Slovenia: Risk Assessment
Country Rating1
Rating: A2
Business Climate Rating1
Rating: A2
Risk Assessment2
Growth limited by the sluggishness of European demand
After a severe recession in 2009, the rebound in 2010 was moderate. And in 2011, the Slovenian economy will still not return to pre-crisis levels of activity due to the sluggishness of European demand even though it will remain buoyed by relatively resilient German foreign demand, which will spur in particular the automotive, home appliance, and pharmaceutical sectors. Tourist activity (10% of GDP) will similarly remain dynamic. Economic growth is, however, expected to gradually stabilise in favour of private domestic demand. Railway infrastructures in particular will likely benefit from public investments financed by European funds. With little exposure to toxic assets and benefiting from the support of their European parent companies, the banks have proven resilient to the crisis. They will be able to cope with the gradual withdrawal of government guarantees on loans, which are nonetheless likely to grow albeit moderately in view of the constraints on demand: the job picture has notably become much bleaker with unemployment increasing from below 5% before the crisis to nearly 8% in 2010.
Regaining control over the public sector deficit will be a very gradual process
Since the third quarter 2008, the government has implemented three successive stimulus plans targeting the financial sector, companies, and households with the public deficit widening in consequence. Restoring compliance with the Maastricht criteria, particularly a public sector deficit not exceeding 3%, will notably require a speed-up of pension reform, which is not expected, however, before 2013. But although public sector debt has increased sharply since 2008, growing from 23% of GDP to the near 40% ratio expected in 2011, it will stay far below the 60% limit stipulated in the Maastricht Treaty.
The trade balance is structurally in deficit due to the high import content of exports, but it is offset by the services balance surplus resulting from large tourism revenues. Foreign direct investment inflows, which represent 3% of GDP, only cover financing needs to a limited extent. In this context, foreign debt - mostly private - has been high, exceeding 110% of GDP. Slovenia could find its refinancing capacity restricted as a result of a crisis of confidence among foreign investors. But with its foreign debt denominated almost entirely in euro, exchange rate risk is virtually non-existent.
A stable political environment despite a lack of consensus on reforms
The territorial dispute between Slovenia and Croatia, over an access to the sea, is expected to be settled by an international authority as a result of the Slovenian referendum in June 2010 giving preference to a third party referee solution.
The political environment is stable with the country governed by a coalition of centre-left parties likely to stay in power until the next legislative and presidential elections, scheduled in 2012. The members of the coalition disagree nonetheless on the extent of the reforms to be undertaken, and the lack of a consensus could slow progress on implementing them, especially those that apply to modernisation of the pension system and the job market.
Strengths
- Highest per capita GDP in Central Europe
- Diversified, essentially export-focused, production underpinned by long-cultivated close ties between local and West European companies
- Euro zone membership since 2007 sheltering the country from exchange rate risk
- Limited public sector debt
- Diversified economic sectors (automotives, home appliances, pharmaceuticals, tourism, financial services)
- Germany, the main trading partner, market for 25% of Slovenian exports
Weaknesses
- Economy dependent on world trade and vulnerable to economic conditions in the euro zone
- Banks with heavy debt abroad
- Impact of the ageing population on public sector finances
- Erosion of competitiveness
- Increased unemployment in the wake of the crisis