Country Risk Rating

A3
Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average. - Source: Coface

Business Climate Rating

A2
The business environment is good. When available, corporate financial information is reliable. Debt collection is reasonably efficient. Institutions generally perform efficiently. Intercompany transactions usually run smoothly in the relatively stable environment rated A2.

Strengths

  • Eurozone member
  • High level of political and social development
  • Diversified economy
  • Integrated in the European production chain
  • External accounts in surplus
  • Efforts to clean up the banking sector
  • Public debt on a downward trend

Weaknesses

  • Eurozone member
  • High level of political and social development
  • Diversified economy
  • Integrated in the European production chain
  • External accounts in surplus
  • Efforts to clean up the banking sector
  • Public debt on a downward trend

Current Trends

Solid growth driven by domestic demand

Growth will continue to slow in 2020 but will remain solid, despite an unfavorable external environment, thanks to robust domestic demand. Job creation (unemployment rate of 4.2% in the second quarter of 2019) and the resulting increase in real wages will translate into strong growth in household consumption. In addition, credit conditions will remain favorable, with very low-interest rates, and households have room for maneuver after significantly increasing their savings rate (15.4% of gross disposable income in March 2019, against 12.7% two years earlier). At the same time, business investment will remain dynamic amid efforts to boost production capacity, of which the utilization rate remains high (84% in the third quarter of 2019), in line with domestic demand. Public investment will also continue to grow at a sustained pace, thanks to increased use of European funding. Vibrant activity at home will make it possible to partially offset the effects of the regional economic situation, which remains unsupportive. While Austria and Croatia (each of which accounts for 8% of total exports) should show resilience, the two main markets for Slovenian exports, Italy (13%) and especially Germany (20%), are expected to be flat again in 2020. Compounding this unfavorable environment, Slovenian exports have gradually become less competitive as a corollary to the higher wages of recent years. At the same time, imports are set to increase faster, driven by domestic demand. As a result, foreign trade will weigh on growth, after driving it constantly since 2007.

Budgetary rigor and privatization of the banking sector

With brisk activity levels enabling a substantial increase in revenues, and with favorable financing conditions lowering the interest burden, the budget accounts should remain in surplus in 2020. The government has also announced the introduction of savings measures (around 1% at each ministry) to ensure compliance with the balanced budget rule in the constitution. Public debt will continue to decline rapidly, approaching the target of 60% of GDP. While 62% is held by non-residents, Slovenia’s public debt has a solid profile: 99.9% is denominated in euros and only a small portion matures in less than one year (2.8%).

In addition, following the 2012/2013 banking crisis, the authorities set up a bad bank, which led to a dramatic drop in the ratio of non-performing loans (2.3% in March 2019, against 32% four years earlier), and carried out major recapitalizations and restructuring measures to clean up the sector. In line with commitments to the European Union, the government completed the sale of 75% of the shares of NLB, the country's leading bank (23% of the sector's assets), with a final transaction in June 2019 (€109.5 million for 10% of the shares), after many postponements. The government also sold its shares in the country's third-largest bank, Abanka, to the second-largest one, NKBM, whose market share now stands at 22.5%. As a result, the State now holds only 12% of the sector's assets, compared with 45% at the beginning of 2018.

Slovenia still has a substantial current account surplus, but this will continue to narrow in 2020. While the goods balance could turn negative as imports outpace exports, the services balance will remain largely in surplus, driven by transport and, above all, tourism. The Slovenian economy is very open, with exports of goods and services accounting for 85% of GDP and being mainly directed towards neighboring countries. Automotive, pharmaceuticals and electrical and electronic equipment – sectors in which the country is integrated within German and Austrian production chains – account for 48% of exports. Conversely, the income balance is structurally in deficit due to the repatriation of dividends generated by large inward foreign investments (2.8% of GDP in 2018). Although still high, external debt (92% of GDP in June 2019), half of which is attributable to private commitments, will continue its downward trend.

High popularity rating for the Prime Minister

Pro-European independent Prime Minister Marjan Šarec has been leading a coalition of five center-left parties since September 2018, with only 43 seats out of 90. The government is fragile because it depends on the non-participating support of the left-wing Levica party (9 seats). In addition, during the new government’s first year, five ministers resigned, three of them following cases of alleged corruption. However, the Prime Minister's popularity rating is high (52% approval in August 2019) and polls indicate that in the event of an election, his LMS party would receive about 20% of the votes, five points more than the conservative SDS, which is the main opposition party (compared with 13% and 25% respectively in the June 2018 elections). Vibrant economic growth will likewise promote government continuity. In any event, the EU and euro zone membership would mitigate the economic impacts of political instability.

Source:

Coface (02/2020)
Slovenia