How Slovenia turned itself around

Matthew McDowall

Another Balkan country didn’t need an EU bailout to get its crisis-ridden economy back on track.

While Greece braces  for another round of externally imposed austerity, at the other end of the Balkan Peninsula there is another eurozone country that managed to bail itself out of crisis, and is now doing pretty well.
Slovenia’s €4.8 billion bailout of its stricken banks was covered from its own funds, without recourse to the don’t-call-it-troika of the International Monetary Fund, European Central Bank and European Commission that has led Greece’s bailouts.

The rescue of Slovenia’s largely state-owned banks was announced in December 2013, months after the government launched an austerity plan to repair public finances.
The country, once referred to as “a Balkan Switzerland,” was being dubbed “the next Cyprus” in anticipation of an international rescue package, haircuts for depositors, and dramatic spending cuts.
Yet Slovenia calculated that it could rely on the open market to cover the costs of its banking crash.
The outcome has been much better than expected.
“In the beginning of winter 2013, it was an established forecast that Slovenia would have negative growth of one percent of GDP in 2014, while according to provisional data, the actual outcome was 2.6 percent, a difference that is enormous,” Slovenian finance minister Dušan Mramor told POLITICO in his office in Ljubljana. “In my view it was extremely important that Slovenia was able to maintain the trust of the international financial community and this trust led to very good macroeconomic results. With the troika it would have been harder to achieve so quickly. We avoided unnecessary moves that would be detrimental for GDP.”
Slovenia has been funding the bailout partly though bond issues, while also pursuing incremental fiscal tightening to keep the markets onside — so far successfully. The budget deficit came in at 4.9 percent of GDP in 2014, including bank recapitalization costs, with the structural deficit standing at 3.3 percent, just 0.1 point higher than forecast.

Balancing the books

Slovenia aims to balance its budget by 2020, selling off a slew of state-owned companies along the way, while reforming education, pensions, the tax system and business legislation.
Mramor, a softly-spoken university professor who is a non-party technocrat, is confident that the reformist path will not be disrupted, despite Slovenia’s socialist economic traditions.
Politicians often talk of “reform” in an airy, conceptual manner, but Mramor is refreshingly concrete, peppering his answers with numbers and specific examples, drumming his fingers on the table for emphasis.
The government has implemented 57 measures for fiscal tightening, mainly by halting any automatic spending increases. It has assessed 91 companies for privatization and put 47 on the table for a sale or part-sale. The length of higher education will be reduced. Taxation of student incomes has been equalized with the rest of the population to boost revenues and reduce labor market segmentation.
The contrast with Greece should not be over-emphasized, given the different scale (and cause) of that country’s crisis. But a comparison with neighboring Croatia is worth examination.
Both are former Yugoslav republics with top-heavy states. But despite Croatia not experiencing a banking crisis on the scale of Slovenia’s, it has endured seven consecutive years without meaningful growth (by some measures, 2015 will be the eighth year of recession).
Much of the difference is down to Slovenia’s strength as an exporter, which has been bolstered by reform.
“Slovenian goods exports per capita are about 4.5 times higher than Croatia’s,” said Hrvoje Stojić, economic research director at Hypo Alpe Adria in Zagreb. “Slovenia has recently become a more attractive destination for FDI thanks to competitiveness gains and better medium-term growth prospects.”
In contrast, investors despair at Croatia’s lack of appetite for reform, despite a government with a strong mandate, and some work on liberalizing investment legislation.
Exports account for 77 percent of Slovenia’s GDP, compared to 44 percent in Croatia, according to Ivan Dražetić, a trader at InterCapital Securities, a regional brokerage. Companies like white goods manufacturer Gorenje punch well above Slovenia’s moderate weight on European markets.

Deploying funds

Slovenia has also been fairly successful in deploying EU funds — more so than Croatia, which only joined the EU in July 2013, nine years after its northern neighbor.
Although Slovenia has bounced back strongly from its crisis, there is still work to do. Restructuring of state-owned companies has been slower than hoped. On June 16, the government rejected the only remaining bid for Telekom Slovenije — regarded as one of the country’s most appealing assets — from U.K. private equity firm Cinven, saying that it represented “too high a risk.”
Backtracking on that privatization was seen as a bad sign, despite recent sales of supermarket Mercator and brewer Laško, which were part-owned by state banks rather than the state directly.
Stojić also questioned whether the government’s insistence on retaining control in some of the companies on offer through a 25 percent-plus-one-share holding, including in the biggest bank NLB, will appeal to serious investors. It certainly does not reduce the politicization of the banking sector that led Slovenia into its crisis in the first place.
Unions, which previously bought into the fiscal program, are starting to object more strongly, while the government’s coalition partners have chafed against privatization as well.
But Mramor insisted that reform would not be derailed by political problems.