COMMISSION STAFF WORKING DOCUMENT In-depth review for SLOVENIA in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances
Date: 2013-04-10
Institutions: European Commission
Subjects: Slovenia, banking system, competitiveness, economic growth, economic recession, economic reform, indebtedness, labour market, macroeconomics, public debt, public sector

EUROPEAN 
COMMISSION 

Brussels, 10.4.2013  
SWD(2013) 122 final 

COMMISSION STAFF WORKING DOCUMENT 

In-depth review for SLOVENIA 

in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and 
correction of macroeconomic imbalances 

Accompanying the document 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP 

Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and 
correction of macroeconomic imbalances 

{COM(2013) 199 final} 
{SWD(2013) 113 final} 
{SWD(2013) 114 final} 
{SWD(2013) 115 final} 
{SWD(2013) 116 final} 
{SWD(2013) 117 final} 
{SWD(2013) 118 final} 
{SWD(2013) 119 final} 
{SWD(2013) 120 final} 
{SWD(2013) 121 final} 
{SWD(2013) 123 final} 
{SWD(2013) 124 final} 
{SWD(2013) 125 final}

EN 

   EN 

 
 
 
 
 
  
 
 
 
 
TABLE OF CONTENTS 

Executive summary and conclusions ......................................................................................... 3 

1. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

2.5. 

3. 

3.1. 

3.2. 

Introduction .................................................................................................................. 5 

Macroeconomic situation and potential imbalances .................................................... 5 

Macroeconomic scene setter ........................................................................................ 5 

Sustainability of external positions .............................................................................. 6 

Competitiveness and export performance.................................................................... 9 

Private sector indebtedness ........................................................................................ 15 

Asset market developments........................................................................................ 17 

In-depth analyses........................................................................................................ 19 

Banking sector vulnerabilities.................................................................................... 19 

State-owned  enterprises:  a  key  source  of  macroeconomic 
imbalances  and 
impediment to private investment.............................................................................. 27 

4. 

Policy challenges........................................................................................................ 36 

References and sources ............................................................................................................ 40 

2 

 
 
EXECUTIVE SUMMARY AND CONCLUSIONS  

In  May  2012,  the  Commission  concluded  that  Slovenia  was  experiencing  macroeconomic 
imbalances,  in  particular  as  regards  developments  related  to  corporate  sector  deleveraging, 
banking stability and to some extent also external competitiveness. It highlighted the necessity 
of  a  prompt  and  thorough  policy  response  to  minimise  the  risk  of  existing  imbalances 
becoming  excessive.  In  the  Alert  Mechanism  Report  (AMR)  published  on  28  November 
2012,  the  Commission  found  it  useful,  also  taking  into  account  the  serious  imbalances 
identified  in  May,  to  examine  further  the  risks  involved  and  progress  in  the  unwinding  of 
imbalances  in  an  in-depth  analysis.  To  this  end  this  In-Depth  Review  (IDR)  takes  a  broad 
view  of  the  Slovenian  economy  in  line  with  the  scope  of  the  surveillance  under  the 
Macroeconomic  Imbalance  Procedure  (MIP).  The  main  observations  and  findings  from  this 
analysis are that the negative economic trends and imbalances identified in the 2012 IDR have 
aggravated. Notably:  

•  The levels of total private debt are below the euro area average and the alert thresholds 
of the scoreboard, but many corporates remain over-indebted, leading to further rises 
in non-performing loans. 23.7% of this segment of bank credit is now in arrears of 90 
days or over. 

•  The size of the Slovenian banking sector is relatively small and less than half the euroa 
area  average,  but  major  domestic  banks  face  continued  deterioration  of  their  credit 
portfolios,  which  puts  sustained  pressure  on  capital  buffers,  which  remain  low  in 
regional comparison. Further recapitalisations are likely to be needed. 

•  Credit  is  contracting  and  the  interaction  between  weak  banks  and  the  sovereign  has 
intensified.  The  nominal  stock  of  bank  credit  to  the  private,  non-banking  sector  is 
shrinking at an annual rate of more than 5%. The state has de facto become the main 
source of capital and remains a sizeable, though declining, source of deposits for the 
banking  sector.  At  the  same  time,  the  state  itself  has  to  consolidate  and  yields  on 
government bonds remain elevated. Public debt amounted to 54% of GDP in 2012 and 
is forecast to exceed the 60%-of-GDP threshold by 2014.  

•  The  deleveraging  challenge  is  accentuated  by  a  double-dip  recession  and  growth 
forecasts have been revised downwards. Real GDP is now 8% below the peak reached 
in 2008 and this situation is forecast to persist through to 2014. Economic contraction 
hinders  corporate  balance  sheet  repair  and  makes  it  difficult  for  new  firms  to  grow, 
inevitably leaving banks increasingly exposed to legacy portfolios. 

•  Net  external  debt  is  relatively  contained  and  the  current  account  has  turned  into 
surplus.  However,  this  is  due  to  reduced  imports  from  lower  economic  activity  and 
employment, while cost-competitiveness losses have not been reversed. Export market 
shares  have  been  lost  and  export  performance  is  substantially  weaker  than  in  peer 
countries. 

•  Policies  to  address  the  limited  adjustment  capacity  of  the  economy  have  yet  to  fully 
develop. Important positive steps have been the enactment of a partial pension reform 
in the final weeks of 2012 as well as the labour market reform adopted early March.  

•  The  complex  nexus  of  state  ownership  limits  adjustment  and  distorts  resource 
allocation, especially as regards new investment. It also seems to keep foreign-direct 

3 

 
 
 
investment  lower  than  in  peer  countries.  State-controlled  funds  and  enterprises  also 
impact public finances through the interaction of elevated debt levels, recapitalisation 
needs and significant government guarantees.  

•  Framework  legislation  for  bank  restructuring  and  privatisation  was  passed  but  still 

needs to be implemented effectively.  

Periods  of  policy  uncertainty  and  legal  obstacles  to  reforms  have  prevented  Slovenia  from 
addressing its imbalances adequately and enhancing its adjustment capacity, thus increasing 
its vulnerability at a time of heightened sovereign funding stress in Europe.  

A  comprehensive  reform  strategy  accompanied  by  a  credible  implementation  path  would 
stabilise  the  financial  sector,  unleash  Slovenia´s  growth  potential  and  increase  employment. 
The  IDR  thus  also  discusses  the  policy  challenges  stemming  from  these  developments  and 
possible policy responses. A number of elements can be considered: 

• 

the  credible  repair  of  the  banking  system  through  a  balanced  set  of  measures  and 
maintenance  of  financial  stability  through  prudent  supervision  and  improved 
governance structures, including the eventual privatisation of state-owned banks; 

•  a  sounder  financing  of  the  net  international  investment  positions  (NIIP)  and  growth 
through foreign direct investment (FDI) facilitated by an improvement of the business 
environment;  

•  cost-competitiveness developments supportive of adjustment and helping to avoid the 
re-emergence  of  external  imbalances  through  continued  public  sector  wage  restraint, 
adaptation of minimum wage setting and a set of labour market reforms; 

• 

the  enhancement  of  adjustment  capacity  at  the  microeconomic  level,  particularly  in 
relation to state-ownership and labour market institutions. 

4 

 
 
1. 

INTRODUCTION 

On  28  November  2012,  the  European  Commission  presented  its  second  Alert  Mechanism 
Report (AMR), prepared in accordance with Article 3 of Regulation (EU) No. 1176/2011 on 
the  prevention  and  correction  of  macroeconomic  imbalances.  The  AMR  serves  as  an  initial 
screening device helping to identify Member States that warrant further in-depth analysis to 
determine  whether  imbalances  exist  or  risk  emerging.  According  to  Article  5  of  Regulation 
No. 1176/2011, these country-specific “in-depth reviews” (IDR) should examine the nature, 
origin and severity of macroeconomic developments in the Member State concerned, which 
constitute,  or  could  lead  to,  imbalances.  On  the  basis  of  this  analysis,  the  Commission  will 
establish  whether  it  considers  that  an  imbalance  exists  and  what  type  of  follow-up  it  will 
recommend to the Council. 

This is the second IDR for Slovenia. The previous IDR was published on 30 May 2012 on the 
basis  of  which  the  Commission  concluded  that  Slovenia  was  experiencing  severe 
macroeconomic imbalances, in particular as regards developments related to corporate sector 
deleveraging,  banking  stability  and  to  some  extent  also  external  competitiveness.  It 
highlighted  the  necessity  of  a  prompt  and  thorough  policy  response  to  minimise  the  risk  of 
existing  imbalances  becoming  excessive.  Overall,  in  the  AMR  the  Commission  found  it 
useful, also taking into account the serious imbalances identified in May, to examine further 
the  risks  involved  and  progress  in  the  unwinding  of  imbalances  in  an  in-depth  analysis.  To 
this end this IDR takes a broad view of the Slovenian economy in line with the scope of the 
surveillance under the Macroeconomic Imbalance Procedure (MIP). 

Against this background, Section 2 of this IDR looks more in detail into these developments 
covering  both  the  external  and  internal  dimensions.  This  is  followed  by  a  specific  focus 
updating  the  assessment  of  the  banking  sector  in  Section  3.1  and  a  specific  focus  on  the 
special  position  of  state-owned  enterprises  in  Section  3.2,  which  has  been  a  recurring  issue 
since pre-accession negotiations.1 Section 4 discusses policy considerations. 

2. 

MACROECONOMIC SITUATION AND POTENTIAL IMBALANCES 

2.1.  Macroeconomic scene setter 

Slovenia is experiencing a double-dip recession. Real GDP contracted by 2.3% in 2012 and 
will contract by 2% in 2013 according to the Commission services’ 2013 Winter Forecast. As 
a result, GDP is about 8 pps. below the peak reached in 2008 and this gap is not expected to 
close over the forecast horizon; the corresponding gap for the euro area as a whole is about 
1½  pps.  in  2012,  closing  to  zero  in  2014.  As  a  consequence,  and  in  contrast  to  most  other 
European economies, the recovery in 2010-11 was so short-lived and modest in Slovenia that 
real GDP has now fallen below the previous trough. 

1  

See European Commission (2000), p. 58 and p.81, European Commission (2003), pp. 5-9 and p. 59, and 
also Lindstrom and Piroska (2004), pp. 6-7.  

5 

 
 
 
                                                            
Graph  1:  Gross  domestic  product  and  gross  fixed 
capital formation, €bn at  constant 2005 prices 

Graph 2: General government deficit and debt, % 
of GDP  

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SI GDP (lhs)

SI GFCF (lhs)

General government debt as % of GDP (lhs)

EA-17 GDP (rhs)

EA-17 GFCF (rhs)

General government deficit as % of GDP (rhs)

Source:  Eurostat  and  Commission  services’  2013  Winter 
Forecast 

Source:  Eurostat  and  Commission  services’  2013  Winter 
Forecast 

Demand remains weak, employment is still in decline and the financial situation of firm 
continues to deteriorate. Weak demand and capital support measures continue to drive the 
deterioration  of  Slovenia’s  public  finances.  The  excessive  deficit  will  probably  not  be 
corrected  in  2013,  the  deadline  set  by  the  Council,  according  to  the  Commission  services’ 
2013 Winter Forecast, which foresees a deficit of 5.1% of GDP. Debt is expected to approach 
the 60% of GDP threshold by 2013, even without including additional measures necessary to 
stabilise  the  financial  sector.  Employment  is  still  contracting  and  is  forecast  to  remain  on  a 
downward  path  until  2014,  the  period  covered  by  the  Commission  services’  2013  Winter 
Forecast.  Many  companies,  especially  those  oriented  to  the  domestic  market,  struggle  to 
service  debts.  The  transmission  of  financial  distress  from  firms  to  banks  has  intensified, 
leading to substantial further loan losses.  

Slovenia’s  accessed  sovereign  debt  markets  in  2012.  Slovenia  has  maintained  an 
investment  grade  rating  (Moody's  Baa2,  S&P  A-,  Fitch  A-),  despite  a  downgrade,  whereas 
throughout most of the year yields on Slovenian government bonds rose in tandem with those 
for Italy and Spain. Market access was eventually reconfirmed through a sizeable US-dollar 
issue in October. Nevertheless, funding vulnerabilities remain as reform progress is uneven. 
Uncertainty  as  to  the  true  scale  of  contingent  fiscal  liabilities  in  the  banking  sector  and 
possible further downgrades2 have the potential to make Slovenia’s re-financing programme 
more  challenging  in  2013,  with  potential  knock-on  implications  especially  for  the  banking 
sector.  

2.2. 

Sustainability of external positions 

Weak domestic demand has allowed the current account to move into surplus. Final data 
for 2011 show the impact of the trade surplus on reducing net borrowing. Despite the sizeable 

2  

The ratings outlooks of Moody’s and Fitch remain negative. 

6 

 
 
 
 
 
 
                                                            
general government deficit, the current account has moved from balance in 2011 to a surplus 
of  2%  of  GDP  in  2012,  according  to  the  Commission  services’  2013  Winter  Forecast.  It  is 
expected to remain in surplus over the forecast horizon, even once adjusted for the very weak 
stage in the cycle, whereas the current account norm for Slovenia is a slight deficit according 
to  Commission  internal  estimates.3  This  development  can  be  attributed  primarily  to  weak 
domestic demand, with a secondary role through the income balance for profits and earnings 
of foreign workers. The role of weak domestic demand since 2009 is driving a gap between 
imports  and  exports.  Indeed,  internal  estimates  suggest  that  Slovenia  may  be  one  of  the 
relatively  few  EU  Member  States  where  current  account  improvement  can  primarily  be 
attributed  to  cyclical  factors.4  While  these  estimates  are  sensitive  to  the  specific  calculation 
methodology adopted, they nonetheless point to underlying structural weaknesses.  

Graph 3: Imports and exports of goods and services, €bn at current prices 

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Exports

Imports

Source: AMECO and Commission services’ 2013 Winter Forecast 

The  relatively  benign  level  of  the  net  international  investment  position  (NIIP)  hides 
underlying  weaknesses.  Historical  NIIP  data  have  been  revised,  leaving  Slovenia  slightly 
above the 35% of GDP NIIP threshold in the AMR scoreboard – still the lowest reading for a 
new  Member  State.  As  this  is  primarily  due  to  the  very  low  FDI  stock,  it  is  in  fact  a 
consequence  of  features  of  Slovenia’s  business  environment  and  history  of  state-ownership. 
Consequently, the structure of Slovenia’s external debt, comprising essentially portfolio and 
other  investment,5  makes  this  position  more  vulnerable  to  abrupt  changes  in  investor 
confidence  than  the  headline  indicators  would  suggest.  The  need  for  rapid  repayment  of 
wholesale borrowing by domestic banks, which has contributed to deleveraging, exemplifies 
this vulnerability (see section 3.1). The 2012 IDR analysis in this respect remains valid. More 

3  

4  
5  

The  current  account  norm  describes  the  'average'  current  account  balance  that  would  prevail  in  a 
country  with  similar  structural  characteristics  such  as  ageing  profile,  fiscal  deficit,  degree  of  energy 
dependence, etc. A comparison of a country's business-cycle-adjusted current account balance with the 
current  account  norm  indicates  in  how  far  the  former  deviates  from  the  'norm'.  Estimated  current 
account norms are based on a panel regression of 68 countries and available data for the period 1970 to 
2012. For details on the methodology, see Salto and Turrini (2010). 
See Salto and Turrini (2010). 
The structure of this has changed over the past two years, with a shift from wholesale funding to ECB 
lending.  

7 

 
 
 
 
                                                            
success  in  attracting  FDI  to  finance  Slovenia’s  catching-up  process  would  initially  imply 
current account deficits and in the longer run a more negative but more sustainable NIIP. 

Graph  4:  Net  lending/borrowing  by  sector  (%  of 
GDP) 

Graph  5:  Components  of  net  lending/borrowing 
(% of GDP) 

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99 00 01 02 03 04 05 06 07 08 09 10 11

Households
Financial corporations
Total Economy

General government
Non-Financial corporations

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

Capital account (KA)

Income balance

Current transfers

  Trade balance - services

  Trade balance - goods

Trade balance

Current account balance (CA)

Net lending/borrowing (CA+KA)

Source: EUROSTAT 

Source: EUROSTAT 

Graph 6: Financing of net lending/borrowing (% of 
GDP) 

Graph 7: Net external debt and composition of Net 
International Investment Position (% of GDP) 

* indicates estimated figure using quarterly data. 

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95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

Net errors and omissions
Official reserves (net)
Other investment (net)
Portfolio investment (net)
Direct investment (net)
Current account balance
Net lending/borrowing (CA+KA)

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112*

Net portfolio investment
Changes in reserves (net)
Other investment (net)
Net direct investment
Net financial derivatives
Net external debt (neg. sign)
Net int'l investment position (NIIP)
Marketable debt (portfolio debt instr. and other investment, net)

Source: EUROSTAT 

Source: EUROSTAT 

* indicates estimated figure using quarterly data. 

* indicates estimated figure using quarterly data. 

8 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Creating  a  good  investment  climate,  including  for  FDI  in  productive  sectors,  would 
reduce  external  vulnerabilities  by  promoting  a  beneficial  shift  towards  equity  and  less 
volatile debt in Slovenia's overall financing. Despite its high-quality workforce and location 
close to main EU markets, Slovenia's inward FDI stock stood at only 31% when the crisis hit 
in  2009,  compared  to  78%  in  Hungary  and  58%  in  Slovakia.  Slovenia  scores  "below 
expectations" on the basis of comparison of the FDI Attraction Index with the FDI Potential 
Index.6 This confirms it is among the catching-up economies that have received less FDI than 
would  be  expected  based  on  economic  determinants.  Significantly  increased  FDI  would  be 
beneficial, for growth and external sustainability. FDI in productive activities could provide 
much-needed equity to the real sector and bring fresh capital and improved risk management 
to  banks,  thereby  allowing  credit  growth  to  resume  in  the  future.  FDI  could  also  reinforce 
corporate  governance  and  promote  external  balance  by  bringing  higher  technology  content 
manufacturing,  strengthening  integration  into  international  supply  chains  and  opening  up 
access  to  growth  or  niche  markets.  Finally,  FDI  is  a  key  portfolio  diversification  tool  for  a 
small  open  economy  such  as  Slovenia,  allowing  a  wider  range  of  investors  to  shoulder 
Slovenia-specific risks and opening up space for diversification of Slovenian balance sheets.  

2.3. 

Competitiveness and export performance 

Slovenia’s competitiveness remains to be re-established. This is in line with the 2012 IDR 
assessment.  With  wage  growth  still  low,  nominal  unit  labour  cost  (NULC)  growth  has 
decreased,  with  the  indicator  falling  below  the  scoreboard  threshold.  This  is  reflected  in  a 
slight  depreciation  in  the  ULC-based  measure  of  the  real  effective  exchange  rate  (REER 
ULC). However, sustained NULC and price growth below that of Slovenia’s trading partners 
will be necessary to repair previous cost-competitiveness losses, especially from the 2007-09 
period.  Necessary  corporate  balance  sheet  repair  could  also  absorb  initial  labour  cost 
reductions by improved profitability, thus helping in the sectoral allocation of capital. Lack of 
competitiveness will hold back exports and disincentivise FDI. Moreover, as policy currently 
stands,  there  are  strong  built-in  dynamics  in  both  public  and  minimum  wages  that  could 
reignite  adverse  trends  in  the  coming  years.  Pressure  on  wages  is  to  be  expected  once 
economic  growth  resumes  as  employees  seek  to  re-establish  differentials  that  were 
compressed in 2010 by a hike in minimum wages and by its subsequent inflation-indexation 
based increases.  

6  

UNCTAD (2012). 

9 

 
 
 
 
                                                            
Graph 8: Decomposition of developments in ULCs  Graph  9:  Developments 

in  Real  Effective 

Exchange Rates 

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-6

)

%

(

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C

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Inflation (GDP deflator growth)
Real Compensation per Employee
Productivity Contribution (negative sign)
Nominal unit labour cost
ULC in 36 industrial competitors of EU-27

8

6

4

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)

%

(

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98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

NEER
REER (HICP)

relative HICP (-)
REER (ULC)

Source: Eurostat & Commission services 2013 WF 

Source: Eurostat & Commission services 2013 WF 
Improving  cost  competitiveness,  notably  in  terms  of  labour  costs,  could  make  a  key 
difference in preventing the return of external imbalances. Competitive labour cost levels 
would  contribute  to  positive  trade  and  current  account  developments  and  help  Slovenia 
become a more attractive investment location. The government has cut nominal public sector 
wages by around 3% in net terms in 2012 and has envisaged cutting the wage bill by 5% in 
2013. Although this only indirectly affects the tradable sector, this is one of the government's 
main levers in containing wage costs. There are currently no plans to pull the other main lever 
available – alteration of minimum wage adjustment (see Box 1). 

10 

 
 
 
 
 
 
 
 
 
 
 
 
 
Box 1: The minimum wage in Slovenia7 

A hike of the minimum wage in 2010 contributed to the loss in price competitiveness and 
was ill-timed given rising unemployment. In March 2010, the minimum wage increased by 
about  one  quarter,  from  597  to  734  Euros  per  month.  At  the  same  time,  the  number  of 
minimum  wage  recipients  more  than  doubled.  The  large  discretionary  adjustment  in  the 
minimum  wage  coincided  with  the  period  of  economic  slowdown  and  interrupted  the  on-
going deceleration in the wage growth.8 The increase in the minimum wage was exceptionally 
high not only compared to its developments in the last decade but also compared to average 
yearly  increases  in  inflation  and  labour  productivity  over  the  same  period.  The  minimum 
wage  was  also  pushed  well  above  the  basic  wages  negotiated  in  some  sectoral  collective 
agreements, even for tasks requiring medium education. At the beginning of 2011, 2012 and 
2013 the minimum wage was adjusted by the inflation rate in the previous year, resulting in a 
further increase of the minimum wage by 6.7% to the level of 784 Euros per month in 2013. 
In  2011,  Slovenia  was  placed  among  the  EU  countries  with  the  most  expensive  minimum 
wage workers compared to the average wage workers, measured both in gross terms and in 
terms  of  the  labour  costs.  The  high  level  of  the  minimum  wage  is  estimated  to  have  a 
significant negative impact on employment and to delay employment recovery.9  

Graph  10:  Unit  labour  costs,  compensation  per 
employee, labour productivity, y-o-y growth rate 

Graph  11:  Minimum  wage,  inflation  and  labour 
productivity, y-o-y growth rate 

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y-o-y%

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Labour productivity_SI
Nominal compensation per employee_SI
Nominal unit labour costs_SI
Nominal unit labour costs_EU27

03

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11

12

Minimum wage (in Euros)
HICP growth (rhs)
Minimum wage growth (rhs)
Real labour productivity per person employed (rhs)

Source: AMECO 

Source: Ministry of Labour, Family and Social Affairs 

Graph  12:  Minimum  wage  and  the  number  of 
minimum wage recipients 

Graph  13:  Costs  of  the  minimum  wage  worker 
compared to the average wage worker, 2011 

11 

 
 
 
 
 
 
s
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09

10

11

12

70

60

50

40

30

20

10

Average paid minimum wage
Minimum wage - legal amount
Minimum wage - amount in the transition period*
Minimum wage recipients, in 1000 (rhs)

0
0
0
1

n

i

i

,
s
t
n
e
p
c
e
r

i

e
g
a
w
m
u
m
n
m

i

i

f
o
r
e
b
m
u
n
e
h
T

60

50

40

30

20

10

0

SI FR MT LU LV BE NL PT IE LT HU UK PL SK RO ES EE BG CZ

In gross terms

In terms of labour costs

*The lowest amount set in the legislation 

Source: 
Development (2012). 

Institute  of  Macroeconomic  Analysis 

Source:  Eurostat  (wages  in  gross  terms);  Commission 
services;  Joint  European  Commission-OECD  project, 
using OECD Tax-Benefits models (labour costs) 

and 

Although the minimum wage is below the relative poverty threshold, the risk of poverty among 
the  employed  is  low.  Net  income  of  minimum  wage  workers  is  not  sufficient  to  reach  the  relative 
poverty threshold (60% of median equivalised disposable household income); however, net income of 
minimum wage workers is among the highest in the EU when compared with average wage workers. 
The at-risk-of-poverty rate of employed persons is low in Slovenia compared to other EU countries, 
including of the workers with primary education who tend to be low-paid. The main cause of poverty 
is  unemployment,  thus  increases  in  unemployment  as  a  result  of  inadequately  high  minimum  wages 
may actually increase overall poverty.  

Graph  14:  Net  income  of  the  minimum  wage 
worker as a % of net income of the average- wage 
worker, 2011 

Graph 15: In-work at-risk-of-poverty rate, 2010 

70

60

50

40

30

20

10

0

Primary education

Secondary education

Tertiary education

Households without children

Households with children

Single person

Single person with children

-5

5

15

25

35

NL SI BE FR LU CZ UK MT PT PL SK LT ES HU LV EE ROBG CZ

SI

EU27

EU15

NMS12

Source: Commission services; Joint European Commission-
OECD project, using OECD Tax-Benefits models, Eurostat 

Source: Eurostat, Commission services 

Employment  protection  legislation  in  Slovenia  used  to  be  among  the  most  rigid  in  the 
EU, which may also have limited the attractiveness of Slovenia as a production location 

12 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
and imply upward pressure on wages. Using the OECD indicator, Slovenia stood out in its 
tight regulation of permanent contracts, notably in case of individual dismissals. In addition, 
outcomes  on  the  labour  market  point  at  labour  market  segmentation,  above  all  among  the 
young,  stemming  from  a  very  high  and  increasing share of newly concluded contracts for a 
definite period and relatively low transition rates from temporary to permanent contracts.  

Graph  16:  Employment  protection 
individual dismissals, 2008  

legislation, 

Graph  17:  The  share  of  temporary  employees  in 
total number of employees aged 15-24 

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

80

70

60

50

40

30

20

10

0

T
P

I

Z S
C

E
D

L
N

E
S

U
L

R
F

I

K F
S

S
E

L
E

E
E

T
A

L
P

E
B

U
H

T

I

E

I

K
D

K
U

07

08

09

10

11

EU27

ES

IT

PT

SI

Note: Scale from 0 (least stringent) to 6 (most restrictive) 

Source: Eurostat, Commission services 

Effects of reforms after 2008 are not taken into account.  
Source: OECD, Commission services 
Strict  employment  protection  legislation  reduces  the  adjustment  capacity  of  the 
economy and causes labour market segmentation. Rigid employment protection legislation 
may have hampered the necessary re-allocation of labour across firms and sectors, including 
away from state-owned enterprises. By hindering adjustment in the quantity of labour inputs, 
strict employment protection also transmitted output falls during recessions into falling labour 
productivity.  In  contrast,  when  labour  demand  recovers,  it  will  favour  wage  growth  over 
employment growth. By reducing labour turnover and by boosting the wage bargaining power 
of  insiders,  rigid  employment  protection  legislation  may  accentuated  wage  pressures 
throughout  the  economic  cycle.  Furthermore,  to  the  extent  that  employment  protection 
legislation  increased  the  effective  labour  costs  borne  by  employers,  it  could  also  have 
translated into a loss of price competitiveness and reduce investment, including FDI.  

Slovenia recently revised employment protection legislation with a view to fostering job 
creation, tackling segmentation, and enhancing the adjustment capacity of the economy. 
The key measures aim at strengthening incentives for firms to use permanent contracts as a 
rule.  To  this  end,  the  regulation  of  permanent  contracts  has  been  relaxed  by  streamlining 
dismissal  procedures  in  case  of  individual  and  collective  dismissals,  and  reducing  dismissal 
costs  for  workers  with  longer  tenures.  Conversely,  protection  of  fixed  term  contracts  is 
increased to curb abuse. The reform also introduces temporary/mini jobs for retired persons 
and  financial  support  to  both  employers  and  employees  during  the  notice  period  in  case  of 
consensual dismissals. While the reform goes in the right direction, it may not be sufficiently 
ambitious to have a substantial impact on the labour market and flexibility. In addition, new 
restrictions  on  the  chaining  of  fixed  term  contracts  may  have  a  negative  impact  on  job 

13 

 
 
 
 
 
 
creation.  Finally,  the  reform  does  not  address  the  problems  associated  with  the  extensively 
used and under-regulated “student work” status.  

Over burdensome regulation of professional services has been identified as detrimental 
to the business environment. Slovenia has over 300 regulated professions (the EU average 
per  country  is  below  200).  Slovenia  is  also  among  the  member  states  which  relatively 
frequently impose specific qualification requirements not linked to professional titles (notably 
in the areas of tourism and security services). Unjustified qualification-related entry barriers 
in  professional  services,  such  as  reserves  of  activity,  can  hinder  competition  and  increase 
costs for businesses and households. A reform process was launched in 2012, with legislative 
changes  foreseen  for  the  craft,  tourism  and  construction  sectors  in  early  2013  and  other 
sectors  due  to  follow.  In  parallel  as  a  tool  for  improving  the  overall  business  environment, 
efforts  are  being  made  to  develop  a  fully  operational  Point  of  Single  Contact  for  online 
completion of administrative procedures in the services sector by 2015. 

Slovenia has not yet adopted a plan for the transition to e-procurement and is one of the 
EU Member States with the least developed infrastructure in this area. This means that 
the  significant  economic  benefits  of  e-procurement  (including  greater  transparency,  faster 
procedures and more competition) are currently not being fully exploited in Slovenia. 

After years in which Slovenia did not keep up with the gains in export market shares of 
other catching-up economies, adverse cost trends have coincided with a decline in export 
market  shares.  Slovenia  now  breaches  the  AMR  scoreboard  threshold  with  a  cumulative 
three-year  loss  of  market  shares  of  6.4%,  principally  because  of  losses  incurred  in  2010.  In 
that  year  the  country  failed  to  benefit  proportionally  from  the  sharp  rebound  in  world  trade 
and  the  minimum  wage  saw  a  large  upward  adjustment.  The  overall  pattern  of  trade  has 
remained similar in 2012, with early signs of some strengthening of exports beyond the EU 
which  have  previously  been  weak.  Modest  gains  in  export  market  shares  are  forecast  until 
2014, the period covered by the Commission services’ 2013 Winter Forecast. The impact of 
weak export performance, including on account of losses in competitiveness, is significant as 
exports are the largest demand component in the Slovenian economy, amounting to over 75% 
of GDP. As a result, even if economic reforms were to lead to only small increases in exports, 
these can have significant positive effects on external balance, growth and employment. 

14 

 
 
Graph  18:  Export  growth  net  of  global  import 
growth (in pps.) 

Graph 19: Export market share growth (% y-o-y) 

30

25

20

15

10

5

0

-5

-10

-15

)

%

(

e
t
a
r

h
t
w
o
r
G

20

10

0

-10

-20

-30

-40

K
S

T
L

L
P

G
B

Z
C

V
L

O
R

I

U S
H

E
E

L
N

E
D

T
A

E
B

S
E

T

I

L
E

U
L

K
D

E
S

I

T F
P

R
F

E

I

K
U

Y
C

T
M

2000-2007

2008-2010

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Denominator: World Export growth (neg. sign)

Numerator: Export growth

EMS growth rate

Source:  Commission  services'  calculations  based  on 
UN COMTRADE data  

Source: EUROSTAT 

Weak  export  performance  also  reflects  weaknesses  in  non-cost  competitiveness.  As 
described in the 2012 IDR, Slovenia’s industrial structure is still largely dominated by low-to-
medium technology and labour intensive products. There is also a structural services surplus 
based  on  tourism  and  road  haulage.  Relevant  factors  that  may  play  a  role  in  non-cost 
competitiveness are Slovenia’s niche in global supply chains together with other factors such 
as product marketing and quality. ECFIN estimates for exports and imports disaggregated by 
product  show  no  strong  trend  in  Slovenia  compared  to  other  countries  during  the  interval 
1995-2007; there has been neither a substantial increase in the success of exports in foreign 
markets  nor  a  substantial  increase  in  the  proportion  of  domestic  production  seriously 
challenged  by  imports.10  This  may  indicate  a  failure  to  capitalise  sufficiently  on  European 
integration and the catching-up potential. New ECFIN estimates11 indicate that Slovenia ranks 
relatively high in the EU in terms of the import content of exports and of investment, as might 
be expected from a small manufacturing-oriented country with limited natural resources and a 
sizeable  intermediate  goods  sector.  This  is  especially  the  case  as  regards  goods.  Given 
Slovenia's position in the supply chain, cost-competitiveness and adjustment capacity are key 
to responding to demand shocks.  

2.4. 

Private sector indebtedness  

Private sector debt levels (as a percentage of GDP) remain below the euro area average, 
but  still  contribute  disproportionately  to  the  weakness  and  adjustment  needs  of  the 
Slovenian  economy.  As  described  in  the  2012  IDR,  debt  levels  increased  fast  during  the 
boom but remained below the AMR scoreboard threshold given the low starting level as well 
as  the  stalling  credit  growth  since  2009.  Slovenian  households  have  only  moderately 
participated  in  the  credit  boom.  Lending  to  households  for  housing  purchases  continued  to 

15 

 
 
 
 
 
 
 
grow  in  2009-10  but  has  since  faded.  In  contrast,  the  indebtedness  accumulated  by  non-
financial  corporations  in  only  a  few  short  years  before  the  crisis  was  frequently  out  of 
proportion with their debt-service capacity. Commission estimates of deleveraging pressures 
based  on  corporate  assets  confirm  that  Slovenia  is  in  the  group  of  countries  where  rapid 
corporate  debt  build-up  has  led  to  deleveraging pressures  even  in  the  absence  of  high  debt-
levels in absolute terms.12 

Graph 20: Decomposition of debt (% of GDP) 

Graph 21: Sectoral contributions to credit growth 
(%) 

P
D
G

f
o
%

250

200

150

100

50

0

01

02

03

04

05

06

07

08

09

10

11 12*

Financial corporations
Household
Private sector EA17

Government
Non financial corporations
Private sector

30

25

20

15

10

5

0

-5

05

06

07

08

Households
Other

10

09
Non-financial corporations
Total loans

11

Source: EUROSTAT 

Source: ECB 

Slovenia continues to face corporate and bank over-indebtedness and the deterioration 
in asset quality triggered by the recessionary environment. While these imbalances are not 
signalled  in  the  AMR  scoreboard,  where  no  indicator  exceeds  the  threshold,  the  2012  IDR 
diagnosis  remains  valid.  The  fallout  from  the  2009  recession  continues  to  put  the  balance 
sheets of thinly capitalised banks under considerable strain. The state has already had to step 
in several times to recapitalise the banks it owns. The fact that the economy is in a double-dip 
recession  is  aggravating  these  trends.  The  economy  is  therefore  undergoing  a  necessary  but 
difficult deleveraging process, with the stock of non-financial, private sector credit shrinking 
at  around  5%  on  an  annual  basis  in  nominal  terms.  Credit  to  non-financial  corporations 
continues  to  fall,  as  banks  write  down  loans  and  readjust  their  lending  volumes  to  their 
domestic  deposits  base.  Despite  this,  corporate  debt-to-equity  ratios  remain  high  at  144%. 
Composite indicators rank Slovenia alongside countries where strong deleveraging pressures 
arise  from  both  lending  supply  and  demand  factors.13  The  in-depth  analysis  in  section  3.1 
provides an update on the situation in the banking sector and the state-of-play of the policy 
response. 

Access to credit from Slovenian banks has deteriorated for non-financial corporations. 
Credit  to  non-financial  corporations  declined  by  10.2%  in  2012.  Corporate  credit  (for  loans 
above  EUR  1m)  is  more  than  2  pps.  more  expensive  in  Slovenia  than  in  the  euro  area  as  a 
whole  and  this  margin  has  increased  again  in  2012.  Non-financial  corporations'  demand  for 
loans has amounted to around 130% of new loan volumes over the last two and a half years 
according to the Bank of Slovenia (BoS survey results). However, the same source reports a 
decrease in creditworthy demand, which can be related to the poor financial prospects of the 

16 

 
 
 
 
 
 
 
 
 
 
 
corporate sector. Credit transactions fail to be concluded mainly due to banks' stricter credit 
standards  and  corporations'  rejections  of  credit  conditions.  For  these  reasons,  some  non-
financial  corporations  have  resorted  to  issuances  of  short-term  commercial  papers.  This 
replaces  long-term  corporate  bonds  and  credits  from  abroad,  although  the  latter  funding 
source has stabilised recently.  

2.5. 

Asset market developments 

Activity on financial asset markets remains very subdued with little issuance of bonds or 
shares.  Stock  market  valuations  remain  depressed  and  liquidity  at  the  Ljubljana  stock 
exchange remains limited. Corporate bond issuances, which had provided a measure of relief 
from the credit crunch for larger companies, are down from EUR 77m in 2009 to zero as of 
October 2012.  

Graph  22:  Slovenian  blue-chip  stock  market  index 
(SBITOP) 

Graph 23: Activity on the Ljubljana stock exchange 

3000

2500

2000

1500

1000

500

0

3500

3000

2500

2000

1500

1000

500

0

200

180

160

140

120

100

80

60

40

20

0

04

05

06

07

08

09

10

11

12

13

02

03

04

05

06

07

08

09

10

11

LJSE trading volume (€m)

Number of issued securities (rhs)

Source: Bloomberg 

Source: Bank of Slovenia 

Note:  All  companies  in  the  index  are  at  least  partially  state 
controlled. 

House prices, which had seen only a small correction since the crisis, may now be falling 
in a more sustained manner. As of 2012Q3 Slovenian house prices were about 24% below 
the 2008 peak in inflation-adjusted terms. About half of this adjustment came from a nominal 
reduction,  while  the  rest  was  due  to  consumer  price  inflation.  The  inflation-adjusted  house-
price  fall  is  moderate  compared  to  other  new  Member  States  (e.g.,  -31%  in  Hungary  and 
Poland, -44% in Estonia, -64% in Romania). The nominal adjustment continues to be volatile: 
a slight nominal increase in Q2 followed a fall in Q1. Transaction volumes on the real estate 
market in Q2 were significantly reduced relative to the 2007 average, down 59% for newly 
built dwellings and down 30% for existing dwellings. This reduced housing market liquidity 
could  suggest  that  any  ongoing  price  adjustment  is  slowed  down  by  institutional  and 
behavioural  frictions.  Such  frictions  could  arise  when  banks  opt  against  disposal  of  their 
property holdings at market-clearing prices that would imply recognition of significant losses.  

17 

 
 
 
 
Graph 24: Housing and Mortgage Market (levels) 

Graph  25:  Housing  and  Mortgage  Market 
(growth) 

03Q4

07Q3

12Q3

140

120

100

80

60

40

20

0

House Price Index
(2005=100)

Outstanding Household
Long-term Loans (% of
GDP)

Residential Investment
(GFCF, dwellings)
(2005=100)

Note: The three indicators / bars convey different messages and 
their value or calculation formulae should not be strictly contrasted
across the panel. The comparison is interesting from inter-temporal 
perspective as well as in terms of general dynamics with a view to 
concluding whether risks related to house prices, household 
indebtedness and housing investment have accumulated or cleared 
in coordinated manner over time. 

40

30

20

10

0

-10

-20

-30

-40

%

%

80

60

40

20

0

-20

-40

-60

-80

00Q3

02Q3

04Q3

06Q3

08Q3

10Q3

12Q3

MFI loans for house purchase, yoy change (rhs)

Residential Investment, yoy change (nominal terms) (lhs)

Relative HPI yoy change (HH&NPISH final consumption
expenditure deflated) (lhs)
Nominal House Price Index yoy change (lhs)

Source: EUROSTAT, ECB, OECD 

Source: EUROSTAT, ECB, OECD 

House price valuation methods signal a substantial additional correction potential.14 As 
of 2011Q4 the price-to-rental and the price-to-income ratios were above their averages over 
the period 2003-11 (by about 8% and 7%, respectively). However, the effective overvaluation 
might be higher, as the sample available for calculating the Slovenian long-term average does 
not cover one full cycle. The corresponding bias is probably above 11%, approximated by the 
average of the price-to-rental ratio for the euro area over the period 2003-11 compared with 
the long-term average over 1996-2011. Given that the pre-crisis upturn in the euro area as a 
whole was probably more moderate than in the new Member States, this estimate would be a 
conservative  lower  bound  for  the  bias.  An  adjustment  potential  is  also  signalled  from  a 
fundamental model of relative house prices.15 Based on the Commission services’ forecast for 
GDP  growth,  the  current  long-term  trend  for  house  prices  is  about  10%  below  2011  levels, 
and  could  drop  further  if  fundamentals  continue  to  deteriorate  in  2013.  A  caveat  due  to  the 
short data history applies here as well, and leads probably to an underestimation of the gap.. 
This has potential implications for loan collateral values and banks´ soundness.  

Characteristics of the housing market, such as Slovenia’s high home ownership rate, do 
not  explain  house  price  resilience,  since  potential  buyers  are  likely  to  be  affected  by 
credit  constraints.  Arguably,  the  home-ownership  rate  is  high,  at  around  81%.  In  the 
Slovenian housing market price resilience could point to the fact that marginal transactions on 
the  market  rely  on  specific  parts  of  the  population,  such  as  younger,  first-time  buyers,  that 
could be particularly sensitive to developments in the credit market. Credit tightness, coupled 
with  stocks  of  dwellings  that  might  ultimately  need  to  get  on  the  market,  is  therefore 
increasing  the  chances  of  a  housing  price  correction  and  corresponding  adjustments  to  real 
estate collateral.  

Housing  investment  has  receded  significantly,  but  adjustment  is  not  such  as  to  lower 
pressure  on  house  prices.  The  current  fall  of  33%  below  2007  levels  (40%  in  real  terms) 
does not seem to fully reflect the fall in transactions in new homes (as discussed above). It is 
thus  likely  that  some  of  the  newly  built  dwellings  are  currently  kept  out  of  the  market  as  a 

18 

 
 
 
 
result of various institutional and behavioural mechanisms at play (e.g. strategy of developers, 
relationships  between  banks  and  construction  sector  borrowers).  Building  permits  are  down 
about  70%  from  the  2007  level  and  have  thus  fallen  considerably  deeper.  This  sharp  fall 
possibly  reflects  the  absorption  of  the  backlog  of  old  permits  and  suggests  that  the  pipeline 
will be adjusting over the coming period.  

3. 

IN-DEPTH ANALYSES 

3.1. 

Banking sector vulnerabilities 

Slovenian  banks  face  increasing  challenges.  The  large,  state-owned  banks,  and  possibly 
some  other  banks,  need  additional  capital  again.  The  necessary  deleveraging  process  is 
accelerating as wholesale lenders are repaid and the deposit base has reduced.16 Credit quality 
has deteriorated further, leading to higher loan-losses now and, due to the lagged booking of 
impairments,  also  in  2013.  Downward  revisions  of  economic  forecasts  imply  an  additional 
deterioration  of  loan  portfolios  also  in  the  future.  Newly  available  estimates  of  stress  loan 
losses point to possible additional recapitalisation needs. Work-out of bad and doubtful assets 
remains challenging. 

Repeated and increasing recapitalisation needs are concentrated in state-owned banks, 
Some of the smaller, privately owned domestic banks also face challenges. Additional capital 
would  strengthen  confidence  in  the  banking  sector.  If  required  for  regulatory  reasons,  as 
already repeatedly done in the past (see Box 2) the state is likely to provide this at least for the 
largest three banks which are majority state-owned.17 A durable return  of confidence would 
benefit  from  banks  resolving  distressed  loans  and  demonstrating  a  viable  business  model, 
including  solving  the  governance  challenges  in  state-owned  banks  (see  section  3.2  for  the 
implications of continued state ownership of the three largest banks). 

Box 2: Recapitalisation of NLB, NKBM and Abanka 

The  Nova  Ljubljanska  bank  (NLB)  continues  to  generate  substantial  fiscal  costs.  NLB 
Group is by far the biggest banking group in Slovenia, with assets amounting to around 23% 
of the total assets of the banking system and (25% for total loans and advances to non-banks) 
as  of  the  end  of  2012,  down  from  29%  at  the  end  of  2009.  NLB  Group  is  experiencing 
sustained  deterioration  of  the  quality  of  its  loan  book,  which  resulted  in  a  net  loss  for  the 
fourth  consecutive  year  in  2012.  NLB  Group's  insufficient  capital  base  was  identified  by 
European Banking Authority (EBA) in 2011. To address the situation, further strengthening 
of the core Tier I base was recommended.  

On  2  July  2012  the  Commission  temporarily  approved,  under  EU  state  aid  rules,  an 
additional  capital  injection  to  the  NLB  for  reasons  of  financial  stability.  A  contingent 
convertible bond (CoCo) worth EUR 320m, direct cash injections worth EUR 63m from state-
owned funds and restructuring of existing subordinated instruments yielded a capital increase 
of  around  €500m.  This  increase,  together  with  some  restructuring  of  risk  weighted  assets, 
increased the Core Tier 1 capital ratio to 9.5% to comply with the EBA recommendation of 
autumn 2011. The state's share (direct and indirect) increased by 5pps. to around 64%, while 
the share of erstwhile strategic investor KBC declined to 22%. At the end of 2012, KBC sold 

19 

 
 
 
 
its  remaining  shares  to  the  Slovenian  state  at  a  substantially  reduced  price  (less  than  1%  of 
what  it  paid  in  2002)  as  part  of  its  restructuring  under  state-aid  rules.18  Losses  recognised 
since  the  recapitalisation  brought  Core  Tier  1  capital  excluding  the  CoCo  below  7%  thus 
triggering conversion19. Further capital needs would be exposed in the process of transferring 
assets  to  a  Bank  Asset  Management  Company  (BAMC,  see  below).  Moody’s  downgraded 
NLB’s  credit  ratings  with  negative  outlook  on  12  March,  citing  capital  needs,  ongoing 
material losses and the expectation of further losses in 2013. 

Recapitalisation needs also emerged for NKBM and Abanka, banks whose shares trade 
at  low  price-to-book  ratios.  NKBM,  the  second  biggest  bank  in  the  country  and  majority 
state-owned, raised fresh capital of EUR 104m in April 2011, which allowed it to successfully 
pass  the  EBA  stress  test  of  summer  2011.  Nevertheless,  after  posting  losses  as  a  result  of 
further  deterioration  of  its  asset  quality,  the  need  for  fresh  capital  re-emerged  in  2012.  In 
October  a  further  increase  was  launched,  producing  a  net  positive  effect  of  EUR  182m  on 
capital  position  for  regulatory  purposes  through  a  mix  of  measures  including  the  sale  of  a 
subsidiary  insurance  company  (see  also  Box  3),  buy-back  of  subordinated  instruments,  the 
sale of assets pledged as collateral and further scaling down of risk-weighted assets. With a 
hybrid  loan  by  the  government,20  the  Core  Tier  1  ratio  reached  9%,  thus  meeting  the 
requirement  by  the  EBA,  before  the  end  of  2012.  On  18  March  2013  NKBM  announced  it 
would trigger conversion of this instrument, subject to the approval of the supervisory board 
in April.21 Meanwhile, Abanka, the third biggest and also majority state-owned bank,22 is also 
looking to raise new capital. An initial attempt to issue new shares in summer 2012 failed due 
to insufficient interest at the high asking price. The exercise was re-launched in December at a 
significantly  lower  asking  price,  but  again  failed  to  attract  sufficient  investor  interest.  After 
these  two  failed-attempts,  the  BoS  has  accorded  Abanka  a  further  extension  to  raise  the 
required  capital  by  31  July  2013.  There  are  also long-standing  merger  talks  with  Gorenjska 
banka, a somewhat smaller but better capitalised, majority privately-owned bank in which the 
state  holds  a  blocking  minority  share.  The  viability  of  such  a  merger  would  need  to  be 
assessed by the owners of both banks. 

The shift away from foreign wholesale funding has continued, but further deleveraging 
will be needed in the absence of new sources of replacement funding. After the onset of 
the  crisis,  banks  issued  bonds,  some  of  which  were  backed  by  government  guarantees,  and 
competed  to  attract  more  deposits.  Help  from  the  government  and  from  the  ECB,  whose 
LTROs  now  amount  to  8.5%  of  the  sector  balance  sheet,23  together  with  cumulative 
deleveraging of around 10% over 2009-2012, have enabled banks to repay around half of their 
foreign  liabilities.  However,  other  sources  of  replacement  financing  will  be  difficult  to 
mobilise. Banks under majority foreign ownership previously reliant upon funding from their 
parent institutions intensify competition for retail deposits.24 As a result, interest margins are 
being  squeezed,  raising  risks  to  profitability.  Furthermore,  in  a  new  development  since  the 
2012  IDR,  domestic  deposits  have  started  contracting  on  aggregate,  declining  4.8%  in 
nominal terms in the first nine months of 2012.25 This development is principally observed at 
domestically-owned  banks.  It  has  so  far  been  explained  by  one-off  factors,  notably  the 
contraction  of  government  deposits,26  but  still  requires  close  monitoring,  particularly  on  a 
bank-by-bank level. Finally, the balance sheet of the development bank SID, which was used 
to  partially  offset  deleveraging  over  the  past  three  years,  has  been  significantly  expanded. 
With  wholesale  funding  opportunities  unlikely  to  return  and  given  the  time  limits  on  the 
ECB’s extraordinary LTRO policy, funding pressures are likely to push the sector into further 

20 

 
 
deleveraging  on  an  aggregate  level  and  potentially  also  rationalisation  such  that,  bank-by-
bank, funding needs and funding sources (particularly deposits) come closer into alignment.  

21 

 
 
 
Graph 26: Financing of the Slovenian banking sector 

50

40

30

20

10

0

)
7
0
0
2

l

u
J
e
c
n
s
.

i

m
u
c
(

%

-10

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Remaining liabilities
Government deposits

External liabilities
ECB borrowing

Bonds issued
Interbank borrowing

HH & Corp. Deposits
Total liabilities

Source: ECB, Commission services calculations 

Credit quality has deteriorated further since spring 2012 with the decline concentrated 
in  the  impaired  balance  sheets  of  the  state-owned  banks.  Non-performing  loans  (NPLs), 
defined as arrears over 90 days, ran at a rate of 5.4% at the end of 2009. By the end of 2011 
this  had  risen  to  11.2%  and  by  the  end  of  2012  still  further  to  14.4%.  In  the  corporate 
segment, NPLs were at 24% by the end of 2012, up from 18.5% a year earlier. NPL trends 
have  remained  the  most  negative  in  the  large  state-owned  banks.  The  construction  sector 
remains the most afflicted, with NPLs now standing at 61%, but the increase in NPLs from 
11.1% to 17.4% for the manufacturing sector also has a large impact as the sector accounts for 
over a quarter of the non-financial corporate sector (NFC) portfolio. NPL ratios pertaining to 
smaller  segments  such  as  financial  services  and  real  estate  activities  have  also  continued 
rising.  Indeed,  all  sectors  now  show  NPL  ratios  in  excess  of  10%  with  the  exception  of 
primary  industries  and  utilities.  These  ratios  are  understated,  to  the  extent  that  they  are 
reported  in  proportion  to  total  exposures27  rather  than  total  loans.  Furthermore,  some  of  the 
loans classified as performing have formally been restructured or rescheduled, and the data on 
households have not been refreshed since end-2011.28 

22 

 
 
 
 
 
 
 
Graph 27: Non-performing loans, % of gross loans  Graph  28:  Overdue  90  days+  classified  claims  by 

sector, €m  

7,000

6,000

5,000

4,000

3,000

2,000

1,000

,0

09

10

11

12*

Companies

Non-residents

Households

*Includes  sole  traders  but  other  households  not  yet 
available 

Source:  Bank  of  Slovenia  reports,  Commission  services 
calculations 

30

25

20

15

10

5

0

Abanka Vipa

NLB

NKBM

Majority foreign-
owned banks

2010

2011

2012 ytd

Notes: 
NPL  ratio  definitions  vary  between  banks  and  between 
annual reports and statistical returns to the Bank of Slovenia 
(which  compares  NPLs  to  classified  claims,  which  is  a 
broader concept than gross loans) 
Abanka  Vipa:  from  Annual  Reports,  2012  H1  from  semi-
annual report 
NLB: from Annual Reports, 2012 H1 from Fitch 
NKBM: from Annual reports, 2012 Q3 from interim report 
Majority  foreign-owned:  from  Bank  of  Slovenia  (classified 
claims concept) 

Credit quality deterioration has led to a further acceleration of losses. Impairment costs 
of EUR 1,206m in 2011 drove a before-tax loss of EUR 539m. The trend continued in 2012, 
with  impairment  costs  up  by  around  32%  according  to  unaudited  figures,  driven  by  a  32% 
increase at NLB and a 92% increase at NKBM. This led to losses in 2012 over 40% larger 
than in 2011, despite one-off factors boosting income.29 As discussed in the 2012 IDR, loan 
losses  are  recognised  with  a  significant  lag  after  the  materialisation  of  loan  arrears.  In  part, 
this is due to how provisioning rules are specified. In this respect, NPL increases observed in 
2012 would drive the recognition of further losses in 2013 and 2014. At the same time, the 
scope for banks realise one-off profits seems to be largely exhausted after the discounted buy-
back of hybrid instruments in 2012. 

23 

 
 
 
 
 
 
 
 
 
Graph 29: Banking system P&L (€m)  

700

600

500

400

300

200

100

0

n
m
R
U
E

8
0
-
g
u
A

8
0
-
c
e
D

9
0
-
r
p
A

9
0
-
g
u
A

9
0
-
c
e
D

0
1
-
r
p
A

0
1
-
g
u
A

0
1
-
c
e
D

1
1
-
r
p
A

1
1
-
g
u
A

1
1
-
c
e
D

2
1
-
r
p
A

2
1
-
g
u
A

2
1
-
c
e
D

Gross profit minus operating costs

Net interest income minus operating costs

Provisions and impairments

Note: Pre-impairment profit is calculated as gross income minus operating expenses. 2012 gross income is boosted by one-
off profits on buy-back of hybrid instruments, so the graph also shows pre-impairment profit arising from net interest income 
(calculated as net interest income minus operating expenses) to strip out these one-off effects.  

Source: Bank of Slovenia reports, Commission services calculations 

The  key  question  for  the  Slovenian  banking  system  is  how  far  credit  quality 
deterioration and loss increases will go given the worsened economic climate. Banks are 
deleveraging  by  scaling  back  new  lending,  which  is  partly  demand-driven,  so  they  are 
increasingly  reliant  only  on  legacy  portfolios.  Furthermore,  migration  matrix  analysis  based 
on  Slovenia’s  A-E  classification  system  reported  by  the  Bank  of  Slovenia  (BoS)  shows  a 
distinct negative trend in loan ratings in the year to September 2012. 15.9% of doubtful, so-
called  C-classified,  loans  became  non-performing  (D  classified),  with  ratings  downgrades 
outweighing  upgrades  by  a  balance  of  22.7%.  For  non-performing  D  claims,  the  trend  was 
even  more  distinct,  with  44.9%  of  them  migrating  to  the  E  category,  which  usually 
corresponds  to  write-off  –  with  downgrades  outweighing  upgrades  by  a  balance  of  40%.30 
Credit  quality  in  the  corporate  segment  will  either  improve  or  deteriorate  depending  on  the 
balance  of  two  effects:  (i)  a  mechanical  reduction  of  the  NPL  ratio  as  loans  to  the  main 
corporate casualties of the 2009 recession are written off31 and (ii) a second wave of defaults 
caused by the double dip. A second wave could involve previously stronger firms that fully 
used  their  shock  absorbers  in  2009-2011  (cost  cutting,  bank  forbearance  and  lower  interest 
rates)  and  therefore  can  be  tipped  into  default  more  easily  compared  with  the  previous 
downturn.32  

Several new assessments point to potential future losses. The BoS and the IMF performed 
stress  tests  in  April  2012  as  part  of  the  Financial  Sector  Assessment  Programme  (published 
only in December, and therefore not available in time for the 2012 IDR, IMF 2012a). These 
estimates pointed to a Core Tier 1 capital shortfall of approximately 3½% of GDP by 2013 in 
the  baseline  scenario,  rising  to  around  5%  in  an  adverse  scenario  (with  slight  variations 
depending  on  methodology).  For  the  subset  of  large,  domestically-owned  banks,  the  stress 
scenario  suggested  a  shortfall  of  approximately  4½%  of  GDP  under  an  adverse  scenario  to 
reach the EBA threshold of 9% core equity tier 1 set by the 2011 Recapitalization exercise. 

24 

 
 
 
 
Separately in mid-2012, third-party due diligence exercises were conducted in the three main 
state-owned  banks  which  constitute  the  bulk  of  the  domestically-owned,  large  banks.  This 
corresponded  to  the  country  specific  recommendation  to  obtain  third-party  verification  of 
stress-loan-loss  estimates.  The  government  subsequently  earmarked  EUR  1bn  for 
recapitalisations (around 2¾% of GDP) in the Act on Measures of the Republic of Slovenia to 
Strengthen  Bank  Stability.  This  is  understood  to  correspond  to  the  need  for  write-downs 
identified  in  the  due  diligence  reports,  net  of  the  July  2012  NLB  recapitalisation  of  slightly 
below  1½%  of  GDP  (see  Box  2).  The  due  diligence-based  figure  of  2¾%  of  GDP  and  the 
IMF/BoS figure of 4½% of GDP for large domestic banks can therefore be usefully compared 
and  seem  to  point  to  additional  capital  needs  of  a  similar  order  of  magnitude.  While  some 
recapitalisation  has  taken  place  since  these  alternative  estimates  were  produced  (also  in 
NKBM),  the  underlying  macroeconomic  outcomes  and  forecasts  have  also  been  revised 
significantly downwards.  

Asset work-out is at the heart of a solution for the banking sector. The factors highlighted 
in  the  2012  IDR  remain  problematic,  notably  dealing  with  bankrupted  construction  and 
holding  companies  and  their  associated  real  estate  and  share  collateral,  managing  loans  in 
arrears  and  enforcing  claims,  if  necessary  through  frequently  unsatisfactory  insolvency 
proceedings. After previous attempts to co-ordinate the resolution of claims and shareholdings 
within  bank  consortia  stalled,  the  government  has  legislated  to  create  legal  instruments 
allowing the removal of problematic legacy assets from the banking system.33  

The Stability of Banks Act came into force in December 2012. It provides a framework for 
issuing state-guaranteed securities to fund the transfer of legacy assets from banks to an asset 
management  company  (BAMC)  or  a  special  purpose  vehicle  (SPV)  together  with 
recapitalisations to address the losses crystallised as a result of transferring assets at long-term 
economic value (generally below book value). In line with state-aid rules on asset valuations, 
the  transfer  of  these  troubled  assets  into  a  state-guaranteed  fund  would  crystallise  a  capital 
shortfall in participating banks which the government intends to simultaneously cover through 
cash recapitalisations. After transfer of these assets, the BAMC would be responsible for asset 
work-out until 2017 when the assets would revert to the Slovenian Sovereign Holding (SSH). 
The  BAMC  would  aim  to  consolidate  claims  and  shareholdings  and  achieve  substantial 
financial restructuring of the corporate sector. The government currently foresees funding the 
transfer of assets with up to EUR 4bn of government-guaranteed bonds and making good any 
capital shortfalls with up to EUR 1bn of cash contributions.  

Implementation of the BAMC (or separate special-purpose vehicles, SPVs) is at an early 
stage, with challenges lying ahead. The by-law adopted on 13 March 2013 specifies some 
operational  processes,  particularly  around  the  modalities  of  asset  selection  and  granting  of 
government  guarantees.  Furthermore,  it  provides  a  methodology  for  determining  the  long-
term economic value of loans and some criteria for admissible valuations for other risk items. 
It lists the types of assets that can be transferred: besides standard loans, the by-law specifies 
capital stakes and real assets acquired through enforcing collateral rights; capital stakes that 
together  with  loans  form  a  business  whole  for  the  transferring  bank;  a  wide  range  of  off-
balance-sheet risk items; and any other assets that may reduce the participating bank’s ability 
to  meet  its  capital  adequacy  requirements.  The  wide  range  of  types  of  risk  item  eligible  for 
transfer means significant flexibility and discretion are retained. The selection of participating 
banks  and  the  basis  for  opting  between  transfer  to  the  BAMC  and  transfer  to  an  SPV  also 
remain  subject  to  administrative  discretion.  It  is  anticipated  that  guidelines  will  be  issued 
providing additional details pertinent to a more complete economic assessment of the policy 

25 

 
 
and it may well be that the policy, its costs and its effects become clear only after selection 
and valuation of specific assets has occurred. Some of the important open questions pertain to: 
(i)  the  nature  of  the  assets  actually  to  be  transferred  (as  opposed  to  just  eligible  to  be 
transferred), (ii) impairments accounted for to-date on these assets. (iii) which banks will be 
involved, and when, (iv) the number and frequency of transfers planned, (v) the structure of 
debt instruments to be issued by the BAMC, and (vi) the BAMC business plan on maximising 
recovery value and asset management solutions. 

In the short term, the BAMC (or SPVs) can strengthen banks’ balance sheets. It aims to 
achieve  this  through  purging  a  lot  of  risky  assets  from  bank  balance  sheets,  replacing  them 
with  potentially  ECB-eligible  BAMC  debt  instruments,  thus  easing  funding  pressure  on  the 
banks. 34 

The transfer of assets to the BAMC would also crystallise losses, thus bringing forward 
and  revealing  capital  shortfalls.  The  transfer  value  may,  according  to  the  bylaw  approved 
mid-March,  also  be  reduced  by  up  to  3%  of  the  asset  value  to  cover  the  administrative  and 
operational costs of the BAMC for managing the assets. Bank profits and losses would further 
be  affected  going  forward,  losing  the  revenue  streams  associated  with  transferred  assets  in 
return for interest on BAMC bonds and possible further remunerations to the BAMC to cover 
costs.35  

In  all  cases,  the  sovereign-bank  feedback  loop  is  maintained  or  strengthened.  Banks 
retain  government  bonds  (in  all  cases),  gain  state-guaranteed  assets  and  contingent 
claims on the state (in case the BAMC or the APS is applied) while the government increases 
its substantial direct and indirect ownership stakes in the sector (in all cases). Banks will also 
be subject to restructuring requirements under state-aid rules.  

In  the  medium-to-long  term,  recapitalised  banks  with  cleaned  (or  guaranteed)  balance 
sheets could become more attractive to potential investors. The attractiveness is crucially 
contingent on a wider set of factors, including the will of the government to reduce ownership 
below  the  "blocking  minority"  threshold  of  25%+1  share  as  well  as  Slovenia’s  growth 
prospects  and  the  appetite  of  investors  for  European  banks  more  generally.  Whether  banks 
sustainably return to profit will also depend on improved management while the Stability of 
Banks  Act  gives  the  Ministry  of  Finance  strong  powers  to  shape  the  business  planning  of 
banks transferring their legacy assets. These powers could be used to strengthen the banks but 
it  should  be  avoided  to  use  these  powers  to  promote  credit  flows  to  favoured  categories  of 
borrowers with inadequate creditworthiness.  

The  success  of  the  work-out  phase  will  depend  inter  alia  on  the  speed  at  which  the 
BAMC  can  become  fully  operational.  The  BAMC  will  need  to  quickly  ensure  key 
operational prerequisites including skilled staff, the availability of banks' restructuring plans, 
IT infrastructure, asset documentation and legal prerogatives. The more numerous the assets, 
the more critical these institutional underpinnings will be. The practicalities of substituting for 
in-bank management of what might be a very diverse corporate portfolio finally selected for 
transfer  adds  to  the  magnitude  of  the  challenge  facing  the  Slovenian  BAMC.  The  BAMC’s 
ability to break even will ultimately reflect the realism of transfer prices, market conditions, 
the efficiency of the BAMC and the trade-off between minimising losses to the taxpayer and 
exercising forbearance to keep companies in business. Given the lifespan of the BAMC and 
the potential shortfall of realisable values below long-term economic value within this period, 
policymakers  face  a  choice  between  actively  running  off  the  portfolio,  even  at  the  cost  of 

26 

 
 
realising  losses,  or  transferring  a  sizeable  rump  of  legacy  assets  to  the  SSH36  in  five  years’ 
time.  

Fiscal  costs  for  recapitalisations  could  exceed  EUR  1bn  over  time  and  will  likely  be 
deficit-increasing. The EUR 1 billion currently earmarked for recapitalisations (which can be 
increased if necessary), according to the explanatory memorandum, may well be needed in its 
entirety  given  the  potential  capital  shortfalls  discussed  above.  To  recapitalise  with  cash, 
Slovenia will need to raise the corresponding amounts on financial markets. The government-
guaranteed  bonds  that  would  be  used  to  pay  for  transfers  are  likely  to  be  debt-increasing, 
subject  to  a  Eurostat  decision.  If  the  BAMC  makes  losses  during  its  lifetime  (or  losses  are 
incurred on guaranteed assets in an APS), the guarantees could also generate future deficits. 

The  adequate  use  of  the  new  supervision  and  resolution  powers  of  the  BoS  are  key  to 
ensure  stabilisation  of  the  financial  system.  The  bank  supervision  framework  has  been 
modernised. Changes to the Act on Banking entered into force in December 2012. The wide 
powers  of  the  BoS  (the  supervisor)  had  not  been  extensively  used  previously  as  they  were 
considered  blunt,  ineffective  and  lacking  in  credibility.  In  addition  to  addressing  drafting 
defects,  the  changes  allow  the  BoS  to  intervene  faster,  with  more  of  a  forward-looking 
justification.  The  BoS  also  gets  new  powers  termed  ‘extraordinary  measures’,  including  the 
power  to  transfer  a  bank’s  assets.  The  amendments  to  the  Act  on  Banking,  together  with 
legacy asset measures described above give policymakers in Slovenia new tools to intervene 
in failing banks.  

3.2. 

State-owned  enterprises:  a  key  source  of  macroeconomic  imbalances  and 
impediment to private investment 

State  ownership  has  a  significant  role  in  the  Slovenian  economy  with  many  features 
remaining  unchanged  since  the  transition  period  of  the  90s.  The  privatisation  and 
corporate  restructuring  tools  adopted  during  the  1990s  resulted  in  the  state  remaining 
dominant, especially in the financial sector. This is particularly evident in the area of large-
scale privatisations and corporate governance, where Slovenia has fallen considerably behind 
its  peers.  Compared  with  other  EU  and  euro-area  Member  States  in  Central  and  Eastern 
Europe  for  the  period  2004-2010,  Slovenia  has  generated  around  75%  less  in  privatisation 
revenues. Moreover, the state’s share of the banking sector is now around three times as large 
as  the  average  for  this  comparison  group.37  European  Commission  pre-accession  reports  on 
Slovenia  already  highlighted  the  role  of  these  features  in  holding  back  development  and 
competition, and hindering FDI inflows.38 This in-depth section draws on publicly available 
information  to  provide  a  fresh  analysis  of  the  state-owned  segment39  of  the  Slovenian 
economy, from the perspective of economic performance and contingent fiscal liabilities.40 

The  size  and  weakness  of  the  state-owned enterprise (SOE)  sector hold back economic 
development  and  contribute  to  existing  imbalances.  State  dominance  and  frequently 
malfunctioning  governance  of  state  assets  impede  private  domestic  and  foreign  investment. 
Cross-ownership of financial institutions and corporates limits the adjustment capacity of the 
economy and delays the restructuring process. A number of SOEs classified both inside and 
outside general government accounts are facing challenging financial conditions. These might 
even aggravate given the expected continued economic downturn.41 Several are accumulating 
losses and reducing equity value. Most companies are highly levered and total debt of non-
bank SOEs amounts to over 30% of the Slovenian GDP. Recapitalisations of SOEs in 2011 

27 

 
 
 
weighed  on  government's  budget  by  close  to  EUR  0.5bn  (1.4%  of  GDP,  a  large  portion  of 
which  arose  in  the  banking  sector)  and  SOEs  and  funds  classified  within  the  general 
government  have  gross  debt  amounting  to  5.4%  of  GDP  on  a  non-consolidated  basis.  Also 
going  forward,  SOE's  subdued  performance  and  delayed  restructuring  result  in  fiscal  risks 
related to further state recapitalisations and government guaranteed debt of SOEs. 

The  cross-ownership  of  SOEs  in  the  non-financial  sector  with  state-owned  financial 
institutions  creates  contagion  risks  and  prevents  the  economy  from  adjusting.  State 
ownership  encompasses  a  complex  matrix  of  frequently  financially-troubled  and  debt-
burdened  banks,  insurance  groups  and  non-financial  corporations,  which  own  each  other. 
Some  of  these  companies  emerged  weakened  from  the  recent  economic  and  financial  crisis 
and  contribute  to  the  increase  of  impaired  assets  in  the  banking  sector.  Debt-to-equity 
conversions  enforced  on  SOEs'  defaulted  obligations  strengthen  the  fiscal  loops  with  the 
banking  sector  and  the  sovereign.  The  density  of  these  inter-linkages  is  manifested  in  the 
state-bank-corporate  nexus,  with  reciprocal  risks  for  SOEs  reliant  upon  loss-making  banks 
and banks exposed to loss-making SOEs.42 Furthermore, cross-ownership, cross-subsidy and 
cross-recapitalisation  of  SOEs  and  state-owned  banks  combined  with  state  influence  and 
frequently sub-optimal corporate governance soften budget constraints and create a business 
environment  where  the  normal  allocative  function  of  capital  markets  is  distorted.  This 
impedes  the  deleveraging  of  banks  and  the  required  restructuring  of  the  corporate  sector. 
Graph 30 illustrates the complex cross ownership of SOEs and financial institutions.  

28 

 
 
 
Graph 30: State ownership shares (%) – the example of Intereuropa 

Republic of Slovenia

Factor Banka (10%)

KAD (100%)

SOD (100%)

Triglav (67%)

NLB (57%)

Luka Koper (72%)

Hit (60%)

25%

Gorenjska Banka (26%)

Abanka (52%)

24%

3%

Sava (31%)

Intereuropa  (51%)

Notes: 

The companies inside the general government (KAD and SOD) are shown with a solid border line.  

The computation of state ownership (shown in brackets) may not be fully exhaustive due to complexity of shareholding structures and lack of 
publicly available data. See also footnote 40.  

Source: 2011 AUKN report, 2011 Annual company reports, Commission services calculations 

The origin of these inter-linkages can be traced back to the transition of Slovenia from 
planned to market economy in the 1990s. Privatisation in Slovenia was gradual and allowed 
for both paid and non-equivalent (i.e. voucher-based) privatisation with the intention to start 
the development of capital markets in the economy (Simoneti, 2001). The distribution of the 
shares followed the envisaged final split as stipulated in the Ownership Transformation Act43 
(see  Table  1).  However,  the  overall  bias  in  favour  of  insiders'  control,  which  could  be 
explained by the business culture existent at the time, predetermined considerable influence of 
managers  and  employees  and  left  ownership  in  the  hands  of  highly  fragmented  but 
collectively  powerful  internal  groups  with  little  incentives  to  improve  profitability  and 
restructure  companies.  A  secondary  privatisation  at  a  later  stage  aimed  to  consolidate 
ownership interest over time and increase the share of strategic investors. However, given the 
existence of powerful internal owners, strategic external investors (both foreign and domestic) 
had  difficulty  in  acquiring  a  controlling  share.  The  emphasis  was  instead  on  internal 
management buy-outs supported by high levels of debt provided mainly by the state-owned 
banks, and on distributing the remaining shares to state-owned funds. Thus, neither primary 
nor  secondary  privatization  attracted  enough  strategic  investors  or  foreign  participation  to 
allow for the restructuring of financially troubled companies during the transition.44  

29 

 
 
 
 
Table 1: Split of privatisation shares in Slovenia according to the Ownership Transformation Act 

Entity entitled to 
receive shares 

Share to be received 
(% of total) 

Way of transfer

Reasoning 

KAD 

SOD

Privately managed 
privatisation funds

Internal owners

Optional 

10%

10%

20%

20%

40%

Free transfer

In exchange for vouchers purchased from citizens

In exchange for vouchers 

Sell/ in exchange for vouchers

KAD and SOD were initially envisaged as portfolio investors which would use profits on 
investments to fund pensions and other state liabilities in relation to the restitution process under 
the Denationalisation Act.

Created with the intention to offset influence of insiders and to monitor management performance 
as an external shareholder.

To give priority to employees and management to acquire shares in the company they work for at 
favourable conditions. 

The use of the remaining 40% was optional: for buy-outs by internal owners, in exchange for 
vouchers by the public or the private investment funds, or for sell to strategic investors. 

Source: Simoneti et al. (2001) 

State dominance in key sectors such as finance, energy and transport is not conducive to 
FDI,  thereby  delaying  required  internal  rebalancing  of  the  economy.  All  10  companies 
included  in  the  Ljubljana  Stock  Exchange’s  benchmark  SBI  TOP  index  are  to  a  greater  or 
lesser  degree  state-owned  or  state-controlled,  with  potentially  negative  impacts  on  minority 
shareholders.  This  dissuades  investment  and  prevents  equity  financing  from  playing  its  full 
role  in  Slovenia’s  development.  A  market  environment  open  for  private  competition  and 
welcoming for investment is one of the main prerequisites for FDI. Instead, in Slovenia, state 
ownership  and  influence  on  those  SOEs  that  are  relatively  strong  performing  are  used  to 
reshuffle assets and indirectly recapitalise other SOEs in economic difficulties (e.g. banks, see 
Box 3 and 4 for a recent examples). This thwarts the privatisation process required to boost 
productivity, deepen capital markets and enhance technological spill-overs from FDI. Indeed, 
under  31%  of  GDP,  the  Slovenian  inward  FDI  stock  is  one  of  the  lowest  among  new  EU 
Member  States  (Graph  31  and  section  2.2).  Bulgaria,  for  example,  has  attracted  3  times  as 
much FDI as Slovenia. 

Graph 31: Inward FDI stock comparison across countries (% of GDP) 

100

90

80

70

60

50

40

30

20

10

0

00

01
Bulgaria

Lithuania

02

03
Czech Republic

04

Poland

05

06

07

Estonia

Slovakia

08
Hungary

Slovenia

09

11

10
Latvia

Romania

Source: United Nations 

30 

 
 
 
 
 
Box 3: An example of maintaining state ownership  

Recent consolidations in the insurance sector may provide an insight into how access to the 
resources of better-performing SOEs can potentially be used to reshuffle assets among state-
owned entities, to indirectly recapitalise state-owned banks under strain, and to maintain state 
ownership.  

NKBM, the second largest bank in Slovenia and 51.2% state owned, tried in autumn 2012 to 
sell  its  51%  share  of  the  insurer  Zavarovalnica  Maribor  (ZM)  to  reach  a  sufficient  capital 
adequacy  level.  According  to  numerous  reports  various  private,  including  foreign  investors 
were interested in buying these ZM shares. One of these offers seem to have been higher than 
the successful bid but was conditioned on taking over at least 75% of ZM, i.e. reducing the 
public  ownership  below  the  blocking  minority  threshold,  implying  that  reinsurer  Sava  Re 
(47.1% state-owned) would sell part of its 49% share.45 However, Sava Re, instead of selling 
own  shares  in  ZM,  made  also  an  offer  for  the  NKBM  share  in  ZM.  In  order  to  arrive  at  a 
sufficient amount Sava Re made this offer together with SOD (100% state-owned restitution 
fund, recapitalised by the Republic of Slovenia in 2011 and 2013 and itself one of Sava Re’s 
owners). In the end, Sava Re purchased 11.8% of ZM for EUR 15m and SOD spent EUR 50m 
for a 39.2% stake. SOD aims at withdrawing from ownership and Sava Re intends to buy the 
share from SOD after its IPO planned for spring 201346.  

With a share of at least 11% of total employment, SOEs have a material effect on labour 
productivity and competitiveness of the Slovenian economy overall.47 Taking into account 
employment shares in the public and private sector (21% and 68%, respectively), at least one 
out of eight employees in the corporate sector is employed by SOEs.  

Graph 32: Employees in private, public and SOEs sectors, December 2011 

11%

21%

68%

Private Sector

Public Sector

SOEs

31 

 
 
 
 
 
Notes: Employment in SOEs captures employees in the 46 largest SOEs analysed so far plus those in the state-owned banks. Public sector 
employees  are  those  who  are  employed  in  the  government  administration,  health  and  education  sector.  Private  sector  employees  are 
calculated as a residual (total employment net of those employed in the SOEs and in the public sector).  

Source: National Statistical Office of Slovenia, 2011 AUKN report, 2011 Annual company reports, Commission services calculations.  

A  number  of  SOEs  are  accumulating  losses  and  debt,  reducing  their  equity  value  and 
will face viability risks if they are not restructured and recapitalised.48 Debt and losses of 
the  four  entities  consolidated  within  the  GGA  (three  funds  and  part  of  the  railway  holding) 
have a direct negative impact on public finances. All four of these SOEs are highly levered 
and with gross debt equivalent to over 1% of GDP each, with the exception of DSU, whose 
debt  is  lower  in  absolute  terms  but  equivalent  to  over  20  times  its  2011  earnings.  KAD 
reported both negative EBITDA49 and a net loss in 2011 due to impairments on its portfolio 
companies.  The  Railway  holding  also  had  to  report  a  loss  in  2011  following  a  prolonged 
period of underperformance. These losses reduce equity and may raise recapitalisation needs 
in  the  future.  The  negative  or  low  levels  of  return-on  equity  (ROE)  reported  by  KAD,  the 
Railway holding and D.S.U. suggest poor investment returns for the state. 

About half of  the non-bank SOEs outside GGA are assessed as highly  indebted. About 
one quarter reports negative EBITDA and double digit negative return on equity. Some have 
already been recapitalised by the state and several may need to be recapitalised (again), absent 
an improved outlook. A further half of these companies report net losses and negative ROEs. 
The remainder of these highly indebted companies report low earnings and return on equity, 
which could indicate either a general squeeze in profitability margins in the relevant industry 
possibly due to the economic crisis, an inefficient management of the underlying businesses, 
or  debt-burdened  capital  structures  (i.e.  high  interest  expenses).  Conversely,  the  companies 
with relatively high ROEs may operate in environments where firm-level efficiency is not the 
only determinant of profitability.50 Furthermore, some of these firms may be less exposed to 
cyclical developments. 

The  state-owned  insurance  companies  reviewed  demonstrate  reasonable  profits  and 
coverage  ratios  of  premium  income  over  claims.  Nevertheless,  profits  may  slow  down 
going  forward,  with  claims  relating  to  the  2012  floods  reducing  profits.  According  to  the 
AUKN report, the Slovenian insurance sector in general is marked by a reduction in demand 
for some insurance products, particularly due to lower economic activity in the construction 
industry  and  transportation.  The  report  also  states  that  financial  investments  represent  a 
greater  proportion  of  the  total  assets  of  Slovenian  insurance  companies  without  going  into 
details on specific exposures. So far no significant direct exposure of the insurance sector to 
risks  coming  from  the  banking  system  was  discovered  (e.g.  big  CDSs  and  other  credit 
insurance instruments exposures). However, insurance companies are exposed to risks given 
tightening  conditions  in  capital  markets  and  the  industry's  close  link  to  both  the  banking 
sector and the rest of the SOEs. 

Recapitalisations,  called  state  guarantees  and  other  capital  transfers  to  loss  making 
SOEs contributed 1.4 pps. to the budget deficit of 6.4% of GDP in 2011 (Table 2, Graph 
33). This figure refers to deficit increasing capital injections as reported in the October 2012 
EDP notification tables. In addition, the figure captures only direct recapitalisations and not 
the  indirect  recapitalisations  (see  Boxes  3  and  4);  therefore  it  is  underestimating  the  fiscal 
impact. Half of this amount (EUR 243m or 0.7 pp.) is attributable to the first recapitalisation 
of NLB, the largest banking group in Slovenia. The remainder was distributed amongst other 
loss-making  SOEs  in  smaller  capital  injections,  called  state  guarantees  and  other  claims  as 
described  in  Table  4  (disaggregated  information  is  not  available  for  the  smaller  transfers). 

32 

 
 
Some  of  the  recapitalisations  were  carried  out  through  the  SOD  holding,  which  is  the  only 
holding  within  the  general  government  that  has  officially  been  recording  accounting  profits 
over this period, reporting EUR 115m of net profit for 2011; however, this profit was mostly 
due  to  non-recurring  items  amounting  to  EUR  180mn  on  revenue  level.51  In  addition,  SOD 
was recapitalised in 2011 by EUR 60m and KAD by EUR 90m. An additional EUR 20m of 
capital  increase  into  SOD  was  done  in  2013.  KAD  and  SOD  capital  increases  are  not 
classified as public deficit increasing one-off measures as the two funds are consolidated with 
GGA.52  

Deficit  increasing  recapitalisation  needs  apparently  were  lower  in  2012;  however  they 
may  increase  in  2013  (Table  2,  Graph  33).  For  2012,  the  government  has  reported  one 
direct capital injection of EUR 63m for the second NLB recapitalisation. An additional EUR 
37m  of  called  state  guarantees  (less  repayments)  appears  in  the  government  accounts  in  the 
October 2012 EDP notification tables. Known potential recapitalisations in 2013 are related to 
banks. In addition, NLB issued a contingent convertible (CoCo) bond of c. EUR 320m which 
was subscribed by the government in 2012 and was triggered in February 2013. Conversion of 
NKBM’s  EUR  100m  hybrid  instrument  subscribed  by  the  government  in  the  absence  of 
immediate  private  interest  was  now  also  triggered  in  early  2013  according  to  the  bank’s 
management. Conversion of these instruments is likely to be deficit increasing (see also Box 
2).53 

Graph 33: SOE recapitalisations and other capital transfers, 2011- YTD2013*, as % of GDP 

Deficit increasing

Rest

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

2011

2012

2013

Source: October 2012 EDP tables, Ministry of Finance, news releases. Commission services calculations. 
* 2013 figure includes all transfers known as at mid-March including conversion of the NLB and NKBM hybrids. 

33 

 
 
 
 
 
Table 2: State aid and non-state aid SOE recapitalisations and other capital transfers, 2011-2013 

Company

name

NLB

NKBM

Adria Airways

Slovenian Railway holding

KAD

SOD

Other

Total

Total as a % of GDP

Total deficit increasing

Total deficit increasing as a % of GDP

Transfers (EUR mn)

Type of Transfer

(2011/ 2012/ 2013)

State Recap/ State Recap/ NLB CoCo 

Recap/ Sale of Subsidiary/ NKBM Hybrid Loan

State Recap

Recognition of Slovenian Railways claims to RS

State Recap (not deficit-increasing)

State Recap  (not deficit-increasing)

Called state guarantees

2011

243

104

49

119

90

60

79

693

1.9%

490

1.4%

2012

63

65

-

-

-

-

24

152

0.4%

87

0.2%

2013

320

100

- 

- 

- 

20

28

468

1.3%

448

1.3%

Source: October 2012 EDP notification tables, Ministry of Finance, news releases 
Notes:  
The 2011 NKBM recapitalisation involved significant participation of unaffiliated private investors, who acquired shares at precisely equal 
terms to state-controlled entities. This amount is therefore not fully reflected in the total.  
CoCo  bonds 
Conversion of the NKBM hybrid instrument is announced for April and has been taken into account in the calculations. 

the  amount  of  EUR  320m  Euros  were 

in  February,  2013.  

in  2012  for 

the  NLB 

triggered 

issued 

in 

Box 4: Indirect public recapitalisations of banks and impact of cross-ownership 

NKBM,  the  second  largest  banking  group  in  Slovenia,  has  so  far  received  c.  EUR  170m  in 
recapitalisations  by  state-owned  undertakings.  In  2011,  it  raised  EUR  104.3m  by  means  of 
public  offering.  The  state  participated  indirectly  by  transferring  its  pre-emptive  rights  to 
acquire  new  share  in  the  bank  to  three  100%  state  owned  SOEs.  In  their  capacity  of  pre-
emptive right holders, those three SOEs acquired new shares in NKBM proportionately to the 
state's participation at the time, i.e. just enough to avoid diluting the overall state ownership 
below the initial 51%. In 2012, one of those companies, Posta Slovenije, which now holds a 
6.6%  stake  in  NKBM  as  a  result  of  the  above  transaction,  attributed  EUR  5m  of  expected 
losses to devaluation of NKBM shares.54 This compounds the financial pressure for the main 
universal  service  provider  in  the  postal  sector.  In  2012,  as  described  in  Box  3,  NKBM 
succeeded  in  improving  its  capital  basis  by  EUR  65m  through  the  sale  of  its  insurance 
subsidiary to an SOE.  

Together with the 2013 hybrid loan of EUR 100m, this brings state involvement for the past 
three years to around EUR 218m. 

Accumulation  of  losses  indicates  more  recapitalisations  of  SOEs  and  banks  will  be 
required  beyond  2013.  In  2011,  a  total  of  EUR  415.4m  of  net  losses  were  generated  by  a 
third of the SOEs reviewed. This is equivalent to 1.1% of GDP (Table 3, of which 0.4% of 
GDP  was  consolidated  with  the  general  government  deficit).  The  amount  increases  to  EUR 
924.8m or 2.5% of GDP (no direct change in general government deficit)55 including the three 
largest banking groups (NLB, NKBM and Abanka, as discussed in section 3.1). The bulk of 
these losses were generated in companies outside the general government. Continuing losses 
that  would  require  additional 
could  be  expected 
recapitalisations.  Further  recapitalisations  of  SOEs  and  banks  would  likely  be  recorded  as 
deficit increasing one-off capital transfers.56 

to  deplete  capital 

to  an  extent 

34 

 
 
 
  
 
 
Table 3: Overview of key non-bank SOE figures, 2011  

TOTAL 

as % of GDP (Total Empl)

TOTAL INSIDE GG*

as % of GDP (Total Empl)

TOTAL OUTSIDE GG

as % of GDP (Total Empl)

BY SECTOR

ENER

TRAN

CF

COMM

PI

INS 

COMPANIES WITH HIGH LEVERAGE **

as % of GDP (Total Empl)

Total Losses Total Profits

Gross Debt

Employees

-415.4

1.1%

-144.7

0.4%

-270.7

0.7%

-3.2

-16.4

-16.7

0.0

-234.4

0.0

-411.7

1.1%

545.2

1.5%

0.3

0.0%

544.9

1.5%

146.1

31.9

7.8

42.9

254.0

62.1

106.2

0.3%

10905.1

30.1%

1948.9

5.4%

8956.1

24.7%

993.3

3209.4

44.3

488.5

4220.7

na

9228.8

25.5%

81079

10.0%

8952

1.1%

72127

8.8%

10639

3633

2493

11294

39845

4223

44789
5.5%  

Notes: 
In EUR millions (except if stated otherwise), Employees: absolute number and share in total employment. 
Debt of insurance companies is not included in the summary due to differences in business models.  
Total net losses (net profits) is the sum of losses (profits) of all loss (profit) making SOEs, both inside and outside AUKN. 
*  Total  inside  GG  comprises  100%  of  entities  classified  within  general  government  but  figures  are  available  only  on  a  non-consolidated 
basis, so the impact on GG deficit and debt after consolidation will be less. Furthermore the entire Slovenian Railway holding is included 
even though only part of it is classified in the general government due to data unavailability.  
SOEs covered by AUKN (a subset of the companies included in the total) by sector:  
(i) ENER - Energy sector (37.1% of book value of total government portfolio) 
(ii) TRAN - Traffic, Transport and Infrastructure sector (32.0% of book value of total government portfolio) 
(iii) CF - Capital Funds, Companies of Special Significance (12.0% of book value of total government portfolio) 
(iv) COMM - Post and Telecommunications sector (8.6% of book value of total government portfolio) 
(v) FIG - Financial and Insurance Groups Sector (8.5% of book value of total government portfolio) 
(vi) PI - Portfolio Investments (1.4% of book value of total government portfolio)  
** Companies with leverage above 4 times EBITDA, i.e. reporting high levels of debt when compared against their ability to produce cash 
flows. Some of them also have net losses or even a negative operating profit (EBITDA).  
Source:  2011  AUKN  report,  2011  Annual  company  reports,  Commission  services  calculations.  See  also  Georvieva  and  Marco  Riquelme 
(2013) for more details. 

Total debt of non-bank SOEs is at least 30% of GDP, with a majority of this debt (26% 
of GDP) being concentrated in highly levered companies. SOEs consolidated with General 
Government Accounts (GGA) have debt equivalent to 5.4 of GDP (Table 3) compared with 
the total government debt of 46.9% of GDP in 2011.57 Debt of SOEs outside GGA is 24.7% 
of  GDP,  with  highway  operator  DARS  being  the  largest  contributor  with  8.1%  of  GDP. 
DARS poses a relatively high risk to the state budget as its high level of debt, both in absolute 
and in relative terms, is 100% state guaranteed (Table 4). The government is exposed to other 
companies on a smaller scale as it owns less than a 50% stake.  

Contingent liabilities in the form of state guarantees are equivalent to 25% of GDP, and 
SOEs are the main beneficiaries. This number covers various types of state guarantees, e.g. 
for  financing  international  trade,  construction  and  improvement  of  infrastructures,  corporate 
restructuring  etc.  It  excludes  state  guarantees  for  interest  payments  and  state  guarantees 
outside  the  central  government.  In  addition  to  existing  contingent  liabilities,  the  envisaged 
BAMC would increase state guarantees by up to a further 11% of GDP (EUR 4bn). The main 
risk  in  terms  of  contingent  liabilities  lies  with  the  loss-making  Railway  holding  (and,  as 
mentioned above, with DARS). 

35 

 
 
Graph 34: Government debt, non-bank SOE debt and contingent liabilities, 2011, as % of GDP  

State
guarantees

SOE debt

5.4%

24.7%

Government
debt

0%

10%

20%

30%

40%

50%

Gross debt of entities classified within GGA*

Gross debt of entities classified outside GGA

*GGA: General Government Accounts. Debt is reported on a non-consolidated basis.  

Source: 2011 AUKN report, 2011 Annual company reports, European Commission services calculations 

Table 4: Main SOE beneficiaries of state guarantees, debt principal, 30 June 2012 

Debtor

Highway Company DARS

SID Bank

Slovenian Restitution Fund SOD

Slovenian Railways Company SŽ

Sava Hydro Power Plant Financing Company INFRA

Source: Ministry of Finance calculations, November 2012 

Balance (EUR m)

As a % of GDP

2898

1282

470

238

38

8.1%

3.6%

1.3%

0.7%

0.1%

The  government  has  decided  on  a  new  structure  to  manage  its  capital  stakes.  The 
Slovenia  Sovereign  Holding  (SSH)  Act  came  into  force  in  December  2012.  The  aim  of  the 
SSH  is  to  centralise  the  management  of  all investments owned by the Republic of Slovenia 
and  the  state  funds.  It  requires  the  development  of  a  classification  of  investments,  target 
stakes  in  capital  investments  and  methods  of  sale.  The  classification  was  adopted  by  the 
outgoing government and has not been approved by parliament, where the process is currently 
suspended.  It  remains  to  be  seen  how  the  SSH  can  achieve  greater  success  than  its 
predecessor, the Capital Assets Management Agency (AUKN), in terms of privatisations and 
efficient  portfolio  management.  The  13  March  coalition  agreement  foresees  revisions  to  the 
structure and operations of the SSH.  

4. 

POLICY CHALLENGES 

Based  on  the  analysis  in  sections  2  and  3,  a  number  of  broad  challenges  can  be 
highlighted for Slovenia: (i) the credible repair of the banking system through a balanced set 
of measures and maintenance of financial stability through prudent supervision and improved 
governance structures; (ii) a sounder financing of the NIIP and growth through FDI facilitated 

36 

 
 
 
 
 
by  an  improvement  of  the  business  environment;  (iii)  cost-competitiveness  developments 
supportive  of  adjustment  and  helping  to  avoid  the  re-emergence  of  external  imbalances 
through continued public sector wage restraint, adaptation of the minimum wage setting and a 
set  of  labour  market  reforms;  and  (iv)  the  enhancement  of  adjustment  capacity  at  the 
microeconomic  level,  particularly  in  relation  to  state  ownership  and  labour  market 
institutions.  Economic  policies  associated  with  these  challenges  require  a  comprehensive 
reform agenda with mutually reinforcing positive impact on employment, economic activity, 
financial  sector  stability  and  reduction  of  imbalances.  These  measures  should  complement 
measures to correct the excessive deficit and ensure sustainable public finances in the long-
term.  

Challenges identified under the MIP in the 2012 IDR and relevant policy responses were 
reflected and integrated in the country-specific recommendations issued for Slovenia in 
July, 2012. The assessment of progress in the implementation of those recommendations will 
take  place  in  the  context  of  the  assessment  of  Slovenia's  National  Reform  Programme  and 
Stability  Programme  under  the  European  Semester.  Against  this  background,  this  section 
discusses different avenues that could be envisaged to address the challenges identified in this 
IDR. 

Banking system and financial stability 

The  government  has  accelerated  its  policy  response  to  the  banking  sector’s  problems 
since May 2012, but efficient implementation will require a sound strategy and patient 
work  on  important  technical  details.  As  assessed  in  the  in-depth  section,  current  policies 
include the establishment of (i) a range of tools including an asset management company to 
carve problematic legacy assets out of banks’ balance sheets, (ii) further state recapitalisations 
prompted by regulatory requirements and (iii) an upgrade to the legal framework for banking 
and  bank  supervision.  As  Slovenia  moves  into  the  implementation  phase,  strategic  and 
technical  questions  remain.  Efficient  implementation  will  be  challenging  and  technical 
expertise will be key.  

To  regain  credibility  and  stabilise  the  financial  sector,  a  new,  independent  and 
transparent assessment could usefully form the basis for a comprehensive strategy. The 
strategic  imperatives  are  regaining  credibility  and  market  access,  improving  banks’ 
governance and profitability, and right-sizing and strengthening banks’ balance sheets, while 
minimising  fiscal  cost  and  risk.  A  new  third-party  asset  quality  review  and  a  new  thorough 
stress test are needed to quantify the challenges and ensure that the strategy, the overall fiscal 
envelope  and  the  selection  of  tools  are  appropriate.  These  assessments  would  ideally  be 
conducted  by  internationally  recognised  consultants  under  the  guidance  of  a  steering 
committee  comprising  the  relevant  international  financial  institutions  and  the  Slovenian 
authorities.  The  asset  quality  review  and  stress  test  should  cover  the  entire  banking  system 
(with the systemically relevant banks constituting an absolute minimum) and would inform a 
system-wide  viability  assessment.  Publishing 
the  approaches  used,  with  underlying 
assumptions and main findings, would help to maximise credibility. Based on these findings, 
a strategy could usefully articulate how the fiscal resources can be mobilised most efficiently 
in order to constitute a clear and quantified roadmap. The fresh assessment can also provide 
information  on  legacy  portfolios  that  could  help  in  selecting  the  most  efficient  legal  tools, 
especially if a mixed approach is required to cater for the diverse nature of legacy portfolios.  

37 

 
 
 
Strengthened  balance  sheets  alone  are  not  sufficient  to  safeguard  the  soundness  of  the 
banks  concerned;  privatisation  would  help  improve  corporate  governance  of  these 
banks  and  could  potentially  also  provide  fresh  capital.58  Privatisation  would  help  to 
address manifest corporate governance and credibility deficiencies and would reduce implicit 
fiscal  liabilities  and  sovereign-banking  contagion  in  the  future.  The  former  coalition 
agreement  on  retaining  a  blocking  minority  in  banks  and  insurance  companies  was  a  major 
obstacle  in  this  respect,  while  the  13  March  2013  coalition  agreement  is  silent  on  bank 
privatisation. As an interim measure while the bank equity market remains depressed, it is of 
the  utmost  importance  that  governance  of  state-owned  banks  is  improved  substantially  and 
that a framework to ensure that banks operate at arm’s length is put in place. 

Continued strengthening of the supervisory framework and, where necessary, promptly 
using the new powers for supervisory action are vital. A stronger, more active supervisor 
can guide banks through the challenging period ahead, involving dealing with legacy assets, 
deleveraging, shoring up capital positions, improving management and internal processes and 
developing  sustainable  business  models.  Strict  provisioning  requirements  are  essential.  A 
supervisor with a strong reputation, underpinned by strong powers will also lend credibility 
vis-à-vis  investors.  Finally,  it  will  safeguard  against  a  repeat  of  asset  price  bubbles  and 
reckless leveraging-up of firms and banks.  

Improving the business environment 

Policy progress on key business environment issues remains slow. In the area of regulated 
professions different sectors will be reviewed in the course of 2013 and 2014. The need for 
improved  insolvency  and  receivership  legislation  has  been  recognised  and  amendments  are 
now  under  discussion.  State-involvement  in  the  economy  remains  high  and  deters  FDI,  as 
shown in section 3.2 (see also adjustment capacity below). 

The  fast  implementation  of  an  ambitious  plan  to  reduce  state  involvement  in  the 
economy  and  to  improved  corporate  governance  could  stimulate  private  and  foreign 
investment.  Tackling  the  multiple  challenges  identified  in  the  business  environment  in  the 
context  of  the  European  semester,  such  as  the  rigidities  around  regulated  professions,  the 
problem  of  payment  indiscipline,  the  inefficiency  of  civil  justice,  including  bankruptcy 
procedures  and  contract  enforcement,  and  the  complexity  of  spatial  planning  procedures, 
would also be key components for a strategy to improve the investment context.  

38 

 
 
Cost competitiveness 

Policy  action  to  improve  cost-competitiveness  has  been  limited  so  far.  As  described  in 
section  2.3,  the  2010  hike  in  the  minimum  wage  has  compressed  the  bottom  of  the  wage 
distribution.  As  a  result  there  is  the  risk  that  upward  wage  pressures  in  sectoral  collective 
agreements will increase in the future to re-establish wage differentials. If maintained, regular 
automatic adjustment of the minimum wage each year is expected to magnify these tensions. 
To  the  extent  that  public  sector  wage  policies  indirectly  affect  cost  competitiveness,  the 
currently negotiated wage cut is likely to be beneficial, at least in the short term. 

A range of measures relating to the labour market can help reverse cost competitiveness 
losses.  Wage  growth  consistent  with  recovery  in  cost  competitiveness  can  be  sought  in 
conjunction with social partners. The government also has more immediate levers to influence 
wage  developments,  including  public  sector  wages  and  minimum  wages.  Adaptation  of 
minimum wage setting seems particularly needed in light of the analysis in section 2.3. 

Adjustment capacity 

Enhancing  Slovenia’s  economic  adjustment  capacity  is  an  urgent  priority  in  order  to 
minimise the cost of the crisis and set the foundations for future growth. Reallocation of 
labour and capital from firms that over-expanded in the boom phase is needed. As described 
in the 2012 IDR, the extent of resource misallocation in the years preceding the crisis stems 
from both over-investment in certain sectors and unwise lending and investment choices by 
banks  and  firms.  The  adjustment  process  will  be  significantly  less  costly  and  disruptive  in 
terms  of  bankruptcies  and  unemployment  if  frictions  can  be  removed.  There  is  a  particular 
risk of labour market rigidities interacting with deleveraging to cause firm failures and hence 
abrupt employment losses in the private sector.59 In this IDR, the analysis of the state-owned 
enterprise sectors provides evidence of the many shortcomings of Slovenia’s extensive state-
ownership  nexus.  Most  importantly,  this  nexus  compromises  the  allocative  efficiency  of 
capital  and  labour  markets  and  generates  repeated  recapitalisation  needs.  Funds  of  better 
performing  state-owned  companies  appear  to  have  been  used  in  several  cases  to  exclude 
potential foreign investors.  

Slovenia  has  created  a  new  holding  structure  (SSH)  for  managing  the  state’s  capital 
stakes,  replacing  the  former  agency  (AUKN).  A  restricted  list  of  companies  for 
privatisation was adopted by the former government and is pending approval by parliament. 
The  success  of  the  privatisation  process  and  the  intended  improvements  to  the  corporate 
governance  of  enterprises  remaining  in  state  ownership  will  largely  depend  on  political 
determination and the professionalism of the implementation process. 

A  significant  withdrawal  of  the  state  from  Slovenia’s  corporate  sector,  combined  with 
arms-length  governance  of  enterprises  that  remain  in  state  ownership,  could  improve 
the  adjustment  capacity  of  the  real  economy  and  limit  the  fiscal  burden  of  SOEs.  A 
successful privatisation drive, which in in the current economic environment may take several 
years to complete, ideally going beyond the currently envisaged list of enterprises, could yield 
substantial improvements in the credibility of the banking sector, corporate governance, fiscal 
costs,  adjustment  capacity  and  FDI.60  To  enable  the  envisaged  privatisation  it  probably  will 
prove necessary to reduce public ownership at least below the "blocking minority" threshold 
of 25%+1 share. Success will also depend on the efficiency of the regulatory framework and 
the promotion of competition in the sectors concerned. 

39 

 
 
The recent labour market reform is an important first step towards reducing frictions in 
the labour market. Labour market functioning will only be improved significantly if reforms 
are  sufficiently  ambitious  and  address  labour  market  segmentation  without  introducing  new 
elements of rigidity. The recent reform does not change the regulation of students' occasional 
work (i.e. the status of “student work”), which therefore remains to be reformed.  

40 

 
 
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45