Slovenia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Eurozone member
- Diversified economy (automotive, pharmaceuticals, electrics, electronics, tourism)
- Integrated in the European production chain
- External accounts in surplus
- Efforts to clean up the banking sector
- Small domestic market, very open economy (exports of goods and services represent 80% of GDP in 2020)
- Ageing population and demographic growth at a standstill, resulting in a labor shortage
- Dependence on regional economic conditions and automotive
- Inefficient state-owned companies
- Slow administrative and judicial procedures
Private consumption and investment as the key growth drivers in 2022
Slovenia recorded a robust economic rebound in 2021 after the recession in 2020. With the removal of COVID restrictions early in the year, the economy grew dynamically. However, towards the end of the year, Slovenia was hit hard by the pandemic because of a very hesitant vaccination campaign. This resulted in new restrictions. Furthermore, the global supply problems increasingly reached Slovenia, which is integrated within German, Austrian, and Italian production chains, especially for the automotive sector. These problems will throw a shadow on the first half of 2022. However, starting mid-2022, supply-chain issues should be slowly resolved, which would give a push to goods exports. They should gradually outpace import growth and positively contribute to net exports. In addition, foreign tourism should pick up more significantly this year (direct income estimated at 6% of GDP before the pandemic), with further progress in vaccination. Besides that, the domestic market should remain robust overall for the year. Private consumption should benefit from lower taxes on capital income and more favorable income tax brackets. Moreover, the strong savings rate should give more financial room for further consumption. With a very positive development in the labor market (the unemployment rate already reached pre-COVID levels in mid-2021), the labor shortage should lead to solid wage growth. However, a part of this extra purchasing power will be balanced by the substantial increase in consumer prices. Pulled by high energy and import prices, the yearly inflation rate increased sharply at the end of 2021 and should peak above 5% in spring 2022. With decreased supply-chain issues, the price increase should slowly calm down. While a substantial increase in construction and machinery investments is expected (despite an increase in corporate tax), public investments will be a big focus this year. Within the EU Recovery and Resilience Facility, Slovenia will get a total of EUR 1.8 billion in grants (3.8% of GDP) and EUR 705 million in loans, with a first tranche of grants (EUR 231 million) already paid out in September 2021. In 2022, 0.3% of GDP disbursements were planned to invest in renewable energy projects and digitalization, as well as reform the healthcare and pension systems. Additional support is still coming from the ECB from its unchanged low deposit rate (-0.5%) and the reinvestment of its maturing assets in the balance sheet.
A still noticeable public deficit
Although lower than in 2020 and 2021, the public deficit will remain noticeable this year. On the revenue side, the recovery will increase the indirect taxes more than the tax reform will decrease direct taxes. Expenditures connected to the COVID-19 recession will be markedly smaller. However, public investment remains high due to a stimulus plan implemented between 2020 and 2027. Public debt should slowly decline but remain above its pre-COVID-19 level. After its impressive fall last year, the usually prominent current account surplus should only show a slight increase in 2022 as the trade-in goods surplus should remain uncharacteristically low during at least the year’s first half. The services trade surplus should increase due to a recovery in foreign tourism, while the structural negative investment income balance should be only mildly changed.
Prime Minister Janša constantly challenged in the National Assembly
Since March 2020, Prime Minister Janez Janša (from the populist national-conservative SDS, 26 seats out of 90 seats in the parliament) has been leading a minority government together with Christian-democratic NSi (7 seats) and the social-liberal party Concretely (5 seats). This coalition is supported by the far-right SNS (3 seats) and the representatives of the Italian and Hungarian national minorities (2 seats). Still, it lacks the majority in the parliament, which makes it hard to pass key legislation. The position of the government is difficult as there were already two votes of no confidence against Janša (February and May 2021), one against the minister of education (August 2021), and one against the minister of justice (November 2021). All of them failed by a small margin. The main reasons for them were the government’s inability to deal with the COVID-19 pandemic, the political pressure on the media and the jurisdiction, as well as the authoritarian style of the Prime Minister. President Borut Pahor advanced the next general election, scheduled for June 2022, to 24 April 2022 (the earliest date possible) to reduce this political pressure. While Janša’s SDS still led the polls in early 2022, the SDS lost many allies in the parliament, so a center-left coalition is likely to win the election. In addition, the election could be further advanced by a new successful vote of no confidence.