenia in 2017 ( ) has to be seen in a longer term perspective since the introduction of the European Semester in 2011. Looking at the multi-annual assessment of the implementation of the CSRs since these were first adopted, 94 % of all CSRs addressed to Slovenia have recorded at least 'some progress'. 6 % of these CSRs recorded 'limited' or 'no progress' (Graph 2.1). Full implementation has been achieved in several areas related to the fiscal framework and financial services, including for instance to conduct a system-wide bank asset quality review and to provide additional capital after the shortfall was assessed. Areas with substantial progress have been the strategy for the Slovenian Sovereign Holding, corporate restructuring and improving competitiveness. Graph 2.1:Overall multiannual implementation of 2011-2017 CSRs to date Source: European Commission Slovenia has secured a timely correction of its excessive deficit and strengthened its fiscal framework. Following the boom-bust cycle and the financial crisis, Slovenia went thought a period of an increasing debt-to-GDP ratio and a worsening budget balance leading to an excessive deficit. Over 2009-2016, a significant consolidation effort led to the abrogation of the excessive deficit procedure in June 2016 and ensured continuing improvement in the budgetary situation ever since. In 2017, Slovenia is expected to further decrease the deficit to 0.8 % of GDP before its balancing in 2018. Public debt has risen almost fourfold during crisis reaching a peak in 2015 at 82.6 % of GDP. In 2017, it is expected to decrease to 76.4 % due to economic recovery and a reduction in precautionary cash buffers. The Government transposed the EU Budgetary Frameworks Directive and set out the steps for multiannual medium-term budgetary planning. The appointment of the Fiscal Council means that the 2016 recommendation has been fully implemented. However, the pressure on the public finance in the long term remains. Over the past years, Slovenia has taken some measures to address the age-related expenditure, but the pressure remains significant. Since 2011, Slovenia has been recommended to improve the long-term sustainability and adequacy of its pension system. A parametric pension reform was adopted in 2012 but the reform measures do not safeguard the system's sustainability in the longer term and income adequacy problems in old age can be expected for those with shorter careers. The reforms on health-care and long-term care are under preparation, but their adoption is delayed. The weaknesses in the banking sector have been significantly reduced thanks to the reform measures and the improving macroeconomic environment. The situation in the banking sector was severely affected by the crisis. Consequently, the Council recommendations in 2013 and 2014 have been focused on this sector, including (i) the conduct of a system-wide bank asset quality review, (ii) the transfer of assets to the Bank Asset Management Company, (iii) the improvement of governance and risk management and (iv) the privatisation of state-owned banks. Since 2014 the banking sector has stabilised. Nonetheless, although decreasing, NPLs were still high compared to pre-crisis levels and the recommendation to enable the durable resolution of NPLs was therefore maintained in 2016 and 2017. While access to finance is also improving, the capital market is still not yet sufficiently developed to fully support growth in the real economy and safeguard financial market stability. State ownership in financial sector remains significant and the expected privatisation of NLB has been delayed. Measures have been adopted to improve the employability of lowskilled and older workers. Since 2011 the Council has recommended measures to increase the employability of

low-skilled and older workers. The 2013 labour market reform and targeted active labour market policies somewhat increased employment opportunities for older and low-skilled workers, but their participation rate remains low. The Slovenian authorities have taken action to improve the business environment. Specifically, they reduced administrative burden, removed some restrictions to competition in regulated professions, and ensured better governance of state-owned enterprises (SOEs). In 2013-2014 the Commission's analysis concluded that the high level of state involvement combined with weak corporate governance was having negative spill over effects to the private sector. A comprehensive corporate governance system for state-owned enterprises has been put in place in recent years. The first steps in implementing the system point to an approach that maximises shareholder value. After the initial progress which led to full deregulation of 40 professions in the crafts sector and four in culture, the reforms slowed down and have not been finalised as initially planned. However, in 2017 the planning and construction legislation was overhauled with the aim of simplifying procedures and reducing the number of regulated professions in this area. It is to enter into force in June 2018. Slovenia has made some ( ) progress in addressing the 2017 country-specific recommendations. Limited progress has been made to reduce fiscal risks and sustain public finances (CSR 1). The pension, health and long-term care reforms to ensure long-term sustainability are in the preparation phase. Some progress can be observed in addressing the employability of the lowskilled and older workers (CSR 2). In particular, two new active labour market policy measures aimed at older workers and in-work incentive schemes for the low-skilled were introduced, and measures promoting employment of persons over 55 years were extended. Some progress has been made to improve the financing conditions for creditworthy businesses (CSR 3). New financial supports were offered to SMEs to improve their access to alternative financing sources and the NPLs have continued their downward trend. The Bank Asset Management Company is progressing to fulfil its mandate. Some progress has been made to reduce the administrative burden on business (e.g. new spatial and construction legislation), and improve the governance of SOEs. While the public administration action plan is slowly progressing, some specific measures have been substantially delayed. In 2017, Slovenian Sovereign Holding reached the targets set in the management acts in 2016. Dividend pay-outs in 2017 for companies managed by the SSH have been higher by 38 % compared with 2016, and hit a record high almost doubling the dividends received in 2011. Member States can request from the Commission technical support to prepare, design, and implement growth-enhancing structural reforms. The Structural Reform Support Service (SRSS) provides, in cooperation with the relevant Commission services, tailor-made technical support, which does not require co-financing and is provided at a Member State's request. The support addresses priorities identified in the context of the EU economic governance process (i.e., implementation of country-specific recommendations), but the scope of the SRSS support is wider as it can also cover reforms linked to other Commission priorities, or reforms undertaken at the initiative of Member States. Slovenia has requested technical support from the SRSS to help implement reforms in areas such as: public administration and justice, growth and the business environment, labour market, healthcare, and the financial sector. In particular, the SRSS provides technical support aimed at attracting foreign direct investment, tackling the issue of NPLs and establishing a health system performance assessment. ESI Funds are pivotal in addressing key challenges to inclusive growth and convergence in Slovenia. Among other activities, they help improving the healthcare system and support low-skilled and long-term unemployed to improve their employment prospects (Box 2.1). Box 2.1: Tangible results delivered through EU support to structural change in Slovenia Slovenia is a beneficiary of European Structural and Investment Funds (ESI Funds) support and can receive up to EUR 3.9 billion until 2020. This represents around 1 % of GDP annually over the period 2014-2018 and 29 % of public investment ( I ). By 31 December 2017, an estimated EUR 1.9 billion (49 % of the total) was allocated to projects on the ground. This has paved the way for almost EUR 3.3 million of private investment matching public support to enterprises and more than 700 new full time job equivalent hirings in ESIF-supported enterprises. Out of the EU financing, EUR 253 million of ERDF and CF and EUR 49.3 million from EAFRD is to be delivered via financial instruments, which is more than a double increase compared to the 2007-2013 period. ESI Funds help address structural policy challenges and implement country-specific recommendations. Actions financed cover, among others, the e-Spatial planning platform which aims to accelerate and improve processes in spatial planning, construction of buildings and real estate management, thereby contributing to improved business environment; improving the effectiveness of the justice system; supporting SMEs by direct investments through debt and equity instruments, grants and also by creating an entrepreneurial-support ecosystem providing them with a good working environment and increasing the ease of doing business; supporting environmental infrastructure contributing to Slovenia's achievements of the EU environmental requirements, thus improving the investment environment. ESI Funds, in particular the European Social Fund play a key role in supporting older, low-skilled or long-term unemployed with tailor-made programmes to improve their employment prospects. Activities introducing forms of work which respond to demographic and societal challenges will enable workers to work longer and therefore support the future pension reform. ESI funds finance investments of EUR 150 million in health and social infrastructure to enhance access to affordable, sustainable and high quality services. These investments will support the reduction of inequalities in the healthcare system, and contribute to develop and implement integrated community based care services in line with the reform of long term care currently under preparation (see Chapter 4.1.5). Various reforms were undertaken already as precondition for ESI Funds support ( II ). A Smart Specialisation Strategy for research and innovation was developed to focus efforts on strengthening the competitiveness of the economy by enhancing its innovation capacity, diversifying the existing industries and boost growth of new and fast-growing enterprises. It also aims to improve cooperation between enterprises and public research institutions. The National Transport Development Strategy was developed and is the first comprehensive strategy covering all modes of transport, which underpins all national transport projects until 2030 and beyond. It is aimed towards ensuring a timely development of the transport infrastructure in Slovenia and reducing the existing bottlenecks. Furthermore, the Sustainable Urban Mobility Plans, developed at the level of municipalities or regions, are aimed at improving the air quality in cities and urban areas, as well as promoting the shift from private to public passenger transport. To ensure a more efficient use of water resources, the Water management plans for the Danube river basin area and the Adriatic Sea basin area for the period 2016-2021 have been upgraded and updated. The strategic and legislative steps to improve the Slovenian health and long term care systems are implemented in line with the National Health Care Resolution Plan 2016-2025. The Public Administration Development Strategy 2015–2020 aims at modernising public administration by improving its efficiency, transparency and the quality of services. Slovenia is advancing the take up of the European Fund for Strategic Investments (EFSI). As of December 2017, overall financing volume of operations approved under the EFSI amounted to EUR 59 million, which is expected to trigger total private and public investment of EUR 490 million. More specifically, one project has been approved so far for Slovenia under the Infrastructure and Innovation Window, amounting to EUR 51 million in EIB financing under the EFSI. It concerns the transport sector and is expected to trigger about EUR 102 million in investments. Under the SME Window, one agreement with financial intermediaries has been approved so far. European Investment Fund financing enabled by the EFSI amounts to EUR 8 million, which is expected to mobilise approximatively EUR 388 million in total investment. About 1 500 smaller companies or start-ups will benefit from this support. Funding under Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is additional to the ESI Funds. By the end of 2017, Slovenia has signed agreements for EUR 209 million for projects under the Connecting Europe Facility. https://cohesiondata.ec.europa.eu/countries/SI Table 2.1:Summary Table in 2017 CSR assessment Source: European Commission 3. Summary of the main findings from the Macroeconomic Imbalance Procedure In-Depth Review The in-depth review for the Slovenian economy is presented in this report. In spring 2017, Slovenia was identified as having macroeconomic imbalances, in particular relating to weaknesses in the banking sector, high corporate indebtedness and fiscal risks. The 2018 Alert Mechanism Report (European Commission, 2017b) concluded that a new in-depth review should be undertaken for Slovenia to assess developments relating to identified imbalances. Analyses relevant for the in-depth review can be found in the following sections: fiscal risks related to fiscal policy, long-term sustainability and state-owned enterprises (Sections 4.1.1 to 4.1.6); vulnerabilities in the banking sector and access to finance (Sections 4.2.1 to 4.2.2); deleveraging and investment (Section 1) and productivity, research and development and business environment (Sections 4.4.1, 4.4.2, 4.4.3. ( ) 3.1 Imbalances and their gravity The situation in the banking sector has improved. The non-performing loans (NPL) ratio for the banking sector was 10.8 % in Q1-2017, down from 16.3 % a year earlier (Graph 3.1, reporting ECB data, which are comparable across countries) The stability is also confirmed by the reduction in arrears (loans with no payments within 90 days), which have almost returned to pre-crisis levels (Graph 3.2). Banks are profitable, well capitalised and have a favourable funding structure (Section 4.2). They also have access to sufficient liquidity. Deleveraging in the corporate sector appears to have been completed. The private sector debt-to-GDP ratio decreased to 80.5 % in 2016, which is 6.4 pps less than in 2015 and well below the Commissions’ fundamental-based benchmark. In addition, the share of zombie firms has returned to pre-crisis levels (see Section 4.1.1). Credit to non-financial corporations grew by 7.1 % in September 2017, turning positive after 6 years of consecutive decline. Private investment growth accelerated to 5 % in 2016, supported by an increase in inward foreign direct investment. Nevertheless, the stock of private investment (at 14.4 % of GDP in 2016), including foreign direct investment in Slovenia (at 37.8 % of GDP in Q1-2017) remains relatively low. Weak private investment in turn contributed to a significant downward shift in Slovenia’s potential growth (see Section 1). Graph 3.1:Non-performing exposure of domestic banks (including foreign-controlled subsidiaries and branches) Source: ECB (Consolidated banking statistics)

Graph 3.2:Arrears developments Source: Bank of Slovenia Public debt decreased to 78.5 % of GDP in 2016, but population ageing is set to put considerable pressure on public finances in the long term. Specifically, pension expenditures is set to increase substantially from 11.8 % in 2013 to 15.3 % of GDP in 2060. The performance of state-owned enterprises (SOEs) managed by the Slovenia Sovereign Holding improved significantly in 2016. The overall profitability target of almost 6 % in 2016 as measured by return on equity was almost reached. Dividend pay-outs in 2017 have been 38 % higher than in 2016. 3.2 Evolution, prospects and policy responses Banking sector vulnerabilities have been sustainably reduced. NPLs are expected to stay on a declining trend and they are well provisioned. Banks have acquired significant capacities and competences in managing the workout of NPLs. Their NPL target plans are monitored by the Bank of Slovenia and the Single Supervisory Mechanism. In March 2017, Bank of Slovenia issued a toolkit to prevent, identify and manage NPLs for SMEs (BoS, 2017a). While the overall performance of master restructuring agreements is improving, a sizeable proportion remains unsuccessful. More generally, restructured loans need to be monitored due to the continuously increasing re-default rate, which reached 27 % by March 2017. The long-term profitability of banks remains a challenge in the current low interest environment. The consolidation and restructuring of the banking sector is progressing, with a recent merger of three banks and completion of the wind-down of two smaller banks. The privatisation of Nova Ljubljanska banka is essential to ensure the bank’s viability and prevent credit misallocation in the future. Private investment is expected to grow by 10 % per year over 2017-2019. Such high growth is expected due to the combination of strong external and domestic demand, stronger corporate balance sheets and improved financing conditions. Private investment will also be supported by recently adopted measures to improve the business environment. Relevant measures are in the pipeline to attract foreign direct investment. In the first half of 2017, investment was driven by non-residential construction and machinery and equipment, which is more likely to support productivity in future. Public debt is projected to continue declining and to reach 72 % of GDP by 2019. Strong nominal GDP growth and a reduction in the general government deficit are set to put public debt on a downward trend. The authorities are preparing reforms to ensure the long-term sustainability of public finances. The key objectives of the pension reform have been agreed but its design and adoption have been officially announced for the next government. Some parts of the health care reform were adopted but the key legislation (Health care and health insurance act) has not been adopted. The proposal for long-term care has been publicly consulted but it has not been put forward yet. The longterm sustainability of public finances remains a challenge due to the projected increase in age-related expenditure. The focus of the Slovenian Sovereign Holding has shifted to improving the corporate governance and performance of SOEs. The asset management strategy adopted in July 2015 sets the overall profitability target of the State portfolio as measured by return on equity at 8 % by 2020, with an intermediate target of 7.1 % in 2017. Progress with pending privatisations remains limited (see Section 4.1.4). 3.3 Overall assessment In conclusion, consistent policy actions in a context of increasingly strong recovery, have reduced the sources of imbalances in a sustainable manner. The economy continued to grow strongly in 2017, both in real and nominal terms, thus reducing the risks related to indebtedness in both the public and the corporate sectors. Progress in restructuring the banking sector has coincided with a rapidly falling share of NPLs in total loans, which remain well provisioned. No further deleveraging needs remain in the corporate sector except for in a handful of large companies and among SMEs. A healthy flow of credit to non-financial corporations has resumed. Investment was compressed in recent years, but has increased strongly, as has foreign direct investment. Government debt peaked in 2015 and a continued downward adjustment is expected in the coming years. Table 3.1: Macroeconomic Imbalance Procedure assessment matrix (Continued on the next page) From a policy perspective, there remain medium to long-term challenges for the economy. Protracted low investment until 2016 and unfavourable demographic trends mean the focus must be on growth enhancing policies. This will bring investment back on a long-term sustainable trend, increase productivity growth and sustain competitiveness. In addition, the long-term sustainability of public finances given the ageing population remains to be addressed. Table (continued) Source: European Commission



4. Reform priorities 4.1. Public finances and taxation

4.1.1.Fiscal policy* The general government headline balance continues to improve. In 2016 the deficit decreased to 1.9 % of GDP, down from 2.9 % in 2015. Based on the Autumn forecast, the deficit reached 0.8 % of GDP in 2017 and the budget would be in balance in 2018. In structural terms, the budget remains in deficit. The structural deficit of 1.6 % of GDP in 2017 remained above the euro area average (1.1 % of GDP) and below the medium-term objective of 0.25 % structural surplus. In 2018, the structural balance is expected to remain unchanged ( ). This indicates that the improvement in headline balance is due to the improvement in the economic conditions and falling interest expenditure, not structural measures. Structural balance is negatively affected by the low rate of potential growth. This underscores the need to adopt measures to boost investment and productivity (see Section 4.4). Pressures to increase expenditure are mounting. The compensation of public employees and expenditure on social benefits are projected to increase further due to the public sector wage increases and an extraordinary indexation of pensions. Tax policy has been rather stable. The reform of real estate taxation has been postponed to 2020. Revenues from recurrent immovable property taxation, which is considered less distortive to economic growth than labour taxes, are currently considerably below the EU average. The reform would link the tax base to the properties’ market value, using a mass valuation system. The Mass Valuation Act was adopted and is expected to be applied to all properties in mid-2019. Slovenia is performing well in terms of VAT compliance. In 2015, Slovenia remained among the top five Member States with the lowest VAT gap (as a percentage of VAT theoretical tax liability) in the EU (CASE, 2017), indicating that relatively little VAT revenue is lost due to non-compliance. VAT collection in Slovenia was improved by the introduction of certified cash registers in 2015, which has eased tax payment for companies. 4.1.2.FISCAL FRAMEWORK* In 2017, the members of the Fiscal Council were appointed and the new institution has rapidly become operational. In July 2015, the Slovenian parliament passed the Fiscal Rules Act, providing the legal basis for the establishment of a Fiscal Council that will, among other things, monitor compliance with fiscal rules. However, the members of the Slovenian Fiscal Council were only appointed in March 2017. The 2018 draft budget was the first to be assessed by the Council. In its assessment published on 19 October 2017, the Fiscal Council warned that the draft budget for 2018 was only partially compliant with the fiscal rules and called on the government to take additional measures. The legislation to transpose the EU Budgetary Frameworks Directive was adopted. 4.1.3.FISCAL SUstainability* Public debt rose sharply during the crisis but has started to decrease in 2016. It increased from 22 % of GDP in 2008 to 82.6 % of GDP in 2015. While exceptional items, particularly bank recapitalisations, have contributed significantly to this increase, sustained primary deficits also increased debt. In 2016, public debt decreased to 78.5 % and it is expected to further decrease to 72.0 % of GDP by 2019. The fall is supported by the economic recovery and reduced interest expenditure. The implicit interest rate on state debt has been decreasing since 2014. The strategy is to extend the duration of the debt portfolio, reducing the roll-over risk while taking advantage of the current environment of low interest rates to reduce current financing costs in the medium term. In addition, the authorities plan to reduce the previously accumulated large cash buffers (estimated to have decreased from 16 % of GDP at end-2015 to 13 % of GDP at end-2016). However, fiscal sustainability risks are low in Slovenia in the short term (European Commission, 2018a). The high public debt level represents a source of vulnerability for the Slovenian economy. In the medium term, the debt trajectory’s sensitivity to potential macroeconomic shocks and a non-negligible sustainability gap lead to medium risks ( ) for public finance. Firstly, medium risks are revealed by the debt sustainability analysis. Secondly, the medium-term sustainability gap indicator (S1) complements the results of the debt sustainability analysis indicating that overall, there are medium risks in the medium term. S1 ( ) indicates that the structural primary balance would need to improve by 1.4 pps of GDP in cumulated terms over a five-year horizon (from 2019 until 2024) relative to the baseline no-fiscal-policy-change scenario in order to reach the 60 % public debt-to-GDP ratio reference value by 2032 ( ). The required fiscal adjustment reflected by S1 is essentially due to the debt ratio being currently above the 60 % reference value and the projected ageing costs. Public debt is projected to decrease until 2026 but then increase again, assuming no policy change. Under the baseline scenario ( ) of the debt sustainability analysis public debt is expected to decrease to 63.7 % of GDP by 2026 (Graph 4.1.1). From then onwards public debt is expected to increase to 65 % of GDP in 2028 as a result of medium-term upward pressures, particularly ageing costs. Conversely, if the ageing costs were excluded from the no-policy-change scenario (as they would be if ageing costs were reduced via reforms) the debt ratio would continue to decrease in the medium term. Under a scenario ( ) where the structural primary balance (SPB) is assumed to converge to its historical average, debt levels would spin into an upward trajectory from 2024 onwards. However, if Slovenia was to fulfil its commitments under the Stability and Growth Pact ( ), debt would quickly be reduced towards 60 % of GDP. If Slovenia were to adopt the fiscal commitments outlined in its own Stability Programme ( ), debt reduction would be slower than in the Stability and Growth Pact scenario, but still be considerably faster than in the baseline scenario. Maintaining strong fiscal discipline in the long-run is thus required to reduce the debt-to-GDP ratio and ensure debt sustainability. Graph 4.1.1:Gross debt - DSA Source: European Commission Increasing age-related expenditure, namely on public pensions, healthcare and long term care, puts pressure on public finances in the long term. In the long term, Slovenia is at high risk as shown by the very high value of the long-term sustainability gap indicator S2. The indicator, calculated under a baseline of a no-fiscal-policy-change scenario, shows that a very high fiscal adjustment of 6.0 pps of GDP will be required upfront to stabilise the debt-to-GDP ratio over the infinite horizon ( ). This is primarily due to the strong projected impact of age-related public spending. Pensions account for 3.4 pps of GDP of this required fiscal adjustment while health care and long-term care account for an additional 1.5 pps (0.8 pps and 0.7 pps respectively). Indeed, according to the projections of the 2018 Ageing Report (forthcoming) health care expenditure will increase by 1.0 pps (AWG Reference Scenario; 2.0 pps according to the Risk Scenario), above the EU average of 0.9 pps. When looking at long-term care expenditure, the projected increase is above average only according to the Risk Scenario, with 3.5 pps against an average EU value of 2.7 pps (only 0.9 pps with 1.2 pps for the EU according to the Reference Scenario). 4.1.4.Pension system* Despite having some positive effects, the 2012 pension reform has not ensured the long-term sustainability and the adequacy of the pension system. In 2016, the growth (0.8 %) in the number of old-age pensioners decreased compared to 2015 (1.3 %) and remains low compared to 2012 and 2013 (4 % and 4.1 % respectively). This, combined with the growth in the number of those paying pension contributions to the first (public) pillar, resulted in a significant increase in the ratio between those paying pension contributions and retired people (ZPIZ, 2017). Despite these developments, both sustainability and adequacy remain challenges for the future. There are concerns about the income adequacy of both current and future pensioners. The risk of poverty (and social exclusion) among the elderly is above the EU average (see Section 4.3.3). The ratio between average old-age net pensions and net wages is decreasing, indicating that the adequacy of the pension adequacy is worsening ( ),( ). There is broad consensus on the key objectives of the pension reform but a concrete action plan to adopt it is still missing. Based on the White Paper on pensions of April 2016 ( ) and the following public debate on a new pension reform, a document called ‘Starting points for the modernisation of the Pension and Disability Insurance System in the Republic of Slovenia’ was prepared and unanimously adopted by the Economic and Social Council in July 2017. The document outlines various measures to achieve adequate pensions with a minimum replacement rate of 70 %, and create a sustainable and transparent pension system. However the measures are still broadly defined and lack an action plan. It is therefore unclear how the proposed measures would be realised and key goals achieved. Furthermore, despite the agreement between social partners and the government to adopt the pension reform by 2020, the phase-in period of the reform has not yet been outlined. Achieving pension adequacy for workers with shorter careers will be a challenge. The length of a career significantly impacts the level of pensions. Based on the current legislation, delaying retirement of an average earner for 2 years beyond the statutory pensionable age would result in an increase of the net replacement rates ( ) of 7.6 pps for men and for women. In the future special attention to pension adequacy should be given to workers with shorter careers, especially in the light of demographic changes (see Section 4.3.1), delayed labour market entry and increased use of atypical employment contracts during the economic crisis (European Commission, 2017c; calculations for the upcoming 2018 Pension Adequacy Report of the European Commission and Social Protection Committee), which may exacerbate the situation of future generations ( ). Old-age and disability pensions for those having full retirement conditions were increased in 2017. The Pension and Disability Insurance Act was amended and entered into force as of October 2017. The amended Act increases the minimum old-age and disability pensions to EUR 500 per month ( ) for those fulfilling full retirement conditions. National authorities estimate that around 52 000 pensioners will benefit from the amendment and will on average receive EUR 26 higher pensions. In their current form, supplementary pension schemes will have only a limited effect on old-age income. Analysis (Majcen et. al., 2015) shows that, despite the high number of persons covered, contributions to supplementary pension schemes ( ) dropped between 2008 and 2012 ( ), especially contributions from younger cohorts. While in 2016 around 63 % of those in the first (public) pillar were enrolled in a supplementary pension scheme (MoLFSAEO, 2017d and KAD, 2017), premiums for around a third of insurance policies were not paid in full in 2016 (SZZ, 2016 and KAD, 2017). The ratio between those included in the supplementary pension scheme and those employed increases with age, but entering the scheme at a higher age leads to lower savings ( ) (Majcen et. al., 2015). According to the national authorities, only 3.2 % of all pensioners were receiving pensions from supplementary pension schemes in 2016 ( ). Projections show that the schemes could have a major impact on the adequacy of pensions in Slovenia for those who will regularly contribute to them (MoLFSAEO, 2016). Although the importance of the supplementary pension schemes is recognised by the government and social partners, there is no clear plan on how to ensure greater take-up of the supplementary pension ( ).

4.1.5.Health Care and Long term care * The healthcare system is providing good results despite the relatively limited resources used but pressure will increase due to ageing population. In 2015, Slovenia spent 8.5 % of GDP on healthcare, which is below the EU average of 9.9 %. Slovenia is still performing well in terms of amenable mortality ( ), but prevention can further improve the effectiveness of the healthcare system. For instance, obesity rates are far above the EU average and mortality from liver cirrhosis in men is among the highest in Europe (Graph 4.1.2). Although self-reported unmet needs for medical care are very low in Slovenia (see Box 4.3.1), the share of people reporting waiting times for some specialist services increased from 6 % in 2007 to 13 % in 2015 (OECD/European Observatory on Health Systems and Policies, 2017). However, the ageing population is putting the system under strain and would require more resources to be spent on healthcare in the future. Therefore, increased efficiency is important to continue the provision of high quality care. An EU-supported project to improve prevention has been launched. In 2019, 25 centres of health promotion are to be established in order to reduce lifestyle-related chronic non-communicable diseases. The project is supported by the European Structural and Investment Funds. A reform on healthcare financing is being prepared but its adoption is delayed. The draft Health Care and Health Insurance Act has been prepared but it has not been submitted yet to the Parliament. The current form of supplementary health insurance will be abolished and transformed into a compulsory health allowance within the health insurer (HIIS). Some elements of the reform have already been legislated in 2017. The amendments to the Health Services Act aim at improving transparency and access to health services. Changes include inter alia new regulations for concessions, the uniform arrangement of work permits and the supervision of providers. Under the Medical Practitioners Act, some expenses that are currently being paid by the health insurer (specialisations, apprenticeships, learning and training) have been transferred to the State budget. The recent changes in the Patients’ Rights Act further clarify the rights and obligations for medical appointments. Furthermore, additional funding was provided in 2017 for some services with long waiting times. Graph 4.1.2:Alcohol, overweight and obesity problems are greater in Slovenia than in most other EU countries Source: OECD calculations based on Eurostat Database (European Health Interview Survey in or around 2014), OECD Health Statistics and Health Behaviour in School-aged Children survey in 2013-14. (Chart design: Laboratorio MeS). The Slovenian government is making progress in implementing the National Health Care Plan for 2016–2025. Initial steps have been taken to amend legislation in the field of administration and management of health institutions. Changes concern, inter alia, business autonomy, powers of managing authorities and professional responsibility. In addition, in 2017 the parliament endorsed the emergency law for the financial stabilisation of public healthcare institutions. Around EUR 136 million emergency funding are made available to cover about 80 % of the losses that hospitals had accumulated mostly during the crisis. In order to be eligible, hospitals have to adopt restructuring plans and accept oversight by special Health Ministry committees. A national strategy for primary healthcare development by 2025 is being prepared and reference family medicine outpatient clinics are gradually being introduced. A health technology assessment system is planned to be established by 2020 for all aspects of introducing new health technologies, including optimum utilisation. ICT solutions (ePrescription, eReferral, eAppointment) will improve nationwide information. Public procurement procedures in the health sector are not sufficiently bundled yet. In 2017, aggregated procurement was organised for nine different items. However, the share of procurement carried out centrally is low compared to other countries and human resources dedicated to the task are still limited for such a demanding activity. Pending the more active use of aggregated procurement by tendering authorities, a database prices resulting from recent procurement procedures has been created. Hospitals are required to use the lowest price in this database as the maximum price for any new supply contract for the same items. Additional improvements in public procurement would bring efficiency gains and reduce the risk of collusion among bidders. Public procurement in the health sector requires specific knowledge and expertise and thus professionalisation of those involved. Slovenia has not yet adopted a fully-fledged professionalization strategy. Recent experience shows that well prepared aggregated procurement, notably in medical devices, can increase the average number of bids and significantly reduce the bidding prices. In addition, joint procurement between different hospitals can complement the work of the centralized purchasing body and may be more suitable for some purchases. Furthermore, a more systematic involvement of the relevant health professionals in the entire tendering process would lead to more successful tenders, as it increases the satisfaction with the purchase made. In addition, the small Slovenian market creates the risk that choosing of a single supplier per product creates monopolies. This could lead to treatments becoming unavailable and in the long term increase prices through market concentration. Slovenia does not yet have sufficient capability or the means to identify collusion among bidders and, where applicable, to punish it (see also Section 4.4.3). To date, there is no integrated long-term care system in Slovenia. There is no unified entry point or a standard model for assessing care needs for long-term care services. This creates risks of inefficiencies and makes it more difficult for the user to navigate the system. The provision of community-based long-term care is not well coordinated and the financing of social long-term is fragmented. Until now, Slovenia has focused its limited spending on institutional care rather than home care. A new draft legislative proposal for long-term care has been prepared. The reform aims to establish a sustainable and accessible care system which combines the health and social aspects of care with integrated long-term care services. According to the draft law, the new long-term care system would be rolled out as of 2020. The list of targeted services would include basic and support services as well as non-acute healthcare services. The draft law provides for a uniform method for assessing care needs, and involves interdisciplinary mobile teams, integrated supervision and an integrated network of providers. It encourages informal care support ( ) in the home environment and seeks to relieve individuals and families by providing, under certain conditions, the possibility of cash receipts, training and counselling for informal care providers, as well as 14 days of substitute care a year. Beneficiaries would receive financial compensation or a paid personal assistant or paid healthcare services provided at home or in a nursing home. All beneficiaries would be fully compensated for rehabilitation services aiming to preserve or improve their independence, as well as for social and psychological support and counselling. A two-year pilot programme, partly co-funded through the European Social Fund, has been launched to test the concrete measures as proposed in the draft law. The financing of the services provided by the long-term care Act is still not clear. According to the draft long-term care Act published in October 2017, the sustainability would be ensured partly by a new compulsory insurance fee, partly by the healthcare premiums. 4.1.6.State owned enterprises* Slovenia’s commitment to implementing professional standards in the management of state-owned enterprises (SOEs) is starting to bear fruit. The performance of SOEs in 2016, the first year in which SOEs were fully managed by the Slovenian Sovereign Holding (SSH), reached the targets set in the management acts, since an almost 6 % return on equity was achieved on an aggregated basis (SSH, 2017). In 2017, the return on equity is expected to remain at the same level as in previous year. Dividend pay-outs in 2017 for companies managed by the SSH, acting either as an owner or on behalf of the State, were 38 % higher than in 2016, and hit a record high almost doubling the dividends received in 2011, i.e. when Slovenia first applied a centralised system for managing capital assets. Under the new management plan for 2018 return on equity should increase slightly over the coming years. It is stated that the future focus will be placed on the quality of corporate governance, the transparency and compliance of operations of companies under management and the support for corporate transformation of companies. SSH aims to bring the SOE regular reporting to the standards applicable for listed companies. The return of equity is lowest in the category of strategic companies. Among the SOEs, the SSH differentiates between the strategic companies, which, in addition to economic goals, also attain strategic goals. These are generally the largest companies, and 66.9 % of the portfolio is classified under this category. Whereas in general the return on equity was 6.0 % in 2017, it was 4.5 % for the strategic companies. Analysis in Section 4.4.1 confirms that the total factor productivity of large SOEs is lagging behind that of state-owned and private companies. Certain privatisations announced are still pending. In 2017, only one privatisation process was completed (Paloma, hygienic paper products). No timeline has yet been fixed for the privatisation of Telekom Slovenije which was decided by Parliament back in 2013. 4.2. Financial sector 4.2.1.Banking sector*

The situation of the Slovenian banking sector has improved significantly, due to better profitability, solvency and asset quality. The return on equity more than doubled to reach 7.8 % in 2016, mainly because of lower impairments. The average capital adequacy ratio is relatively stable (18.7 % in June 2017), although it has declined slightly since December 2016 due to renewed credit growth. The year-on-year growth rate of credit to households and to non-financial corporations reached record highs of respectively 7.9 % and 7.1 % in September 2017 (Graph 4.2.1). The funding structure of banks is particularly favourable, with a loan-to-deposit ratio of 78.8 % in 2016. Table 4.2.1:Financial soundness indicators, all banks in Slovenia Source: ECB Consolidated banking data Banks need to find new sources of income and control costs to maintain profitability. Current profitability is mainly driven by lower impairments, or even by releasing previous impairments. This is bound to change as new lending progressively generates new impairments. Profitability is also likely to come under pressure from persistently low interest rates and increases in compliance, prudential, supervisory and investment costs. One possible strategy for offsetting these negative factors is to focus on fee income and to develop new lending products and services. Banks could also opt for partnership or acquisition to reduce their costs and achieve economies of scale. Graph 4.2.1:Year-on-year credit growth, adjusted for sales and securitisation Source: ECB Non-performing loans (NPLs) have continued their downward trend. Declining NPLs are reported both by Bank of Slovenia and the ECB. National statistics are richer and used for the analysis in this section and in Section 1, while ECB statistics are reported in Section 3. According to the national statistics, the NPL ratio for the banking sector as a whole was 10.8 % in June 2017, down from 14.8 % a year earlier (Graph 4.2.2). In the corporate sector, the share of NPLs continued to decline to reach 23.9 % in June 2017, down from 31.3 % a year before. In 2013 and 2014 a substantial part of the NPL reduction was due to transfers of bad assets to the Bank Asset Management Company (BAMC). However, the total stock of NPLs in Slovenia, including those in BAMC’s balance sheet, is also declining at relatively quick speed. Meanwhile, the coverage ratio in the banking sector (i.e. the share of accumulated provisions to gross value of NPLs) has been increasing slowly, approaching the average haircuts (i.e. fair value adjustments over gross transfer values) applicable to BAMC assets. These trends suggest that NPLs reduction has boosted banks’ ability to absorb future losses on the remaining NPL portfolio. Graph 4.2.2:Trends in non-performing loans, including BAMC assets Source: Bank of Slovenia, BAMC The reduction in NPLs in recent quarters has been principally driven by loan restructuring solutions, whose long-term sustainability needs to be closely monitored. The transformation of restructured loans to performing status (i.e. cures) and write-offs (i.e. mostly debt relief through loan restructuring) accounted for less than half of the change in NPL stock in the first half of 2017, down from nearly three quarters of the NPL reduction in 2016. Given that loan sales may pick up in the second half of 2017, the positive impact of loan restructuring on NPLs may be even smaller. One possible reason for this development could be that a sizeable proportion of restructuring arrangements remain unsuccessful, or at best partly successful. Indeed, the ratio of performing forborne loans to all forborne loans is around 17 % in Slovenia, (Graph 4.2.3). Among other things, this may be due to high re-default rates, which prevent forborne NPLs to migrate performing status over time. Furthermore, some of these restructured loans have been converted into bullet loans ( ) or involve payment deferrals ( ), whose overall performance can only be known when the increased payment schedules kick in. The sustainability of the restructured loans therefore needs to be monitored more closely. If the insolvency proceedings in the courts were accelerated (see Section 4.4.5), the reduction of NPLs could be still faster. Graph 4.2.3:Share of forborne loans that are performing (end-June 2017) Source: ECB The BAMC is progressing towards fulfilling most of its mandate, but the size and the nature of the assets remaining on its portfolio create risks that require monitoring. The business strategy adopted in December 2016 aims to ensure the highest possible return to the state and to fully redeem bonds backed by state guarantees by 2022. From its inception in 2013 until June 2017, BAMC generated cumulative cash flows of nearly EUR 1.1 billion, representing nearly 60 % of the aggregate fair value of the loans transferred. Most of these cash flows are from refinancing by banks of loans held at BAMC, but loan/collateral sales appear to be picking up. BAMC engaged in an earlier repayment of part of its outstanding debt, including a full redemption of State loans by December 2016, and turned to more flexible refinancing options. BAMC is expected to return to profitability in 2017, mainly due to lower financing costs. Going forward, a key risk is maintaining the momentum of cash-flow generation from sales, as the remaining assets in BAMC’s portfolio may be more difficult to sell. Recent reforms aim to maintain stability within the banking sector. The consolidation and restructuring of the sector progressed with a merger of three banks and the completed wind-down of two smaller banks. Banks are following their NPL target plans which are monitored by the Bank of Slovenia and the Single Supervisory Mechanism. Backed by the technical assistance of the European Commission and in cooperation with the World Bank, in March 2017 the Bank of Slovenia issued the Handbook for Effective Management and Workout of SME NPLs (Bank of Slovenia, 2017a). The handbook includes a complete toolkit to prevent, identify and manage NPLs in this segment. The impact of upcoming regulatory changes is expected to be relatively limited. In particular, for most banks the gradual implementation of the upcoming IFRS 9 accounting standards are not expected to imply any significant new provisioning ( ). According to a supervisory assessment at end-2016, some of the smaller and less complex banks may suffer more than their peers, especially due to the data needed to obtain estimates of expected credit losses. The impact of the upcoming minimum requirement for own funds and eligible liabilities ( ) on most banks will be very limited, owing to the level of excess capital held. However, less capitalised banks may face significant shortfalls, which will need to be filled by issuing eligible liabilities. The persistent involvement of the Slovenian state in the financial sector entails some risks for financial stability. The Slovenian state controls a significant share of the financial sector through its stakes in NLB, Abanka-Celje and Sava Re, and recent developments show that there is little political will to improve the situation. The government has failed to privatise at least 50 % of NLB by the end of 2017, as committed to in the revised state-aid decision on the recapitalisation of NLB in 2013(). In line with the government commitment, the privatisation of Abanka-Celje is scheduled for 2019. Two attempts by a foreign insurance group to increase its stake in Sava Re were rejected. As demonstrated by the crisis that hit Slovenia in 2013, maintaining a high level of state involvement may entail in the longer run some risks for financial stability, economic efficiency and public finances. 4.2.2.Access to finance for Small and Medium-sized companies* Financing conditions have eased but less for SMEs. Interest rates on business loans and spreads over German 10-year government bonds have fallen but they remain above those in the euro area. Banks in Slovenia remained cautious on lending to SMEs (IMAD, 2016). The costs of borrowing for small loans relative to costs of borrowing for large loans have increased over the past years. Furthermore, there is a lack of financial literacy in SME and a lack of business finance advice to help SMEs dealing with complex procedures for obtaining bank loans ( ), various public financial incentives, and emerging alternative financial sources. These developments are also supported by the recent firm level survey by the European Investment Bank (EIB, 2017). According to the survey, 8 % of firms are finance constrained, which is close to the EU average. The survey shows a clear recent improvement in firms’ satisfaction with the components of external finance offers like cost and collateral requirements. Overall, the survey indicate that significantly fewer businesses perceive access to finance as a barrier to investment than in 2016 (down from 48 % to 29 %). However, SMEs consider access to finance to be a longterm growth barrier more often than large firms. Alternative financial instruments like venture capital and other equity-type capital are only emerging in Slovenia. Alternative financing represents only a minor share of financial resources available for SMEs. Despite a modest increase, private equity in Slovenia is still low. (Invest Europe, 2017) (Graph 4.2.4). Overall access to alternative finance, especially venture capital, is improving in Slovenia, albeit from a very low level. The country still ranks among the last across the EU Member States in its venture capital share as a percentage of GDP ( ). It is possible that not just the limited availability of bank credit, but also a lack of venture capital and other equity financing prevent innovative SMEs from scaling up (Van Roy and Nepelski, 2016). Graph 4.2.4:Annual value of private equity investments in selected Central and Eastern European countries in 2013 to 2016 (million euros) Source: Invest Europe CEE Private Equity Statistics 2016 There has been a concerted policy response to improve access to finance. Box 4.2.1 discusses the funding opportunities created using the EU funds and mechanisms. Financial support has been directed to SMEs also through the Slovene Enterprise Fund (SEF) financial instruments (both debt- and equity-type instruments: grants for start-ups, seed capital, convertible loans, equity, microcredits and guarantees for bank loans with subsidies of interest rate). However, these financial instruments are considered important by only about one out of nine SMEs due to the limited overall amount of funding available (Bank of Slovenia 2017b). Nevertheless, the SEF report shows that several thousand new jobs have been created through its financial support measures. Moreover, the national development bank (SID Bank) has offered specific financial instruments to SMEs.

New technologies are helping to finance Slovenian start-ups. They have had a very high success rate on several international crowdfunding platforms and recently raised a large amount of funding through the initial coin offering platforms. Slovenia is well positioned to become a regional block-chain hub. These improvements are yielding visible results with ‘unicorns’ such as Outfit 7 and several other globally successful start-up cases (see also Section 4.4.5 on the business environment). Box 4.2.1: Policy highlight: improving the access to finance In 2017, there were two positive developments to stimulate further alternative investments. First, in autumn 2017 the SEF invested EUR 8 million ( III ) into a new cross-border equity initiative called the Central Europe Fund of Funds that is managed by the European Investment Fund (EIF). The Funds’ main objectives are to boost equity investments in the region’s SMEs and small mid-caps, establish a sound market-based infrastructure for risk financing, implement and introduce the best market standards for equity investments in enterprises and attract institutional investors and fund managers to Central Europe. In total, investments in five to eight venture capital funds are envisaged to increase the amount available for investments into Central European businesses to about EUR 160 million. Second, in mid-November 2017 the EIF and the national promotional bank SID Bank launched the first Slovenian capital growth investment programme. EUR 100 million, backed by the European Fund for Strategic Investments guarantee, will be made available for innovative and fast-growing SMEs. Additional financial instruments co-financed by the EU structural funds (ESIF) are being prepared. In June 2016, the Slovenian government decided to allocate EUR 253 million of ESI Funds to a fund of funds. The fund of funds manager (the SID Bank) prepared a market test in August 2017, which provided the basis for their investment strategy. The agreement with the SID Bank was signed in November 2017 ( IV ) and the first instalment of EUR 63 million was transferred to them in early December 2017 ( V ). It is expected that in early 2018 the SID Bank will issue public calls to select financial intermediaries in four different areas: RDI, SMEs, energy efficiency and urban development. The funds are expected to reach the final recipients in the second half of 2018. A total of EUR 88 million is to be delivered through loans, EUR 60 million through microloans, EUR 95 million through portfolio guarantees and EUR 10 million through equity financing. Equity financing is allocated solely to support SMEs. Guarantees in combination with grants supported by the European Agricultural and Rural Development Fund will be used for agricultural and forestry businesses. This is a significant step, marking a departure from supporting agricultural, rural and forestry businesses exclusively by way of grants. It is envisaged that the fund of funds will accommodate risks related to the referred businesses’ loans by managing EUR 65 million. The selection of the fund of funds manager is ongoing. The final recipients are expected to benefit in 2018. 4.3. Labour market, education and social policies 4.3.1.Labour Market The labour market situation continues to improve. With the economic recovery, the employment rate has risen for the third year in a row, and unemployment is falling (Graph 4.3.1). In 2017, unemployment (ages 15-74) fell from 8.0 % to 6.8 % on an annual basis. In the third quarter of 2017, the employment rate was 74.1 %, up 3.7 pps compared with the same period in 2016. In the same period, the employment rate of low-skilled workers also improved (Q3-2016: 44.2 %, Q3-2017: 50.2 %) although it remains below the EU average (55.7 %). In spite of these positive trends, challenges remain, in particular for older workers (55-64). In 2016 the employment rate of older workers increased by 1.9 pps and was the highest ever recorded at 38.5 %. Nonetheless, it still lags significantly behind the EU average (55.2 %). Furthermore, the activity rate for this age group is the lowest in the EU. In December 2017 the parliament adopted the Intervention Act and extended measures of promoting employment of persons aged over 55 years ( ). A rapidly ageing society means the working age population and labour supply are shrinking. This could hamper economic growth. The Institute of Macroeconomic Analysis and Development of Slovenia forecasts that by 2020 the labour force could contract by 8 000 persons per year on average (0.82 % of the total active population aged 20-64), causing both the number of employed and unemployed people to drop (IMAD, 2016a). The old-age dependency ratio is projected to double by 2060. This means that today’s young workers and future generations are likely to face a double burden. Their contribution to social security could rise, which would reduce take-home pay, ceteris paribus. These generations are also likely to receive lower pensions, relative to wages, than today’s pensioners (European Commission, 2017f) (see Section 4.1.3). The 65+ proportion of the population is projected to reach 31.6 % by 2060, from 17.1 % currently. Graph 4.3.1:Activity, employment and unemployment rates (annual) Source: European Commission In response to this trend, the government has prepared an Active Ageing Strategy. It is focused on four pillars: i) employment/activity; ii) independent, healthy and safe life of all generations; iii) social inclusion, and; iv) creating an environment to foster activity throughout the lifespan (IMAD and MoLFSAEQ, 2017). The relevant ministries have not yet prepared their six month action plans with concrete proposals although these were due by the end of 2017. Net migration after the economic crisis has been very low. In the last 10 years, immigration was the highest in 2007-2009 and was driven by rapid growth of individual sectors (for example construction) rather than by a comprehensive strategy. In the absence of migration growth in the future, and assuming birth rates and life expectancy will be stable, by 2060 the working age population would be up to half a million individuals smaller than in 2013 (IMAD and MoLFSAEQ, 2017). The strategic migration policy has not helped to attract workers into bottleneck professions. Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights The European Pillar of Social Rights, proclaimed on 17 November 2017 by the European Parliament, the Council and the European Commission, sets out 20 principles and rights to benefit citizens in the EU. In light of the legacy of the crisis and changes in our societies driven by population ageing, digitalisation and new ways of working, the Pillar serves as a compass for a renewed process of convergence towards better working and living conditions. Slovenia performs relatively well on the indicators of the Social Scoreboard ( VI ) supporting the European Pillar of Social Rights. Income inequality is low and so is the share of early school leavers. The risk of poverty and social exclusion has decreased over the last years. However, old-age poverty remains frequent. The low employment rate of older workers and low-skilled is a concern in terms of equal opportunities of under-represented groups. Gross disposable household income has declined significantly during the crisis but is currently growing again. The low employment rate of older workers and low-skilled reflects low participation in adult learning and active labour market policies. Both adult learning and active labour market policies are important to tools to improve access to the labour market. They can help persons wanting to work to gain new skills or incentives for employment. Participation in adult learning is falling since 2010 and has been especially low among older workers and the low-skilled. Participation in active labour market policies is also very low in Slovenia. Slovenia provides high quality general education, successfully containing early leaving from education and training. Additionally, Slovenia has continued increasing its tertiary education attainment rate. In 2016 44.2 % of 30-34 year-olds had obtained a tertiary-level qualification, up by 3.2 pps since 2014. A high level of public regard for teachers, combined with robust social dialogue in the education field and a relatively high level of investment in education, all contributed to the traditionally good performance of the Slovenian education system. There are signs of labour shortages in a number of vocational occupations. According to the Manpower Talent Shortage Survey, the share of employers reporting skills shortages increased from 28 % in 2012 to 33 % in 2016. A survey by the Employment Service of Slovenia shows similar results, especially for drivers of heavy vehicles and tugs, workers in manufacturing, welders, masons, cooks, waiters, toolmakers and salesmen (ESS, 2017). Adjusting education programmes and offering enrolment places could help reduce these gaps. Most workers are well matched with their current jobs but there are indications that the system is not fully able to provide in-demand skills (OECD, 2017a). Population ageing accentuates the need to increase participation in adult learning. While in 2016 the participation of adults in learning was 11.6 % and still slightly (0.8 pps) above the EU average, it has fallen steadily since 2010. Participation in adult learning has been especially low among older workers and the low-skilled. This causes concerns as improving skills through adult learning could increase the chances of being in employment. The participation rate in active labour market policies (ALMP) in Slovenia was among the lowest in the EU, while long-term unemployment (LTU) remains high. In 2016, LTU represented 4.3 % of the active population, which corresponds to 53.3 % of all unemployed people. According to national data, in 2016 the transition rate of LTU to employment was 25.2 % and the share of LTU participants in ALMP programmes represented 48 % of all participants. Around EUR 189 million is earmarked for ALMPs in 2017 and 2018, an increase from previous years but low compared to other OECD countries. In 2017, two new measures are aimed directly at older workers ( ). Regardless of progress, older and low-skilled workers remain under-represented in ALMP and could benefit from implementation of the Upskilling Pathways Recommendation. Despite the low participation rate, Slovenia’s most important ALMP programmes ( ) perform rather well, if judged by labour market impact and cost-effectiveness. In September 2017, the University of Primorska prepared an impact assessment of key employment programmes in Slovenia. Short and longer-term effects are positive with the exception of public works, the programme catering to the jobseekers furthest away from the labour market. Although the programme has some positive effects such as skills development, activation and social inclusion, its labour market impact is modest and the programme’s computed net benefit is negative. (MoLFSAEO & UoP, 2017). Despite these overall good results, low participation rate in the activation measures remains a concern. Incentives to become employed in a low-wage position when on benefits are rather weak. During the first months of unemployment, the net replacement rate of unemployment benefits is very high (above 80 %) for low-wage earners. The unemployment trap for the beneficiaries is high compared to other EU countries. However, employers in Slovenia are required by law to pay a travel and daily meal allowance. These are not subject to taxation and amount to approximately 13 % of the average wage bill. Net wages in Slovenia are therefore some 10 % higher than reported in official statistics. Unemployment benefit recipients do not receive these allowances. Taking them into account reduces the unemployment trap by approximately 10 pps, although it remains above the EU average. Furthermore, only a relatively small share of the unemployed (24 % in 2015) receive unemployment benefits, and for a shorter period than in other EU Member States ( ). A significant number of unemployed people receive other forms of income support (OECD, 2016a). In September 2017, the Act Amending the Labour Market Regulation Act was adopted with the main aim of accelerating activation of the unemployed. An incentive for low- and medium-educated beneficiaries of unemployment benefits was prepared. If they enter full-time employment they will continue to receive 20 % of the latest unemployment benefit amount until the end of the period for which the benefit was originally awarded, but no longer than 12 months after the start of employment. This incentive could further reduce the unemployment trap. The 2013 Employment Relationship Act, introduced to reduce labour market dualism and increase flexibility, appears to have paid off, at least for older workers. A study ‘Equity and productivity effects of the New Labour Code’ ( ) evaluates the short-term equity and productivity effects of the Employment Relationship Act ( ). It shows favourable outcomes for older workers in terms of higher transition rates from fixed-term to permanent contracts, and higher transitions from unemployment to employment (MoLFSAEO and UoP, 2017). However, the analysed period was rather short and next topermanent, fixedterm hiring is also rising. While the reform clearly helped certain vulnerable groups enter employment, temporary employment remains an issue. Young people have seen their job situation improve but are often employed under non-standard and precarious contracts. The share of temporary employment among young people is still the highest in the EU (IMAD, 2017a). In 2016, more than 7 out of 10 young workers in Slovenia had a temporary contract, compared to 13.1 % of workers aged 25-49 (European Commission, JER 2018c). They are also overrepresented in involuntary part-time work and lower wage jobs. This is largely due to the prevalence of student work contracts, which increased despite the recent introduction of employer social security contributions for these contracts (IMAD, 2017a). In addition, women in Slovenia are more often employed on fixed-term contracts than women on average in the EU-28 and more often than men. Workers with shorter careers and longer career breaks could face pension adequacy problems in the future, reinforcing the already existing problems (see Section 4.1.4). The Slovenian Statistical Office estimates that the share of possible bogus self-employment almost doubled between 2012 and 2015 (SORS, 2016). The share of self-employed in total employment has been slowly increasing from 9.5 % in 2008 to 11.6 % in 2016. Wage growth in Slovenia remains moderate and in line with productivity developments. In 2016 nominal wages increased by 2.8 % in Slovenia. Combined with modest productivity gains, this resulted in an increase in nominal unit labour costs. The further tightening of the labour market is expected to put continuous upward pressure on wages. Nominal wages are projected to continue to increase by 2.8 % in 2017 and by around 3.2 % in 2018 and 2019, remaining both below the rate consistent with internal labour market conditions, and below the rate consistent with a stable evolution of cost competitiveness( ). Nominal unit labour costs are also projected to increase, at a rate slightly below the euro area average (Graph 4.3.3). Real wage growth accelerated in 2016 and — after several years of significantly lagging behind — exceeded productivity growth by roughly 0.7 pps in 2016. In the coming years real wage growth is expected to remain somewhat below productivity growth.

Graph 4.3.2:Decomposition of rate of change of unit labour costs Source: European Commission The minimum gross wage increased to EUR 804.96 in 2017, about EUR 14 (1.8 %) higher than in the previous year. Considering that this increase was relatively small and less than the increase of average wages (2.2 %), this is not expected to put pressure on competitiveness. Growth in gross disposable household income (GDHI) per capita however, has been relati