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Document 52013SC0374
COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and stability programme for SLOVENIA Accompanying the document Recommendation for a Council Recommendation on Slovenia's 2013 national reform programme and delivering a Council Opinion on Slovenia's 2013 stability programme for 2012-2016
COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and stability programme for SLOVENIA Accompanying the document Recommendation for a Council Recommendation on Slovenia's 2013 national reform programme and delivering a Council Opinion on Slovenia's 2013 stability programme for 2012-2016
COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and stability programme for SLOVENIA Accompanying the document Recommendation for a Council Recommendation on Slovenia's 2013 national reform programme and delivering a Council Opinion on Slovenia's 2013 stability programme for 2012-2016
/* SWD/2013/0374 final */
COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and stability programme for SLOVENIA Accompanying the document Recommendation for a Council Recommendation on Slovenia's 2013 national reform programme and delivering a Council Opinion on Slovenia's 2013 stability programme for 2012-2016 /* SWD/2013/0374 final */
Contents Executive summary. 3 1........... Introduction. 5 2........... Economic developments
and challenges. 8 2.1........ Recent economic
developments. 8 2.2........ Challenges. 9 3........... Assessment of policy
agenda. 12 3.1........ Fiscal policy and
taxation. 14 3.2........ Financial sector 22 3.3........ Labour market, education
and social policies. 24 3.4........ Structural measures
promoting growth and competitiveness. 27 3.5........ Modernisation of public
administration. 30 3.6........ State ownership and
corporate restructuring. 31 4........... Overview table. 37 5........... Annex. 42
Executive summary
ECONOMIC
OUTLOOK After
subdued growth in 2010-11, Slovenia has slipped back into recession. Real GDP declined
by 2.3% in 2012 and is projected to drop a further 2% in 2013, on the back of
steadily declining domestic demand before stabilising in 2014. The protracted
weakness of the economy has subdued inflation and shrunk disposable income and
credit supply. Unemployment is still rising and is projected to reach 10.3% in
2014. The budget deficit is projected to be significantly above 3% of GDP in
2013, the deadline set by the Council in its recommendation in 2009, and
government debt is projected to rise above the 60% of GDP threshold. KEY
ISSUES The
recession is accentuating the deleveraging challenge for over-indebted
enterprises. Financial distress is reportedly rising in both publicly and
privately-owned enterprises, which is a major cause of high levels of
non-performing loans. As a result, large domestically-owned banks have recorded
sizeable losses, necessitating further recapitalisations and depressing lending
to healthy firms. Barriers in the business environment and weak corporate
governance in state-owned enterprises hinder investment and FDI, and the labour
market is segmented and insufficiently flexible. Past cost-competitiveness
losses have thus not been reversed and export market shares continue to
decline. The 2013 in-depth review (IDR) highlighted important vulnerabilities.
In the Communication accompanying the IDRs, the Commission concluded that
excessive imbalances exist in Slovenia. Slovenia has launched
some of the reforms that are necessary to address the CSRs of the 2012 Council
Recommendation. There has been some short-term consolidation of the public
finances. Parliament adopted a constitutional basis for establishing a general
government budget balance/surplus rule in structural terms. However, further
consolidation measures and improvements in the medium-term budgetary framework
are needed. A pension reform was adopted in December 2012, but it reduces the
burden on public finances only until 2020. To maintain financial sector stability,
parliament adopted legislation for bank restructuring, but the envisaged asset
quality review is still pending, bank balance sheets remain to be cleansed,
bank governance has to be improved and, relatedly, bank privatisation plans are
at an early stage. An important reform tackling labour market rigidity and
segmentation was adopted in March and is due to be followed by the necessary
regulation of student work. The public sector wage bill has been reduced, but the
minimum wage has continued to rise, and there is room for improvement in the matching
of workforce skills with employer needs. The Slovenia Sovereign Holding (SHH)
is not yet in place and announced legislative amendments may jeopardize
necessary corporate governance improvements and envisaged privatisations. A
quick sale of the 15 companies recently slated for full privatisation,
including several major firms, will signal a more welcoming business
environment and help to attract much-needed FDI. Albeit with some delay, the
process of deregulating professional services has started, and the Competition
Protection Agency has been established. The main challenges for Slovenia are to restructure its
banking sector, improve corporate governance of the state-owned enterprises
(SOEs) and correct the excessive macroeconomic imbalances. ·
Public finances: The
general government deficit declined markedly to 4.0% of GDP in 2012 from 6.4%
of GDP in 2011. Nevertheless, Slovenia is not expected to correct the excessive
deficit by 2013, also because of the high cost of bank recapitalisation. The
medium-term budgetary framework and expenditure rule need to be strengthened to
secure long-term sustainability. The contingent liabilities of the state are
among the highest in the EU, which calls for measures to put it on a downward
path. Further pension reforms are needed to stabilise the share of pension
expenditures beyond 2020. ·
Banking
system:
Determined implementation of a comprehensive banking sector strategy is needed
to ensure stability and a return to growth. The transmission of financial
distress from firms to banks, and from banks to the state has intensified,
limiting funding options for both banks and the sovereign. Economic contraction
has further hindered balance sheet repair and left banks increasingly exposed
to non-performing loans, which reached 14.4% in 2012 (24.5% for corporate
loans). Banks are increasingly dependent on ECB funding and government
deposits. ·
State-owned enterprises: The corporate governance of SOEs, which account for one sixth of
total value added, needs to be improved significantly. SOEs form a complex
matrix of frequently financially-troubled banks, insurance groups and
non-financial corporations, which own each other. Better-performing SOEs frequently
use their financial resources to recapitalise other SOEs in difficulties. This
thwarts the productive investment, FDI and privatisation necessary to boost
productivity, deepen capital markets and enhance technological spill-overs. SOEs
burden the public finances – capital transfers to loss-making SOEs contributed
1.4 pps to the budget deficit of 6.4% of GDP in 2011 and the total debt of
non-bank SOEs reached about 30% of GDP, most of it guaranteed by the state. ·
Corporate restructuring and insolvency
proceedings: The insolvency framework lacks proper
incentives and sanctions to ensure that companies file for insolvency at an
early stage, and incentives for early, out-of-court, settlement are also weak.
The in-court, "compulsory settlement" procedures are complex and
debtor-friendly, which is particularly dissuasive for SMEs and micro companies.
·
Labour
market:
The overall employment rate stagnated in 2012, while youth unemployment
increased substantially. Long-term unemployment continued to increase, in
particular among older workers and the low skilled. Labour market flexibility
is insufficient due to high protection of permanent contracts and labour market
segmentation is widespread, including due to loose regulation of student work.
The minimum wage is among the highest in the EU as a percentage of the average
wage and it continues to increase automatically at the beginning of every year
by the level of inflation in the previous year. Despite rising unemployment
participation in active labour market policies is declining while the role of
employers in vocational education and training remains weak. ·
Competitiveness
and business environment: Notwithstanding wage moderation, declining
productivity prevented cost-competitiveness from improving in 2012. Despite its
strong potential, Slovenia has one of the lowest stocks of FDI among new EU
member states (31% of GDP in 2012), and weak export performance (its export
market share fell by 6.4% in the last three years). Professional services, accounting
for about 10% of GVA, remain heavily regulated. The recently established
Competition Protection Agency is not yet financially independent. Transposition
of the 3rd energy package and improvements in the justice system are
also challenges.
1.
Introduction
In May 2012, the Commission proposed a set of
country-specific recommendations (CSRs)[1] for economic and structural reform policies in Slovenia. On the basis of these recommendations,
the Council of the European Union adopted seven CSRs in July 2012.[2] These CSRs concerned public finances and
fiscal governance, pension reform, banking sector balance sheets, labour market
segmentation, skills mismatches, selected aspects of the business environment
and the wage setting. The Commission’s Annual Growth Survey (AGS) 2013[3] and the Alert Mechanism Report (AMR)[4] were published in November 2012. The 2013
AGS sets out the Commission's proposals for five priorities to guide Member
States to renewed growth in 2013: pursuing differentiated, growth-friendly
fiscal consolidation; restoring normal lending to the economy; promoting growth
and competitiveness for today and tomorrow; tackling unemployment and the
social consequences of the crisis; and modernising public administration. The
2012 AMR served as an initial screening device to determine whether
macroeconomic imbalances exist or risk emerging in Member States. Slovenia and 13 other Member States were selected for an In-depth Review (IDR).[5] On the basis of the 2013 IDR for Slovenia, the Commission Communication of 10 April 2013 concluded that Slovenia is experiencing
excessive economic imbalances. These imbalances
correspond closely to challenges identified during the 2011 and 2012 European
Semester, with a focus on a credible repair of the
banking system, improved governance structures, privatisation, withdrawal of
barriers to FDI, improvements to the business environment, cost-competitiveness
developments supportive of adjustment and the enhancement of adjustment
capacity at the microeconomic level. The communication
called on Slovenia to proceed swiftly and decisively to complete the reforms it
has started and include comprehensive and detailed policy measures in its 2013 national
reform programme (NRP) and Stability Programme (SP). Against the background of the 2012 CSRs, the 2013 AGS,
the 2012 AMR, and the 2013 IDR, Slovenia presented updates of its national
reform programme (NRP) and stability programme (SP) on May 9, 2013. These
programmes provide information on the progress made since July 2012 and on the
government's future plans. The information contained in these programmes
provides the basis for the assessment made in this Staff Working Document
(SWD). The NRP was discussed in the competent committees of
the National Assembly and the Economic and Social Council, with both
organisations involving representatives of employee and employer associations.
The SP was discussed in the competent committees of the National Assembly. In addition to these documents, on 23 May 2013 the
Minister of Finance sent a letter to the Commission recapitulating key
commitments in the NRP and adapting or clarifying these commitments in six
respects relating to sections 3.2 and 3.6 of this SWD (See Box 1). Box 1: Key points of the letter of 23 May 2013 from Minister of Finance to Vice President Olli Rehn · if required, the authorities stand ready to work with the Commission and the ECB to ensure asset quality reviews are conducted for a selection of banks, as long as these reviews do not impede the timely transfer of a first tranche of assets, planned before end June. The authorities would stand ready to cover any additional capital shortfall revealed in this process; · measures to strengthen bank balance sheets will be followed by a phase in which the banking sector is consolidated; · the government commits to full divestment of its stakes in the 15 companies that the government earmarked for privatisation on 8 May and expects parliamentary approval before the end of the second quarter of 2013; · the NRP commitment to submit an SOE strategy in the fourth quarter of 2013 is brought forward to the end of the third quarter of 2013; · any outlays of public funds on corporate restructuring will be offset against other expenditure items. Overall assessment The analysis in this SWD leads to the conclusion that Slovenia has made partial progress towards addressing the CSRs. The NRP, the additional
measures announced by the authorities and the letter of 23 May 2013 contain
important new commitments. While these are welcome steps in the right
direction, a comprehensive, detailed, timebound action plan would be necessary
to sustainably address the policy challenges described in the IDR, on the basis
of which the Commission concluded that Slovenia is facing excessive imbalances,
and to improve market confidence. Positive action has been taken to consolidate public
finances in the short-term. In spite of the expenditure-based
consolidation envisaged in the SP, not all expenditure measures are specified
and various are not of a structural nature. The fiscal effort is strongly
concentrated in 2014, while for 2013 the programme envisages only a marginal
improvement in the structural balance. Projections are subject to
important risks, jeopardising the planned correction of the excessive deficit
by 2014 and the achievement of the medium-term objective (MTO) by 2017. By adopting a constitutional basis for establishing a
general government budget balance/surplus rule in structural terms the authorities did a first step towards strengthening
fiscal governance in line with EU legislation. However,
they still need to improve the medium-term budgetary
framework and the fiscal rule that would underpin an appropriate medium-term
objective. A pension reform was adopted in December 2012, but further reforms
are needed to lower the burden on public finances in the period after 2020. Moreover,
further measures need to be identified to put public
debt and contingent fiscal liabilities on a downward path. In the context of
necessary structural reforms, it is important that Parliament tightened rules
to call and win a referendum on 24 May 2013. For the stabilisation of banks, the letter of 23 May 2013 contains important additional commitments.
As a part of a comprehensive strategy for the banking sector, the authorities
aim to implement a bank asset quality review for a selected group of banks in a
phased manner that would allow them to move forward in a timely fashion with
the necessary restructuring of NLB, the largest domestic bank, which is already
subject to a state aid procedure. The objective of this strategy is to improve
corporate governance of banks and create a well-capitalised and profitable
banking system which can support the real economy. To ensure this, the
authorities stand ready to provide the necessary financial backstop if banks
require further capital injection. They also expressed their willingness to work closely with the Commission and the ECB to ensure that the
review meets the highest international standards. If
these important new measures are integrated into a time-bound and comprehensive
action plan and implementation goes ahead in a determined fashion, this would
result in the necessary rehabilitation of the banking sector and a lasting
improvement in market confidence. A comprehensive strategy should also identify measures to strengthen bank management, governance and supervision. In
addition to the welcome decision of the government to
sell its stake in NKBM, the second largest bank, a commitment to improve the
ownership strategy, governance and management of NLB, the largest state-owned
bank, with a view to eventual privatisation, would greatly enhance the credibility
of the reforms in this area. Regarding state ownership, a comprehensive strategy
and appropriate supporting measures would greatly help addressing the
challenges that were identified in the IDR. While welcome amendments to
the Slovenian Sovereign Holding (SSH) law strengthen reporting and auditing
requirements, further measures are necessary to ensure a fast and efficient privatisation
processes. In the letter, the authorities committed to bringing forward the
completion of a comprehensive
privatisation strategy and classification of assets to the third quarter of
2013, which should fully address the remaining issues in this area. Separately,
the government proposed to parliament on May 8, 2013 a list of 15 companies to
privatise, including the second largest bank and the telecommunications
incumbent and some small companies and minority stakes, and expects
parliamentary adoption by the end of the second quarter of 2013, according to
the letter. Experiences in the last decades underline significant
implementation risks, which may be exacerbated by announced
amendments to the SSH law. Defining a realistic but
ambitious timetable for the privatization of these companies after
parliamentary approval would help further enhance credibility and mitigate implementation
risks. Legal changes to insolvency legislation adopted by the
government in April 2013 will improve the insolvency framework, but further
measures may be be needed to bring about sufficient improvement in this area.
Additional legal changes to facilitate out-of-court restructuring and debt
conversion are not described in detail in the NRP. The law on state aid was
modified. It clarifies and broadens eligibility criteria, and foresees a role
for independent evaluation. These legal changes however may lead to further
increases in contingent fiscal liabilities, and could possibly disincentivise
private restructuring deals. The recently adopted labour market reform goes in the
right direction but a significant impact on labour
market segmentation and flexibility is not yet ensured. Moreover, a study to analyse the parallel labour market caused by student work
is envisaged as a basis for determining what regulation
will be required. Concerning wage cost competitiveness,
reduced public sector wages will help promote the necessary adjustment in the
private sector. The NRP states the welcome objective of
revising minimum wage setting but the corresponding measures to achieve this
objective remain to be identfied. Finally, further
progress is needed on matching of skills supply with labour market needs to
promote employment and new investment. Further improvements in the business environment are
envisaged. The NRP presents a set of targets to improve the length of judicial
proceedings and reduce the number of enforcement cases. To ensure sufficient
progress in this important area, underpinning measures should be fully spelled
out. The NRP also announces further measures to streamline spatial planning
procedures. The process of deregulating professional services
has started, although with some delay. Finally, an independent competition
authority was established, but its budget has been cut which hinders its proper
functioning.
2.
Economic developments and challenges
2.1.
Recent economic developments Recent
economic developments Slovenia slipped
back into recession in 2012 with a 2.3% drop of real GDP. The first phase of the recession in 2009 hit an economy on the
verge of overheating and spread from the trade channel quickly to gross fixed
capital formation, which declined by 23%. The continued fall in gross fixed
capital formation stifled the short-lived export-led recovery in 2010-11. The
main drivers behind the deterioration of growth in 2012 were a sharp decline in
private consumption and the protracted weakness in investment. This means the
recent positive adjustment in the current account is likely to be mostly
cyclical, arising from markedly lower domestic demand 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
with growth of merely 0.3% in 2012. Domestic demand has remained
weak since 2009. Private consumption fell by almost
3% in 2012 and investment continued to drop at a high rate, falling 9% overall
in 2012 as a result of a 12.6% fall in construction and a 5.9% fall in
equipment, although these declines were not as sharp as in 2011. Government
spending also contracted by 1.6%. This consolidation was necessitated by the
pro-cyclicality of spending in the years before the crisis. Delays in urgently required enterprise restructuring and increasing
unemployment were amongst the main contributors to the sharp drop of domestic
demand. Deleveraging needs concentrated in the corporate sector as a result of
the build-up of internal and external imbalances, depressed profit margins and
constrained economic activity. Many companies,
especially those targeting the local market, had difficulties with servicing
debt and paying taxes on time. Banking sector rescue measures and the restructuring of the highly indebted corporate sector were postponed
to 2013, pending which banks' cannot offer new credit to firms in sufficient
amounts. Unemployment has been rising driven by the
on-going consolidation in both public and private sectors, while legal rigidities in the labour market (particularly but not only in
relation to permanent contracts) hinder adjustment at firm level and distort
job creation. The transmission of financial
distress from firms to banks, and from banks to the state has intensified, limiting funding options for banks, firms and the sovereign. Economic contraction has further hindered
balance sheet repair and inevitably left banks increasingly exposed to
problematic loans. Non-performing loan ratios reached 14.4% in 2012 for all
types of loans and 24.5% for corporate loans. As a result, banks were faced
with 40% higher losses on their loan portfolios on aggregate level in 2012. Difficulties in the interbank market have left
banks increasingly dependent on ECB funding and government deposits. Five of the largest domestic banks were downgraded by Fitch in April
2013 as a result of delays in tackling the problems of the banking sector and
their exposure to the over-levered corporate sector. Slovenia's access to
sovereign debt was limited for most of 2012, though
market access was regained through a sizeable US-dollar issue in October 2012.
The sovereign was able to refinance itself again, in early May 2013 on the back
of ample liquidity in international capital markets. However, this bond
issuance, which was completed before delivery of key reforms and before
adoption of the supplementary budget, has proven rather expensive. Insufficient reform progress so far, the
complexity of state ownership and lingering doubts as to the true scale of
contingent liabilities continue to weigh on economic recovery in Slovenia and jeopardize the sustainability of public finances. Economic outlook Slovenia’s recession is deepening with
continuously rising unemployment and growth
forecasts being revised downwards. Real GDP is expected to drop a further 2% in 2013 on the back
of steadily declining domestic demand and to at best stabilise in 2014. The
protracted weakness of the economy and domestic consumption has subdued
inflation, labour costs and credit growth, and is pushing the current account
further into surplus. Existing imbalances in the banking and corporate sectors
are expected to continue weighing on growth and fiscal adjustment both in 2013
and 2014. Accordingly, the excessive deficit is not expected to be corrected by
2013 and the government debt is projected to rise swiftly above the 60%
threshold. Further delays in resolving the banking crisis and restructuring the
highly indebted corporate sector have already resulted in a downward revision
of growth forecasts. Any postponement of the wide-ranging structural reforms
that are required and which have only partly been initiated would lead to a
further deterioration of growth prospects. Strong deterioration of private
consumption and subdued investment remain the main drag on growth, while
exports show signs of a modest recovery. Private
consumption is set to fall by 3.7% in 2013 and by 1.9% in 2014 on the back of
weak fundamentals, despite a slight improvement in consumer confidence in the
first few months of 2013. A further increase in unemployment, which is set to
reach 10% in 2013 and 10.3% in 2014, is one of the main contributors to the
negative trend in consumption. The forecast for gross fixed capital formation
for 2013, though still negative, has been revised somewhat upwards to a drop of
5%, due to anticipated one-off investment in machinery for a recently
constructed coal-fired power station and increased absorption of EU funds in
2013. Nevertheless, fixed investment continues to decline, in line with the
corporate sector's deleveraging needs, pressure on banks' balance sheets and
limited access to credit. Positive signs in export data point at a gradual
recovery of volumes with anticipated growth of 1¼% in 2013 and 3¼% in 2014, and
a gradual shift towards faster growing markets outside the EU. However, Slovenia continues to lose market shares against other trading partners in the EU due to
existing frictions in labour and capital markets, and slow adjustment of cost competitiveness. The macroeconomic scenario
underlying the budgetary projections of the stability programme and the
national reform programme was revised downwards in March 2013. According to the projections of the Institute of Macroeconomic Analysis and Development (IMAD), real GDP will continue to drop in 2013 by 1.9%
and will stabilise and strengthen gradually from 2014 onwards. Assessed against
currently available information, including Commission services’ 2013 Spring Forecast and internal projections for growth beyond 2014[6], IMAD's macro scenario for 2013 appears reasonable, but its
scenario for 2014 and beyond appears optimistic in view of the announced
consolidation measures. The difference is mainly due to a quicker and stronger
recovery of investments in the IMAD forecast, while the Commission has taken a
more cautious view given the delay and uncertainty around bank and corporate
restructuring. 2.2.
Challenges On the basis of the 2013
In-depth Review, the Commission concluded on 10 April that Slovenia is experiencing excessive economic imbalances that are rapidly building up. The 10 April Commission Communication (see also Box 2) called on Slovenia to proceed swiftly and decisively with reforms and include comprehensive and
detailed policy measures in its 2013 National Reform Programme and Stability
Programme, in order to reverse this trend. Addressing these imbalances, which
threaten the functioning of the economy and contribute to possible adverse
effects to the monetary union, represents the highest priority challenge for Slovenia at the present time. More specifically, this entails: (i)
a 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
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 as regards state ownership and labour market
institutions. The challenges highlighted
under the Macroeconomic Imbalances Procedure in 2013 are broadly in line with
those of the 2013 Annual Growth Survey and correspond closely to those
identified in the 2012 SWD, namely: (i)
ensuring long-term sustainability of public
finances, including by addressing the low employment
rate of older workers. An additional focus for 2013 is long-term care; (ii) repairing the financial sector; (iii) improving Slovenia’s external trade prospects, which are hampered by
past losses to its cost competitiveness; (iv) reducing labour market segmentation, including that arising from
"student work" (which is increasingly relevant for labour force
participation and equality reasons); (v) improving the overall business and competition framework,
particularly in services; (vi) better harnessing research and development and meeting the needs for
new skills to support growth and the upgrading of Slovenia’s production
structure. A new emphasis, as budget pressures mount, is the need to focus resources
on key priorities and to align and promote vocational education and training in
accordance with labour market needs. Going beyond the challenges highlighted in 2012 and in the Annual
Growth Survey, there are key issues in relation to: ·
Energy, where Slovenia could capitalise on trade
possibilities and enhance retail competition while going further to achieve
targets and implement the third energy package; ·
The justice system, where greater efficiency
could improve the business environment by fostering trust and stability; ·
Environmental sustainability, where the issues
are the costs of environmental pollution, resource efficiency and green growth. 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 to ensure sustainable public
finances in the long-term. Box 2. Main conclusions from the 2013 In-depth Review and key messages from Commission Communication, COM(2013) 199 final, 10.4.2013 Based on the previous In-Depth Review (IDR), in May 2012, the Commission concluded in the 2012 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. The 2013 IDR, in line with the scope of the surveillance under the Macroeconomic Imbalance Procedure (MIP), finds that the negative economic trends and imbalances identified in the 2012 IDR have aggravated. Notably: · The level of total private debt is below the euro-area average and the alert threshold of the scoreboard, but many corporates remain over-indebted, leading to further rises in non-performing loans. · The size of the Slovenian banking sector is less than half the euro area average, but major domestic banks face continued deterioration of their credit portfolios and consequently recapitalisations are likely to be needed. Credit is contracting and the interaction between weak banks and the sovereign has intensified. Corporate balance sheet repair and growth is hindered by a double-dip recession and poor prospects. · Net external debt is relatively contained and the current account has turned into surplus due to historically low inward investment and reduced imports from lower economic activity and employment. Past 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, distorts resource allocation, deters foreign-direct investment and is detrimental to the public finances. Framework legislation for bank restructuring and privatisation was passed but still needs to be implemented effectively. · The policy challenges stemming from these developments include: · 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. These conclusions were reflected in the Commission Communication, COM(2013) 199 final, 10.4.2013, which stated that: SLOVENIA is experiencing excessive macroeconomic imbalances. Urgent policy action is needed to halt the rapid build-up of these imbalances and to manage their unwinding. […]Slovenia should now proceed swiftly and decisively by completing the reforms it has started and include comprehensive and detailed policy measures in its forthcoming National Reform Programme and Stability Programme, in order to halt and reverse this trend. The remainder of this SWD
assesses the policy agenda in light of these challenges, with a particular
emphasis on determining whether this agenda is sufficiently ambitious,
time-bound and detailed to credibly address the identified excessive
imbalances.
3.
Assessment of policy agenda
Overall, the NRP demonstrates that Slovenia has
made partial progress towards addressing the CSRs of the Council
Recommendation, while providing only limited detail on the reforms that would
be needed to address the excessive imbalances and policy challenges detailed in
the In-Depth Review. It is positive that the Stability Programme
announces a correction of the excessive deficit relying mainly on expenditure
reductions and the strengthening of fiscal governance in line with EU
legislation. However, the fiscal effort is strongly
concentrated in 2014, while for 2013 the programme envisages only a marginal
improvement in the structural balance. Programme projections are subject to important
risks, jeopardising the planned correction of the excessive deficit by 2014. The macroeconomic scenario underpinning the programme seems
optimistic especially for 2014. Budgetary implications of some revenue
increasing measures are difficult to assess, because they are not supported
with sufficient information on tax rates, tax basis and possible tax
exemptions. In spite of the announced expenditure-based consolidation, not all
expenditure measures are specified and many of them are not of a structural
nature. Measures to put public debt and contingent fiscal
liabilities on a downward path are not provided.
Achievement of the medium-term objective (MTO) by 2017 is not clearly
demonstrated. Moreover, the programme's MTO is not appropriate, because it does
not adequately take into account the implicit liabilities related to ageing.
While the recent pension reform is an important step, specific measures to
contain age-related costs beyond 2020 have not been provided. For the stabilisation of banks, the letter of 23 May 2013 contains important additional commitments. As a part of a comprehensive strategy for the banking sector, the
authorities aim to implement a bank asset quality review in a phased manner
that would allow them to move forward in a timely fashion with the necessary
restructuring of NLB, the largest domestic bank, which is already subject to a state
aid procedure. The objective of this strategy is to improve corporate
governance of banks and create a well-capitalised and profitable banking system
which can support the real economy. To ensure this, the authorities stand ready
to provide the necessary financial backstop if banks require further capital
injection. They also expressed their willingness to
work closely with the Commission and the ECB to ensure that the review meets
the highest international standards. If these important
new measures are integrated into a time-bound and comprehensive action plan and
implementation goes ahead in a determined fashion, this would result in the necesary
rehabilitation of the banking sector and a lasting improvement in market
confidence. The Bank Asset Management Company (BAMC) remains
the government's preferred institutional platform for bank rehabilitation. The BAMC law allows for up to EUR 4bn state-guaranteed BAMC bonds
to fund asset transfers and an estimated EUR 900m for recapitalisations. The
NRP includes a first attempt to quantify and describe plans for transfers to
the BAMC based on bottom-up stress tests performed by the Bank of Slovenia
(BoS). These in-house estimates of the BoS are based on a series of assumptions
that are not made explicit in the NRP and which may need to be further refined.
The letter specifies that the largest bank, NLB, will transfer selected assets
to the BAMC and states that the authorities have already provided to the
Commission the necessary files detailing the proposed transfers. For the other
two large state-owned banks, first a private solution is sought. This important
new initiative also requires a reassessment of the plans for asset transfers to
the BAMC. It would also be important to explain the interaction of the BAMC
with other corporate restructuring initiatives of the authorities. A comprehensive strategy should also ensure that bank
management, governance and supervision are properly strengthened, as these
elements are vital to prevent a repeat of past mistakes by rescued banks. There is no mention of this consideration in the NRP. NLB, the
largest state-owned bank is set to benefit from the transfer of bad assets to
the BAMC. A clear commitment to promptly improve the ownership strategy,
governance and management of this bank, with a view to eventual privatisation,
would be important and would usefully complement the 8 May 2013 decision of the
government to sell its stake in NKBM, the second largest bank in the country.
Without the prospect of an eventual sale of cleaned banks, as soon as the
general market conditions are acceptable, the rationale for BAMC approach
favoured by the government remains unclear. A comprehensive strategy and supporting measures
regarding state ownership in the real economy would be necessary to address the
challenges identified in the In-Depth Review in this area. There is a dearth of new measures compared with the time section
3.2 of the In-Depth Review was drafted and on the basis of which the Commission
concluded that Slovenia is facing Excessive Imbalances. The announced
privatisation strategy and classification of assets is scheduled for the third
quarter of 2013 (according to the letter). While formulating a comprehensive
strategy will need more time, it would be important to state the principles and
objectives that will underpin this strategy as early as possible. In the
absence of an overall strategy, the NRP announces ad-hoc privatisations in May
2013 and this announcement is substantiated by the proposal to privatise 15
companies sent to parliament on May 8, 2013, with adoption expected by the end
of the second quarter of 2013, according to the letter. This list includes some
important companies like the second largest bank and the telecommunications
incumbent, but also minority stakes and small companies. Defining a realistic
but ambitious timetable for the privatization of these companies after
parliamentary approval would help further enhance credibility and mitigate
apparent implementation risks. Action to improve corporate governance of companies
under state ownership has been delayed. While some
amendments to the sovereign holding (SSH) law strengthen reporting and auditing
requirements, these are not sufficient to ensure fast and efficient
privatisation processes. Experiences in the last decades underline significant
implementation risks. Announced amendments to the SSH act envisage reinstating
the dispersion of ownership across public and quasi-public institutions, which
will not facilitate the privatisation processes. Legal changes to insolvency legislation adopted by
the government in April 2013 are improving the insolvency framework, but
further measures may be needed to bring about sufficient improvement in this
area. A suitable system of incentives for owners,
creditors and managers would be essential for the reform to succeed. Creating
such incentives could be an important step forward to facilitate corporate
restructuring and stabilise the banking sector. The Ministry of Justice aims at
proposing additional legal changes to facilitate out-of-court restructuring and
debt conversion by the end of May 2013. However, the level of detail of the
proposals in the NRP is not sufficient to assess whether the new legislation
can achieve its objectives. Some limitations in the law on state aid have been
lifted, potentially leading to further increases in contingent fiscal
liabilities, and possibly disincentivising private restructuring deals. The NRP
lists some guiding principles in the granting of state aid but provides few
operational details. The recent labour market reform goes in the right
direction, but it remains to be seen whether it will have a significant impact
on labour market segmentation and flexibility. The
reform's impact on the labour market will be monitored and will be used as a
basis for potential legal changes. There is a plan to conduct an analysis of
student work as a basis for determining what regulation will be required,
including introduction of social security contributions, regulation of the
minimum hourly pay and prevention of abuse. The NRP states the objective of revising
minimum wage setting but does not clearly define corresponding measures. Further improvements in business environment are
envisaged. The Competition Protection Agency has
been set up in 2013 and the NRP presents a set of targets to improve the length
of judicial proceedings and reduce the number of enforcement cases. Concerning
the latter, targets are not always underpinned with concrete measures. In
addition, the NRP announces further measures to streamline spatial planning
procedures. Finally, a plan for deregulation of professional services is
presented. 3.1.
Fiscal policy and taxation Budgetary developments
and debt dynamics The main objectives of the budgetary
strategy described in the programme are to correct the excessive deficit,
achieve a balanced budget position in structural terms by 2017 and stabilise
the debt ratio below 55% of GDP. The programme projects correction of the excessive deficit in 2014. The
headline deficit is targeted to gradually decline from 7.9% of GDP in 2013
(4.2% of GDP without bank recapitalisations) to 2.6%, 2.1% and 1.4% of GDP over
2014 – 2016. According to the programme, these headline targets represent
adjustments in the recalculated ratio of the structural balance to GDP[7] by 0.1 pp., 1.2 pps, -0.1 pp. and 0.0 pp.
of GDP over 2013 – 2016. The MTO is defined as a balanced position in
structural terms like in the previous update. This MTO does not appear to take
the implicit liabilities related to ageing sufficiently into account.[8] The programme foresees the achievement of
the MTO in 2017, two years later than in the previous update. However, the
current budgetary plans are unlikely to allow Slovenia to attain its objective
to reach the MTO by 2017 without implementing additional consolidation
measures. The general government deficit declined markedly
to 4.0% of GDP in 2012 from 6.4% of GDP in 2011. Lower-than-planned revenue growth (-0.7% vs. 0.4%),
resulting mainly from shortfalls in taxes on income and wealth and capital
transfers received, largely explains the difference to the deficit target of
3.5% of GDP[9] from the previous update. Total
expenditure declined marginally more than budgeted (-5.4% vs. -5.3%). A
combined significant cut in public investment and lower-than-budgeted interest
expenditures from postponed bond issuances offset overruns in compensation of
employees, intermediate consumption and capital transfers, including the
recapitalisation of the largest bank. The fiscal consolidation recommended in the 2012 CSR was implemented.
Although the 2012 deficit target at 3.5% of GDP was not achieved, the ratio of
the structural balance to GDP improved by a significant 2.0 pps. The May 2012
Act on Balancing Public Finances is the most far-reaching consolidation act
adopted since 2009 and its positive budgetary implications continue into 2013. In
addition, further revenue increasing consolidation measures were adopted for
2013. The headline deficit target for 2013 at
7.9% of GDP incorporates anticipated bank recapitalisations. Bank recapitalisation needs are estimated at EUR
1.3bn or 3.7% of GDP, whereas the Commission's 2013 Spring Forecast, finalised
at end April 2013, includes the amount of EUR 420m or 1.2% of GDP for the
largest two banks. Without these operations, the headline deficit target in the
programme would stand at 4.2% of GDP. Thus, the 2013 deficit target[10] is higher than in the March 2013 EDP notification and previous update (which
set it at 3.0% of GDP and 2.5%
of GDP respectively). On top of the base effect from 2012, the 2013 revision
stems to a large extent from social transfers, especially pension expenditure,
as compared to the previous update. The Commission's 2013 Spring Forecast
projects the headline deficit for 2013 at 4.1% of GDP. However, relative to the
programme it does not incorporate an increase in interest expenditures from May
2013 bond issuances and forecasts lower capital transfers (excluding bank
recapitalisations) in line with a falling trend in this item over past years. These
two factors largely explain why the Commission and programme forecasts for the
2013 deficit are almost at par, despite additional consolidation measures in
the programme. The consolidation path over the programme
horizon is concentrated to 2014. Headline deficit targets for 2014 and afterwards are higher relative
to the previous programme mainly as a result of the base effect from 2013. The
headline deficit targets for 2013 and 2014 (7.9% and 2.6% of GDP respectively)
imply a substantial 5.3 pps. of GDP reduction (a 1.6 pps. of GDP reduction
without bank recapitalisations). The targets for the outer years imply smaller
declines by 0.5 pp. of GDP in 2015 and 0.7 pp. of GDP in 2016. Adjustments in
primary balances will be slightly larger as interest expenditure keeps
increasing.[11] Relative to the previous programme, the reduction
of the headline deficit in 2014 is more ambitious, while in 2015 it is less so.
The consolidation announced in the programme falls mainly on the expenditure
side while the revenue side contributes around one third of consolidation. The
revenue-to-GDP ratio is projected to increase by 0.6 pp. from 2012 to 2016 (excluding
a one-off[12] in 2012). In particular, taxes on income
and wealth are projected to rise as share of GDP. The expenditure-to-GDP ratio
is targeted to drop by 2.1 pps. (excluding one-offs[13] recorded in 2012) over the same period
with a focus on falls in compensation of employees, intermediate consumption
and social transfers as a share of GDP. Revenue increasing measures are identified
more concretely than expenditure decreasing measures, but details on both are
lacking[14]. In addition, the former are of a more structural
(permanent) nature than the latter. Budgetary implications of most envisaged
measures are quantified both for 2013 and 2014 (see Box 3). By contrast,
measures and their implications are missing for 2015 and 2016. Furthermore, the
programme underlines various envisaged steps to fight the grey economy and
improve the collection of taxes, but these are difficult to assess and are not
included in the programme projections. Box 3. Main measures The programme identifies increased VAT rates, amended real estate taxation and possible crisis personal income tax as the key sources of the consolidation on the revenue side. On the expenditure side, the public sector wage bill will be further cut in 2013. This cut will expire on 31 December 2014. By contrast, other expenditure side measures are less clear. There is an intention to continue with freezes in indexation arrangements, slightly reduce some social benefit rates and cut capital expenditure. Additional unspecified expenditure consolidation measures are planned for 2014 in order to avoid the crisis personal income tax. Detailed annual budgetary impacts of major macro-structural reforms (e.g. pension reform) over the programme horizon are not presented. || Main budgetary measures || || Revenue || Expenditure || || 2012 || || · Reduction in the corporate income tax rate from 20% to 18% and higher R&D and investment allowances for personal and corporate income tax (-0.5%) · Higher excise duty rates on tobacco, alcohol and mineral oils (0.25%) · New CO2 charge on mineral oils (full year impact 0.2%) · Higher charges (concession fees) on student work (full-year impact 0.1%) || · Canceled indexation of social benefit rates (until end-2014) (total impact in 2012 and 2013 -0.3%) · Public sector wage bill: net cut in wages by 3% (permanent), cancelled indexation of public sector wages, postponement of payment for promotions (until June 2013) (full-year impact ‑0.85%), and permanent cancellation of third and fourth instalments of the public sector wage increase envisaged back in 2008 (-0.6%) · Lower recreational allowance for pensioners (until the year after the year in which real GDP growth exceeds 2.5%) (full-year impact ‑0.15%) · Canceled indexation of pensions (2012) (-0.1%) · Lower child benefits for higher income families (until the year after the year in which real GDP growth exceeds 2.5%) (full-year impact -0.2%) · Lower increase in minimum income for socially vulnerable people (until 2015) (-0.1%) · Various cuts in social transfers (permanent) (e.g. veteran entitlements and scolarships) (full-year impact -0.1%) || || 2013 || || · Reduction in the corporate income tax rate to 17 % (-0.1%) · Higher road user charge (full-year impact 0.1%) · New tax on financial services and amended bank assets tax (0.1%) · Increase in VAT rates to enter into force on 1 July (full year impact 0.7%) · New taxes on sugar and sweeteners in beverages and lottery tickets to enter into force on 1 August (full year impact 0.1%) || · Cut in public sector holiday allowance (-0.15%) · Cancelled indexation of public sector wages (2013) (‑0.15%) · Cancelled promotions for 2013 (-0.15%) · Higher meals allowance for students (permenent) (0.1%) · Additional measures to curb the public sector wage bill to enter into force on 1 June (full year impact ‑0.2%) · Lower unemployment benefits to enter into force on 1 July (full year impact -0.05%) · Lower capital expenditure (full year impact ‑0.3%) · Lower intermediate consumption (full year impact -0.1%) || || 2014 || || · Real estate tax (0.7%) · Crisis personal income tax1 (0.8%) || · Cancelled indexation of pensions (-0.1%) · Cancelled promotions for 2014 (-0.15%) || || Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A positive sign implies that revenue / expenditure increases as a consequence of this measure. The degree of detail reflects the type of information made available in the stability programme and other budget documents. 1 The crisis personal income tax will be introduced if no political agreement on structural expenditure measures is achieved by 2014. || The balance of risks to
projected deficit targets is significantly tilted to the negative side. For 2013, the achievement of the headline
target at 4.2% of GDP (excluding bank recapitalisations) appears within reach.
However, this does not seem to be the case for 2014 and onwards for several
reasons. First, the macroeconomic scenario underpinning the programme was
prepared in mid-March, but the envisaged composition and size of the consolidation
measures was disclosed only in early May. It is not clear to what extent it
incorporates the impact of the consolidation, such as on private consumption,
which is likely to be impacted by higher VAT rates, real estate tax and a
possible crisis personal income tax. The Commission's 2013 Spring Forecast
projects that GDP will drop by 0.1% in 2014 based on a no-policy-change
assumption, a scenario which only takes into account measures that have been
adopted and hence forecasts a deficit of 4.9% of GDP. In view of this, the
programme macroeconomic scenario might be seen as optimistic especially for
2014. Second, the projected yield of the real estate tax and possible crisis personal
income tax is not underpinned with sufficient information on tax rates, tax
basis and exemptions[15]. Third, expenditure consolidation measures
agreed upon with social partners are mostly of a temporary nature and many of
them need to be (re-)negotiated annually to prevent expenditure growth from
reviving. Furthermore, the announced possible crisis personal income tax might
weaken incentives to agree on structural expenditure cuts. Fourth, the past
track record indicates possible expenditure overruns especially in compensation
of employees and intermediate consumption. Higher compensation of employees in
2013 might stem also from a
court judgement, still challenged by the government, stipulating the payment of
the postponed wage increase to public employees from October 2010. Fifth, in Slovenia any legal act change has been
until recently subject to referenda risks[16]. Finally, additional
capital support operations might materialise, mainly to banks and to companies
calling guarantees, including guarantees yet to be granted according to the
planned government schemes to assist the restructuring of overleveraged
non-financial corporations[17]. The letter clarifies that any additional
outlays arising from newly granted guarantees will be offset against other
expenditure items, without detailing how sufficient budget flexibility would be
achieved within a given fiscal year. The above negative risks
might be partially offset by factors not specified in the programme. First, emerging overruns in primary
current expenditure may to some extent be offset by higher-than-planned cuts in
public investment, as has happened before. However, after public investment has
fallen by 45% in real terms since 2009, room for that is tighter, not to
mention the impact on long-term growth of further retrenchment in public
investment. Second, programme projections do not incorporate the budgetary
implications of measures to (i) broaden the base for health insurance
contributions; (ii) improve collection of taxes and fight the grey economy; and
(iii) legalise illegal buildings. Finally, subject to as yet unspecified implementation
provisions, the general
government budget balance/surplus rule in structural terms is likely to have
positive impacts on the consolidation. The planned adjustments in
the recalculated structural balance are too low over the entire programme horizon, except in 2014. According to the information provided in
the programme, the growth rate of government expenditure, net of discretionary
revenue measures, in 2016 is expected to contribute to an annual structural
adjustment towards the MTO. This is because the growth rate of expenditures
excluding one-offs is below -0.51%, the lower reference rate applicable to Slovenia
under the expenditure benchmark.
However, the recalculated
ratio of the structural balance to GDP is projected to improve by 0.1 pp., 1.2
pps., -0.1 pp. and 0.0 pp. over 2013 – 2016.[18] It appears that a revenue shortfall in
2016 from non-standard behaviour of revenue elasticities – the revenue-to-GDP
ratio declines by 0.5 pp. – partially explains a deviation from the adjustment
towards the MTO for the change in the structural balance indicator. That said, following an overall assessment of Slovenia’s budgetary
plans after the planned correction of the excessive deficit, with the
structural balance as a reference and including an analysis of expenditure net
of discretionary revenue measures, a deviation from the adjustment path towards
the MTO is to be expected in 2016. To this end, the part of the 2012 CSR1
recommending progress towards an appropriate MTO has not been implemented. At the current level of
information, the programme consolidation measures do not appear sufficient for
the correction of the excessive deficit by 2014 in a credible and sustainable manner.
The identified risks,
especially the optimistic macroeconomic scenario for 2014 and lack of
information on tax basis, tax rates and tax exemptions for the real estate tax
and a possible crisis personal income tax, raise doubts on revenue programme
projections. Expenditure projections do not yet seem fully underpinned with
measures, which are warranted in particular for 2015 after the expiry of the
possible temporary crisis personal income tax and temporary cuts in the public
sector wage bill agreed upon with social partners in May 2013. The planned composition
of the consolidation is also somewhat unfavourable. While some taxes are
notably below the EU average, for example real estate taxation, the proposed
crisis personal income tax does not support creation of jobs, is not
growth-friendly and might run counter to the fight against the grey economy. Furthermore,
reliance on tax increases cannot indefinitely postpone the need to tackle
expenditure dynamics. For
instance, higher interest
expenditure and growth in the number of old age pensioners have together led to
an increase in total expenditure by around ½% of GDP on average over 2010-2012.
Both the Commission's 2013 Spring Forecast and the programme project an even
larger increase (¾% of GDP) for 2013. Against this background, there appears a
need for additional consolidation efforts through structural expenditure cuts,
including also an improved systematic
evaluation of public spending based on clear performance criteria[19]. This would also contribute to the efficient enforcement
of the binding medium-term budgetary framework. Box 1. Excessive deficit
procedure for Slovenia On 2 December 2009, the Council decided
that an excessive deficit existed in Slovenia. The Council recommended that
Slovenia's authorities should put an end to the excessive deficit situation by
2013. Specifically, to this end, the Slovenian authorities should: (a)
implement the fiscal consolidation measures in 2010 as planned; (b) ensure an
average annual fiscal effort of ¾% of GDP over the period 2010-2013; (c)
specify the measures that are necessary to achieve the correction of the
excessive deficit by 2013, cyclical conditions permitting, and accelerate the
reduction of the deficit if economic or budgetary conditions turn out better
than currently expected. To reduce the risks to the long-term sustainability of
public finances, Slovenia should further reform the pension system with a view
to curbing age-related expenditures as soon as possible. Furthermore, the
Council invited the Slovenian authorities to implement reforms with a view to raising
potential GDP growth. That included reforms conducive to enhancing the quality
of public finances. In particular, in view of higher-than-budgeted expenditure
growth in the period 2006-2008 and the reliance of the consolidation strategy
on expenditure restraint, Slovenia should strengthen the enforceable nature of
its multi-annual budgetary plans and improve public spending efficiency and
effectiveness. An overview of the current state of
excessive deficit procedures, including also additional EDP steps adopted after
the finalisation of this staff working paper, is available on (see the
country sections at the bottom of the page): http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm The programme projects the
general government gross debt will breach the 60% of GDP reference value in
2013. Debt is projected to
rise from 54% of GDP in 2012 to 63% of GDP in 2014 and 2015 before dropping
marginally to 62% at the end of the programme period. Importantly, this
projection does not include debt accumulation from envisaged transfers of
impaired banking assets to the Bank Asset Management Company (BAMC)[20]. The snowball effect increases the debt
ratio over the entire period but at a decelerating pace. The primary deficit
adds to the debt only in 2013, while stock-flow adjustments are projected to
reduce debt over the entire horizon. Debt projections in previous programmes
have markedly underestimated debt increases, thus risks to the debt-to-GDP
ratio are tilted towards higher debt ratios. These risks arise from the factors
listed above in relation to the deficit targets and from stock-flow adjustments[21] with regard to asset transfers to the BAMC.
Possible privatisation proceeds, not included in the programme, constitute a
positive risk. Under a no-policy-change assumption, the Commission's 2013
Spring Forecast projects the debt ratio will rise to 66% of GDP in 2014, principally
due to primary deficits and accelerating interest expenditure. Following any abrogation
of the EDP, Slovenia would be in a transition period of the debt criterion
introduced by the "6-Pack" and, according to the programme scenario
its plans would ensure sufficient progress towards compliance with such a
criterion in 2016. Long-term sustainability Slovenia
faces high sustainability risks in the medium and long term, mainly due to the
budgetary impact of ageing costs. Government debt (54.1% of GDP in 2012) is
expected to rise to 66.5% in 2014, above the 60% of GDP Treaty threshold. Risks
would be higher in the event of the structural primary balance reverting to
lower values observed in the past, such as the average for the period
1998-2012. This implies a need for a focus on resolutely continuing to
implement sustainability-enhancing measures that avert potential risks to
fiscal sustainability. Further containing age-related expenditure growth,
including through pension reform, appears necessary to contribute to the
sustainability of public finances in the long term. The
full implementation of the fiscal plans in the stability programme would increase
the debt-to-GDP ratio by 23.7pps from 54.1% in 2012 to 77.8% in 2030. As
recommended, Slovenia adopted a pension reform in December 2012 but the reform stabilises pension expenditures only until 2020. The reform took
effect as of January 2013. The reform increases and equalises the statutory
retirement age for men (from 63) and women (from 61) by 2020 to the age of 65,
revises the indexation system for pensions and introduces measures to increase
the low effective retirement age by reducing early retirement eligibility and
generosity. While the reform goes in the right direction, national public
pension expenditure projections indicate a curbing effect only until 2020.
Thereafter, pension expenditures are projected to increase well above the EU
average trend, thus challenging fiscal sustainability in the future and
necessitating additional reform efforts. Further pension expenditure reductions
with a positive effect on sustainability in the medium and long run can be
achieved by aligning the statutory retirement age with gains in life expectancy
and by introducing further restrictions on early retirement. Other measures
such as pension indexation and changes to the pension benefit calculation
method are not considered. The NRP envisages that discussions on several of
these measures will take place in 2013 with an analysis to be presented in 2014
to serve as a basis for a potential additional reform. Containment
of a strong projected increase in long-term care expenditure is also relevant
for ensuring long-term sustainability. The 2012 Ageing Report and
long-term expenditure projections for long-term care (LTC) indicate an expected
increase of the expenditure-to-GDP ratio of 1.9 pps. of GDP from 1.4% in 2010
to 3.3% in 2060. Demand for these services outstrips supply and around two
thirds of needs are met in institutions, while Slovenia still lags behind in
the provision of community-based care. Therefore, to ensure the sustainability
of public finances, age-related expenditure increases on LTC can be contained
by changing the focus of LTC provision from institutional to home care. This
can be done through further development of home care services, a relatively
greater use of cash benefits in support of home care, as well as reduction in
the unit costs of home care services, which are currently relatively high. Furthermore,
a more targeted and means-tested access to publicly funded LTC benefits is
particularly important in view of the combination of the fiscal challenge, high
provision costs and existing demand. The strong increase in demand for LTC can also
be mitigated by policies to reduce disability/ dependency, via health
promotion, disease prevention, rehabilitation and independent living. Slovenia
is, for the first time, in the process of preparing a comprehensive approach to
regulate the system of LTC and the draft law is scheduled to be presented to
the Parliament by the end of 2013. The Act will seek to ensure the transition
from institutional to community-based care. Improving accessibility to LTC and
ensuring a more efficient, effective and sustainable use of resources would be
an essential component of the reform. Fiscal framework The constitution has been chosen as the legal
instrument for transposing the structural budget balance rule from the Treaty
on Stability, Coordination and Governance (TSCG). Slovenia ratified the TSCG on 19 April 2012, and on
24 May 2013 Parliament adopted a constitutional basis for establishing a
general government budget balance/surplus rule in structural terms. The
provision stipulates among others that i) general government budget revenues
and expenditures shall in the medium term be balanced without borrowing, or
that ii) revenues shall exceed expenditures. A temporary derogation from this
principle would only be allowed in exceptional circumstances. The complete transposition
of provisions of the Fiscal Compact (budget rule, independent body for monitoring,
exceptional circumstances and correction mechanism) is foreseen in a special
constitutional implementation act, to be approved with a two thirds majority of
all members in Parliament by November 2013. Other provisions, including from EU
legislation, to improve fiscal governance will be enshrined in the amended Public Finance Act and Accounting Act.
Relevant legislation is expected to be approved by end-2013. The medium-term budgetary framework still
remains insufficiently binding and transparent. For instance, there are no enforcement mechanisms in case of deviation from fiscal
targets. Thus, medium-term
fiscal targets can be revised, which can lead to uncorrected slippages on the
expenditure side. The medium-term budgetary framework and
expenditure rule are insufficiently focused on achieving the MTO and securing
long-term sustainability.[22] In addition, budget constraints on certain general government units,
especially indirect budgetary users,[23] do not appear to be fully enforced. Finally, the Fiscal Council does not contribute
to the development of fiscal strategy and its role and visibility have actually
gradually declined since 2010.[24] The integration of the financing of
indirect budgetary users into the medium-term budgetary framework appears to be
incomplete. Around 1500 indirect budgetary users are established by the state
and municipalities. They are mainly financed with current and capital transfers
from the central government[25] or local government budgets, but it
appears that budgetary discipline is not strictly imposed. Consequently, there
are indications of expenditure overruns occurring especially in compensation of
employees which are covered either with additional budgetary transfers or
redistribution of funds among budgetary items (e.g. from investment into wages)
for an individual user. The authorities could review financing and spending of
indirect budgetary users[26] and correct identified shortcomings,
including through possible mergers of some positions, improved transparency of
aggregate spending and setting-up of expenditure sub-rules for them. This could
contribute to strengthened coherence of indirect budgetary users with the
central and local government budgets and facilitate their compatibility with
the overall medium-term budgetary framework. Tax system The tax-to-GDP ratio in
Slovenia is the highest of the new Member States, but at 37.2% in 2011 it
remains below the EU average (38.8%). The tax burden is above the average in relation to
consumption, average in relation to labour and below average on capital. A
specific feature of the tax system is the relatively high share of social
contributions, including at the minimum wage, which offsets a relatively lower
share of labour income taxes. Overall, taxation on consumption has remained stable
since 2000 with the implicit tax rate oscillating around 24%. Taxation on
labour has declined, as shown by a drop of the implicit tax rate on labour from
37.3% in 2006 to 35.2 % in 2011. The low tax burden on capital is evident in
the low implicit tax rate on capital, which was 20.5% in 2011 (EU-25: 29.4%). The previous government
implemented changes in the tax system that further reduced taxation of capital
and slightly increased taxation of consumption. A new multi-annual programme of corporate income tax
rate reductions started in 2012, which decreased the rate from 20% in 2011 to
17% in 2013. The personal and corporate income tax investment allowance was
increased to 40% (from 30%) and the R&D allowance to 100% (from 40%) in
2012. Moreover, in 2013 the threshold for the personal income tax bracket at
41% is lifted from 1.3 times to 1.5 times the average wage and a new tax bracket
at 50% is introduced for high-wage earners. A simplified gross flat tax scheme
for small taxpayers (sole proprietors) in the personal and corporate income tax
was expanded in 2013. Finally, a transaction tax on financial services charged
on fees (compensation) paid for the provision of financial services which are
not subject to VAT was introduced, excise duty rates increased and
environmental charges broadened. These changes would have been expected to
increase growth-friendliness of the tax system. However, their growth
implications are likely to be muted in conditions of falling investment for
four consecutive years. Furthermore, some changes might increase distortions in
the tax system (e.g. gross flat tax scheme). The new government announced
higher VAT rates, a new tax on sugar and sweeteners in beverages, a new tax on lottery
tickets and broader, higher real estate taxation from 2014. The government also
announced the cancellation of the further cuts in the corporate income tax rate
to 15% (currently 17%) which were planned for 2014 and 2015. A new crisis personal
income tax might also be introduced for 2014 only. There remains further scope
for growth-friendly and revenue-neutral tax shifting that also facilitates
green growth. In this
context, immovable property stands out as the most obvious candidate for tax
increases, also taking distributional considerations, limited scope for evasion
and low current taxation into account. The new government is tackling this with
the amended real estate taxation. Slovenia applies the reduced VAT rate to
almost all categories of goods and services allowed for by the VAT Directive 2006/112/EC.
Thus, there is potential for realising revenue increases by limiting the
application of the reduced VAT rate. In addition, corporate income taxation,
while being rather low, is subject to a large number of tax expenditures
resulting in significant distortions. An overhaul of the corporate income tax
could improve efficiency and resource allocation without discouraging
investment. There appears to be room for improving tax
compliance. Available
estimates of the size of the shadow economy vary greatly from 8% of GDP
(National Statistical Office) to around 24% of GDP. Estimates collected by
European Employment Observatory point to a share of undeclared work of around
17%. Despite the discrepancy between available estimates, the indicators
suggest that the size of the shadow economy in Slovenia is above EU average[27]. To improve tax collection and free up
resources to fight the shadow economy, Slovenia could improve the use of
e-government, including expanding the use of third-party information to pre-fill
tax returns and further upgrading the tax administration's IT system EDIS. In
addition, Slovenia could broaden mandatory electronic payments for purchases
over a certain threshold and possibly use electronic data on consumption
patterns to detect individuals who under-declare income. In this context, the
programme indicates several envisaged measures to improve the tax collection. 3.2.
Financial sector Slovenian banks face increasing challenges. The large, state-owned banks, and some other banks, need additional
capital again. The necessary bank deleveraging process is accelerating as
wholesale lenders are repaid. Credit quality has deteriorated further, leading
to higher loan-losses now and, due to the lagged booking of impairments, also
through the remainder of 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. These developments and the related policy development challenges
are described in detail in the 2013 IDR. The government has accelerated its policy response
to the banking sector’s problems since May 2012, partially covering some of the
areas of the third 2012 CSR. Efficient
implementation will require a sound strategy and patient work on important
technical details. A range of tools including a bank asset management company
(BAMC) have been established to carve problematic assets out of banks’ balance
sheets, and there has been an upgrade to the legal framework for banking and
bank supervision. The policy agenda now foresees implementation of balance
sheet cleaning and further state recapitalisations prompted by regulatory
requirements. These elements were evaluated in the IDR, which concluded that
important strategic questions remain, that efficient implementation will be
challenging and that technical expertise will be key. The 2013 IDR indicated
three banking policy priorities: i) a new, independent and transparent
assessment of banks, as a foundation for balance sheet cleaning and a wider
banking sector strategy; ii) improved governance, ultimately leading to
privatisation; iii) strengthened supervisory and regulatory frameworks and
actions. For the stabilisation of banks, the letter of 23 May 2013 contains important additional commitments. As a part of a comprehensive strategy for the banking sector, the
authorities aim to implement a bank asset quality review in a phased manner that
would allow them to move forward in a timely fashion with the necessary restructuring
of NLB, the largest domestic bank, which is already subject to a state aid
procedure. The objective of this strategy is to improve corporate governance of
banks and create a well-capitalised and profitable banking system which can
support the real economy. To ensure this, the authorities stand ready to
provide the necessary financial backstop if banks require further capital
injection. They also expressed their willingness to
work closely with the Commission and the ECB to ensure that the review meets
the highest international standards. If these important
new measures are integrated into a time-bound and comprehensive action plan and
implementation goes ahead in a determined fashion, this would result in the
necesary rehabilitation of the banking sector and a lasting improvement in
market confidence. The Bank Asset Management Company (BAMC) remains
the government's preferred institutional platform for bank rehabilitation. The BAMC law allows for up to EUR 4bn state-guaranteed BAMC bonds
to fund asset transfers and an estimated EUR 900m for recapitalisations. The
NRP includes a first attempt to quantify and describe plans for transfers to
the BAMC based on bottom-up stress tests performed by Bank of Slovenia. These
in-house estimates of BoS are based on a series of assumptions that are not
made explicit in the NRP and which may need to be further refined. The letter
specifies that the largest bank, NLB, will transfer selected assets to the BAMC
and states that the authorities have already provided to the Commission the
necessary files detailing the proposed transfers. For the other two large state-owned
banks first a private solution is sought. However, it may be difficult to keep to the ambitious
timescale for commencing transfer of assets to the BAMC that is envisaged by
the authorities. Effecting a first transfer by
end-June seems too ambitious in light of state-aid procedures as the European
Commission has not yet received all information needed. In a final
restructuring decision, i.e. before any asset transfer to the BAMC can take
place, the Commission needs to approve for each bank (i) the assets to be
transferred to the BAMC and corresponding valuations, (ii) the public
recapitalisation amounts and (iii) the restructuring plans of the participating
banks. Slovenia commits, in line with the state aid rules, that assets will be
transferred to the BAMC only after receiving the Commission’s final approval of
the restructuring plans. The potential simultaneous restructuring of several
large banks will imply the need to ensure collectively rational restructuring
plans that strike a balance between necessary deleveraging and servicing the
economy, and rely on realistic assumptions about retail deposits. Here, the
announcement in the letter that the balance sheet cleaning phase will be
followed by a sector consolidation phase is relevant and important but it needs
to be further specified as there is no information in the NRP on operational
restructuring of banks or improvements to credit and risk processes and bank
efficiency. Thorough implementation and full compliance with
state aid rules is key to credibility and would fully justify a somewhat later
start of the process. The announcement of credible
external adviser, process and methodology, with appropriate sequencing of
portfolio and bank coverage and publishing of interim reports will also help
rebuild market confidence. Current standards of transparency for such exercises
include publishing of capital needs for all the banks concerned, publishing of
other key findings and sharing of full findings with the European Commission
and the European Central Bank on a confidential basis. Beyond the announced full privatisation of NKBM,
there is no commitment in the NRP to improve the ownership strategy and
governance of state-controlled banks. The 2013 IDR
detailed the poor performance and governance concerns that undermine the
state-owned banks. Appropriate, arm’s-length management of state-controlled
banks, underpinned by transparent selection of key personnel and disclosure of
financial interests, would have been a key element to ensure and demonstrate a
break from past mistakes. This omission leaves the overall strategy somewhat inconsistent,
since the strongest argument in favour of the BAMC approach is that cleaned
banks are then easier to sell. On 8 May, the government agreed to a complete
sale of its stake in NKBM, the second-largest bank. This decision will require
approval by parliament, expected by the end of the second quarter in 2013
according to the letter, followed by swift progress in sale-related activities.
An ambitious timetable for divestment of direct and indirect shareholdings down
to significantly below blocking minority share as a first step would be key to
the overall strategy. There has apparently been no decision as regards other
state-controlled banks (NLB, Abanka, and Gorenjska banka). The NRP does not describe any new initiative to
strengthen bank supervision, which was identified as necessary in the 2013 IDR[28]. In terms of supervisory actions
vis-à-vis banks, the only new information in the NRP relates to the new Bank of
Slovenia stress tests. A range of regulatory rules and structures could
usefully have been re-examined, including appropriate macro-prudential
policies, readying the banking sector for the transposition of CRD IV,
developing a workable recovery and resolution regime[29], progressively introducing a robust, best ex-ante financed Deposit
Guarantee Scheme, enhancing supervisory resources and processes, making
provisioning and pillar II capital rules more stringent, making statistical
reporting and disclosure more transparent and granular and upgrading credit
registries to ensure access to all relevant information. 3.3.
Labour market,
education and social policies Labour market and social conditions have worsened. Employment continues to fall. The
employment rate fell further, by 0.3pp to 64.1% in 2012 and youth unemployment
rate increased sharply, by 4.9 pps. to 20.6%. Long-term unemployment is rising
and becoming structural (the long-term unemployment rate stood at 4.6% in
Q32012), comprising predominantly older workers and the low skilled. Wage
dynamics have been moderate in 2012. The nominal and real growth rates in
compensation per employee were negative in 2012 (-0.4% and -0.8%, respectively)
as a result of cuts in public sector wages and decelerating private sector wage
growth. The 2012 European Semester identified several
challenges related to labour market, education and social policies, in the
perspective of improving cost competitiveness, enhancing adjustment capacity
and supporting employment. These challenges were reflected in the Council Recommendations
for Slovenia on pensions, employment of older workers, labour market
segmentation, skills mismatch and wages. All recommendations have been
partially implemented, broadly in line with the 2013 Annual Growth Survey
priorities. Policy action to improve cost-competitiveness has been
limited so far. In 2012, the government cut nominal gross wage per employee in the
public sector by around 3% and real wage growth overall became negative. A
further reduction of labour costs in the public sector was agreed in mid-May
2013. The minimum wage continues to increase automatically at the beginning of every
year by the level of inflation in the previous year and these increases
compound the large discretionary increase in 2010. Slovenia is among the EU
countries with the highest minimum wage relative to the average wage in both
gross and net terms. This is despite a level of the average wage that does not
appear particularly low in comparison to other EU countries (including relative
to living costs). The net income of minimum wage workers does not reach the at-risk-of-poverty
threshold while risks of in-work poverty, though increasing, are low in
comparative perspective, including among workers with low education who tend to
be low-paid workers.[30] Sustained progress in reducing unit labour costs can help
in regaining cost competitiveness. Despite the negative growth in nominal
compensation per employee, nominal unit labour cost (NULC) registered a
moderate positive growth in 2012 (0.7%) due to more negative productivity
growth (-1.1%). However, until Slovenia can sustain nominal unit labour costs (NULC)
and price growth below that of its trading partners, it will not repair
previous cost-competitiveness losses, especially from the 2007-09 period. There
are strong built-in dynamics in both public and minimum wages that could
reignite adverse trends in the coming years. Pressures on wages are expected to
pick up once economic growth resumes as employees seek to re-establish
differentials that were compressed in 2010 by a hike in minimum wages and by
subsequent inflation-indexation based minimum wage increases. The NRP announces
adjustments to minimum wage setting in 2013 in consultation with social
partners to support competitiveness and fairness, but no detailed measures are
reported. The 2012 pension reform is a valuable first step to
increase the very low employment rate of older workers in order to come closer
to the Europe 2020 employment target and to close the gap between the effective
and statutory retirement age.[31] The reform is
likely to increase labour supply as it incentivises employees to prolong their
working lives. In addition, several recently adopted legal acts support labour
demand by introducing financial incentives for employers to hire older workers.
Protection of older workers was reduced by the new
Employment Relationship Act, though older workers still remain a protected
group in terms of dismissals and working time arrangements. The employment rate
of older workers could be further increased by restricting the remaining
opportunities for early retirement and providing additional incentives to
remain in work until reaching the statutory retirement age or even beyond. In
addition, the employability of older workers could be enhanced by further strengthening
their participation in targeted active labour market policies and lifelong
learning measures. No measures have been taken so far to adapt work
environments to longer working lives despite the observed lower than the EU
average healthy life expectancy (50 years). A reform of employment protection legislation was
adopted in March 2013 to reduce labour market segmentation and increase
flexibility. In line with the 2012 CSR to reduce asymmetries between permanent
and temporary contracts, the reform reduces protection of permanent contracts
by simplifying dismissal procedures. However, dismissal costs remain broadly
unchanged for the majority of workers, i.e. they are reduced noticeably only
for workers with contribution periods above 25 years or less than one year. At
the same time the protection of fixed-term contracts is increased to prevent
abuse and increase the rights stemming from such contracts. The reform also
introduces occasional work for retired persons and ensures support to both
employers and employees during the notice period in case of consensual
dismissals. While the reform goes in the right direction, it remains to be seen
whether the reform is sufficiently ambitious to have a significant impact on
labour market segmentation and flexibility, and improve Slovenia's FDI-attractiveness.
New restrictions on temporary agency work may have a negative impact on job
creation. The NRP announces that the impact of the reform on the labour market
will be monitored and, if needed, legal changes will be enacted. While no
systemic measures have been taken to address the widespread and unprotected
student work available to pupils and students, the financial incentive to use
this labour market status has been reduced by cutting the student allowance for
personal income tax by one quarter in 2013. In addition, it is announced that
analysis will be conducted into labour market segmentation and abuse of the
student work status. Underpinned by this analysis there would then be
regulation of student work on a similar basis as other types of work, but
details are not provided. Sufficient and concrete measures to improve the
matching of skills with labour market demand would help Slovenia to reach the
employment rate target of 75% set for 2020. Measures to reinforce career
guidance throughout the whole educational cycle have been implemented; however,
there is still no effective system to forecast labour market needs. A pilot
project that is currently being carried out by the Public Employment Service could
be used for prioritising and assessing labour market needs. The tertiary and
vocational education systems remain insufficiently oriented towards emerging
labour market needs, which results in skills gaps. Only partial measures have been introduced to improve the matching of skills with labour demand for tertiary
graduates, who face difficulties to enter the labour market. The government
took measures to re-direct enrolment in general secondary education and to
limit enrolment to social sciences at tertiary level, introduced a database on
enrolment at tertiary level, and reduced the duration of the special student
status. In addition, amendments to the Law on Higher Education were adopted in
December 2012 addressing the criteria for transnational higher education, introducing
accreditation systems for institutions and programmes, and introducing greater
autonomy of universities in changing the mandatory contents of study
programmes. According to the NRP, measures presented in the Resolution on the
National Programme of Higher Education 2011-2020 are to be implemented, but no explicit
timetable is presented. Progress on enhancing the role of vocational education
and training has remained slow. A key challenge is the introduction of a dual
vocational education and training system. Other relevant challenges remain to counter
the decline in enrolment in vocational upper secondary programmes, to increase
the attractiveness of vocational education and training as a whole and,
finally, to intensify the involvement of employers both in defining curricula
and providing apprenticeship places. Slovenia performs very well in preventing
early school leaving. The NRP announces amendments to the Vocational Education,
General secondary Education Act and the Slovenian Qualifications Framework Act,
which will be made on the basis of discussions that will start in the second
half of 2013. Worsening labour market developments underline the
need for effective active labour market policies. Despite the rising
unemployment rate, participation of the unemployed in active labour market
policy programmes[32] decreased
according to the preliminary national data for 2012. The "Plan for the
Implementation of Active Labour Market Policy Measures" for 2013 and 2014
is light on new approaches to fight unemployment with the exception of a job
sharing programme (to be developed in 2013). Another new element is mentoring
schemes (to be introduced in 2013). The effectiveness of active labour market
policy measures can be improved by introducing innovative tailor-made
approaches that focus on the needs of specific target groups and by conducting regular
evaluations of existing programmes to make policy making more evidence-based. The
announced "Strategy for Developing Social Entrepreneurship" may have
a positive effect on keeping those furthest away from the labour market active
if it is well designed and effectively implemented. Since
2010, the social situation in Slovenia, including that of children and that of workers
with temporary contracts, has been worsening, although it remains better than
the EU average. The new social legislation implemented in 2012 rationalised social
expenditures. A wider definition of means-tested income, improved targeting and
restricted access to benefits reduced the number of beneficiaries, notably
among pensioners, recipients of child allowance and recipients of exceptional
financial assistance.[33] This new
legislation will be amended by the end of 2013, according to the NRP, in order to
further simplify decision making procedures and redefine property in deciding
on eligibility for transfers. Several discretionary measures in the last years have reduced
or frozen the indexation of pensions and temporarily cut the yearly
recreational supplement, thus having an impact on the income position of
pensioners. Pension policy priorities need to find a suitable balance between
the objectives of ensuring sustainability of the public finances, incentivising
labour market participation and ensuring pension adequacy. 3.4.
Structural measures promoting
growth and competitiveness The Slovenian economy is characterised by a low FDI
stock and weak export performance. Slovenia's inward FDI stock
stood at 31% of GDP in 2012, which is one of the lowest among new EU Member
States, despite having a high-quality workforce and being located close to main
EU markets. In addition, despite economic catch-up potential, Slovenia is
losing world export market shares (6.4% in the last three years). As discussed
in the 2013 IDR, weak export performance reflects not only weaknesses in cost
competitiveness but also non-cost competitiveness given that Slovenia's
industrial structure is still dominated by low-to-medium technology and labour
intensive products. FDI, company development and exports are held back by the
business and competition environment, including by the role of public ownership
in Slovenia. In 2012, the Council Recommendation for Slovenia
contained a CSR on streamlining regulated professions and on improvement of the
administrative capacity of the Competition Protection Office. In addition, in
line with the Annual Growth Survey, the business and competition environment in
Slovenia could be improved by adjusting the regulatory framework, notably in
case of network industries, and improving the way spectrum is awarded to
operators for the rollout of mobile broadband. Slovenia's growing importance as
a transit country increases the need for infrastructure improvements in the
energy and transport sectors. Measures in these areas, including those that
moderate unit labour cost developments and address skills mismatch (see Section
3.3), could help Slovenia to regain competitiveness. Limited progress was achieved in 2012 regarding structural
measures for growth and competitiveness. The government adopted a
"Slovenian Industrial Policy" which outlines priorities over the
period 2014-2020 and aims at increasing productivity from 60% to 80% of the EU
average. However, the document lacks the necessary implementation plans and is
insufficiently coordinated with other related policies. In April 2013 the
Government appointed an inter-ministerial committee to prepare strategic
guidelines for attracting FDI. In the environment of tight funding conditions, financial
engineering products of the Slovenian Enterprise Fund and SID bank have helped
SMEs by providing targeted public guarantees and venture capital. Internal market and
competition environment The Slovenian authorities launched a reform process to
review numerous regulated professions in 2012. An inter-ministerial group
was setup in September 2012 to review regulated professions (of which there are
over 300 in Slovenia) with the objective to better define existing regulated
professions, reduce the administrative cost and simplify access to professions.
A first set of laws in the field of craft, tourism and construction was due to
be adopted by Parliament in early 2013. However, the reform is behind schedule
except for the craft sector where the Small Business Act was adopted on 28
March and entered into force on 27 April. Secondary legislation defining which craft
activities will remain regulated (and under which conditions) is to be adopted
by end July 2013 at the latest. As to the tourism and the construction sectors,
the adoption of revised legislation is now tabled for June and end-September
2013, respectively. By end-September 2013 Slovenia also plans to revise
legislation for a number of other activities and professions including those
related to private investigation, real estate brokerage, driving schools,
lawyers and surveying activities. The revision of other sectors will follow in
the second half of 2013 and in 2014. The swift de-regulation and a significant
reduction of entry barriers are of importance given the expected positive
effects on employment and competition. Slovenia could benefit from a more ambitious implementation
of the Services Directive. 18 sector-specific legal acts have been amended. Professional
services accounting for about 10% of GVA remain heavily regulated, which limits
the growth potential of the Slovenian economy. Slovenia has developed its Point
of Single Contact (PSC) separately for foreign users
and national users. Despite some progress in 2012, the information currently
provided through the PSC is focused on a limited number of regulated activities
(e.g. crafts, construction) while online completion of procedures is not yet
possible for foreign operators. Based on legislative changes made in late 2011, the independent
Competition Protection Agency (CPA) was established on January 1, 2013. The CPA replaces
the previous Competition Protection Office, which operated under the
responsibility of the Ministry of Economic Development and Technology. Whilst
additional staff was transferred to the CPA, the authority suffers from limited
financial resources which are compounded by budget cuts for 2013. Effective
exercise of its competition enforcement powers cannot be ensured without sufficient
and autonomous financing. Slovenia has not yet fully transposed the 3rd
Energy Package Directives, which promotes among other objectives the effective
unbundling of operations to improve market functioning and the protection of
consumers.
Two related infringement procedures have been referred to the Court of Justice.
The Slovenian authorities aim at transposing the the 3rd Energy
Package Directives by September 2013. Although there are no foreign providers
in the retail segment of electricity, prices for end-users are close to the EU
average and the switching rate is increasing. In contrast, in the gas market,
prices are among the highest in the EU. Early 2013, the Competition Protection
Agency launched an investigation to verify the existence of price fixing for
households between mainly municipality-owned gas distributors. The
investigation followed the entrance of a newcomer to the gas market in 2012,
which led to a substantial reduction in retail prices. The investigation has
not been concluded yet. Slovenian railways are dominated by one state-owned holding. Railway
infrastructure and transport operators are not fully separated. The domestic
rail passenger transport market is not open to competition and almost the
entire Slovenian network is awarded to the incumbent railway company without
competitive public tender. Conversely, the rail freight transport market is
open to competition; however the market share of the incumbent rail company
exceeded 90% in 2010. The loss-making national railway holding is a heavy
burden for public finances and prices of passenger transport are subsidised by
the state. Research and innovation In 2013, the main challenge will consist in
preparation of an innovation strategy for smart specialization to harness the
potential for smart growth and the knowledge economy. This strategy
will be instrumental for investments under the European Investment and
Structural Funds for 2014-2020, also in light of decreasing national public
spending on R&D. R&D intensity has exceeded the EU average since 2009
due to a strong growth in expenditure by businesses. The EU 2020 research and
development intensity target of 3% seems achievable. The measures outlined in
the 2011 Research and Innovation Strategy and the above-mentioned National
Programme for Higher Education are yet to materialise. The main challenges
remain the consistency and coordination of the policies to provide support to
research and to stimulate innovation, the effective implementation of these
policies, and the efficient deployment of available resources (including from
the European Regional Development Fund). Improved governance and clear
prioritization are essential to address these challenges. Research vouchers have
been introduced in 2012 to help enterprises to commission research at research
institutes and higher education organisations. Slovenia is lagging behind in the award of spectrum to
operators
for the rollout of mobile broadband. In addition, Slovenia has a low fixed
broadband coverage, compared to the EU average. A low broadband take-up is
limiting the growth potential of ICT-led innovation through the economy. Environment and climate
issues, including infrastructure Energy and transport infrastructure is of high
relevance for Slovenia given its importance as a transit country. There are gaps in
the electricity network (e.g. the missing link with Hungary is currently under
construction) and the most used routes require strengthening (e.g. the link
with Italy). In addition, there is untapped potential to increase absorption of
renewables and the efficiency of the grid through the deployment of smart grids,
which could enhance the functioning of the electricity market. Slovenia
improved its gas connection to Austria and Croatia. The gas connection with
Hungary is under consideration. Lack of administrative capacity to prepare a
comprehensive transport strategy contributes to the underdevelopment of the
railway infrastructure. The one-tier Divača-Koper railway line poses the main
logistic bottleneck for the port of Koper. Slovenia will probably fail to reach the target on
greenhouse gas (GHG) emissions in sectors not covered by the Emission Trading
System.
GHG emissions are projected to increase by 5% (compared to 2005) by 2020[34], based on existing
measures, thus exceeding the 4% target. While several measures were put in
place such as introduction of a carbon tax to the transport sector, there is
room to build upon these measures and expand recent initiatives to foster use
of public transport. GHG emissions from transport accounted for 27% of
Slovenia’s total emissions in 2010, the third highest share in the EU, which is
related to the significant transit traffic that crosses the country (in particular
road freight transport). Slovenia can achieve the GHG emissions target only if
emissions from transport are tackled effectively and high-density road
transport is shifted to railway. GHG emissions could also be reduced by
addressing distortions generated by differential taxation across fuel types.
The NRP announces an action plan to reduce GHG emissions over the period
2013-2020 in view of reaching the target of 4% by 2020. A comprehensive set of measures has been announced to
improve energy efficiency; however, their success will depend on policy
commitment and available funding. The energy efficiency target notified by
Slovenia is not in line with the requirements of Articles 3 and 24 of the
Energy Efficiency Directive. The target of 25% share of renewable energy in
gross final energy consumption by 2020 can only be achieved if further measures
are put in place to develop more renewable energy sources. There has been some
progress in the heating and electricity sectors, but more is needed. Special
attention has to be given to the transport sector, as its share of renewable
energy sources remains low (at 2.9% in 2010, against a target of 10% in 2020). Wastewater, waste management and air quality in urban
cities pose environmental challenges. Challenges related to wastewater
and waste management described in the Staff Working Document 2012 remain. While
the number of landfill sites is decreasing and the low rate of landfill tax
does not provide incentives to start moving waste management up the waste
hierarchy towards recycling, reuse and reduction. Measures have been taken
recently to promote resource efficiency in the water sector. Another challenge,
in particular in urban areas, is poor air quality that carries direct public
health costs and also reduces crop production. As a response, Slovenia
continues to put in action regional air quality plans. The effectiveness of
these measures remains to be demonstrated and requires continuous monitoring. 3.5.
Modernisation of public administration Challenges are concentrated in the area of the justice
system.
Despite recent progress and a distinct
positive trend, judicial proceedings at first instance in litigious civil and
commercial cases remain long (disposition time in 2010 was 431 days[35]). The
rate of resolving litigious civil and commercial cases is low (in 2010, the
clearance rate was 98%[36])
while the number of pending non-criminal cases per inhabitant is high (in 2010,
it was the highest among the Member States[37]),
although there has been a positive sign of advancement recently, particularly in
the clearance rate. The AGS outlines also other priorities in the area of public
administration, which are relevant for Slovenia such as developing
e-procurement capacities and simplifying business licences procedures.
Additional challenges stem from municipal fragmentation. Justice system Justice
systems that ensure predictable, timely and enforceable decisions can improve the
business environment and support FDI. Long proceedings in litigious civil and commercial cases
can be addressed by additional measures, including those identified as
promising through pilot projects. One such project is the Triaža project for
commercial disputes introduced by the Ljubljana District Court, which focuses
on organisational changes, with partial rollout to at least three additional
district courts planned in 2013 before complete nationwide rollout in 2014. The
high number of pending non-criminal cases indicates further scope for
improvement. Recently, considerable progress has been achieved in the reduction
of the pending land register cases. The high number of pending enforcement
cases constitutes approximately two thirds of all pending non-criminal cases. A
more detailed analysis of the roles of different actors in the enforcement
procedure would be needed to identify the remedial measures necessary. The
introduction of an electronic automated enforcement of authentic documents
(COVL) in 2008 has led to good results. Targets to increase the number of
resolved enforcement cases by 5% in 2013 and a further 5% in 2014 are set as a
means of reducing the number of pending cases; however, there are no details
provided on the concrete measures for attaining these target values (e.g.
regarding the legislative amendments to the enforcement legislation planned for
2014). Other administrative
challenges In the area of public procurement, Slovenia has not
yet adopted a plan for transition to e-procurement. Slovenia is one of the EU
Member States with the least developed corresponding infrastructure. Although
the new electronic portal was introduced recently, electronic tenders cannot be
submitted. Thus, the benefits of e-procurement such as greater transparency,
more competition and faster procedures cannot be fully exploited in practice. Governance of spatial planning and provision of
services at municipal level deliver sub-optimal outcomes. Problems linked to
the management of air quality, waste and water are largely linked to the
problem of municipal fragmentation that often fails to build on economies of
scale. Municipal fragmentation also contributes to inefficient spatial planning.
In 2012, legal changes were adopted to streamline and shorten spatial planning
procedures. The NRP announces a set of additional measures in 2013 and 2014 to
this end. Monitoring of implementation of these measures is needed to assess
the efficiency of policy action. Complex business licensing procedures hinder investment,
including from abroad, and weigh on business dynamism. Although Slovenia
performs well as far as starting up a business is concerned, it is one of the
EU countries with the most complex business-licences procedures in all
dimensions (costs, time, and number of licences).[38] This means that
even after successfully been setting-up, new companies experience delays before
they can start their operations, thus making Slovenia less attractive for investments.
The public perception of
corruption is negative and deteriorating as a
result of recent corruption events. Relevant measures have been taken to improve
transparency of public spending by the Slovenia's anti-corruption watchdog (the
Commission for Prevention of Corruption). However, further measures are needed
to improve the enforcement of public procurement rules and increase
effectiveness of control mechanisms. 3.6.
State ownership and corporate restructuring Many
Slovenian non-financial corporations are over-indebted and face financial
distress in current market conditions. The 2013 IDR outlined the economic outcomes in
relation to state ownership, in terms of direct and contingent fiscal costs,
and in terms of distortion of normal commercial operations, while the only drawback
to the state's conduct as an owner and manager of non-financial enterprises
recognised in the NRP is lack of co-ordination. As an alternative focus, the
NRP goes into some detail on the need for policies to foster deleveraging and
avoid the poor outcomes associated with current insolvency procedures,
including through 'pre-court restructuring'. While some deleveraging is clearly
necessary, and the financial distress of some companies is known (particularly
those in state ownership)[39],
there is no systematic information in the NRP to quantify this challenge and to
properly diagnose how it has arisen. The
NRP outlines policy priorities in the areas of state ownership and corporate
deleveraging. Common
solutions are likely to be found in private investment, both domestic and
foreign, in privatisation, in creating the right incentives and conditions for
debt restructuring (hard budget constraints) and in strengthening corporate
governance. In addition, the state is in an exceptionally strong position to
engineer and – if needed – to force financial and operational restructuring in
many private and state-controlled firms. This strength arises from the state's
position as a major direct owner, a major indirect owner, a major direct
creditor (in the form of unpaid tax liabilities) and a major indirect creditor
(through state-controlled banks). Provided that the compatibility conditions of
the European rules are met, the state can also use state aid in pursuit of
these objectives, although this has some drawbacks as discussed below. The
remainder of section assesses the policy response to state ownership and
corporate indebtedness separately. Policies related to state
ownership State-owned
enterprises (SOEs) present an important part of the Slovenian economy and face
multiple challenges.[40] SOEs
accounted for one sixth of total value added of the Slovenian economy,
accounted for around half the total losses in the Slovenian corporate sector
and employed one out of eight people in the private sector in 2011. As detailed
in the 2013 IDR, SOEs are frequently characterised by sub-optimal corporate
governance. State ownership encompasses a complex
matrix of frequently financially-troubled banks, insurance groups and
non-financial corporations, which own each other. 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. This
thwarts the privatisation process required to boost productivity, deepen
capital markets and enhance technological spill-overs from FDI. A number of
SOEs face challenging financial conditions that might even aggravate given the
expected continued economic downturn. Most companies are highly levered and
have been recapitalised. Overall, Slovenia is considerably behind its peers in
large-scale privatisations, corporate governance and privatisation of the
banking sector (EBRD, 2012).[41] State ownership has already
had a negative impact on public finances. Capital transfers to loss-making SOEs
contributed 1.4 pps to the budget deficit of 6.4% of GDP in 2011. The total
debt of non-bank SOEs was at least 30% of GDP, with 5.4 pps attributable to
companies consolidated with general government accounts. In addition, SOEs are
the main beneficiaries of state guarantees worth 25% of GDP, which is a
contingent liability for the general government[42]. Overall,
while containing some positive elements, the state-ownership and privatisation
policies presented in the NRP fall short of what was identified as necessary in the 2013 IDR. Credible, detailed, time-bound commitments
in the following areas in the NRP would have been important to address the
challenges identified in the IDR. In particular, there would have been value in
establishing a specific complete timetable for the
announced privatisations to capitalise on confidence effects. Measures to
consolidate the state's
non-core ownership stakes and specific measures to ensure a
privatisation-oriented governance and management would have lent credibility to
privatisation intentions. At the same time, there will be companies remaining
in state ownership and it would be important to detail measures how these will
be run and how to ensure a smooth interlinkage between policy and economic
considerations in related areas. Some first steps have been taken to improve corporate
governance, as recommended in the CSRs, and to privatise some SOEs. Legislation setting
up the new Slovenian Sovereign Holding (SSH) was enacted. The new holding is
intended to consolidate management and ownership of all investments by the
Republic of Slovenia and the state funds within one structure and allow for
privatisation of some of these assets. To this purpose, two asset
classifications underpinning the privatisation strategy of the SSH was adopted
by the outgoing government in early 2013, though not approved by parliament. The
NRP announces amendments to the SSH Act, in line with the 13 March coalition
agreement, to repeal the provisions on centralisation of ownership, i.e. while management
of state assets would remain centralised under the SSH the ownership would be
dispersed across Republic of Slovenia and various funds. It is questionable
whether the setting up of the SSH in itself will help overcome the slow
privatisation process produced by previous state ownership structures such as
the Capital Assets Management Agency (AUKN, the immediate predecessor of the
SSH) over the previous years. Moreover, the envisaged ownership split is not
facilitating the process. The letter announces there will be a privatisation
strategy submitted by the end of the third quarter of 2013, but neither the
letter nor the NRP provides insight into the intended strategic objectives and
principles.[43]
The
NRP does not report the classification of assets and underlying criteria that
is supposed to underpin this strategy. A split is envisaged into "strategic"
assets (where the state could keep both either majority or minority shares) and
other assets, destined for privatisation. No further details are reported on
the envisaged criteria used for selecting "strategic" assets and
later on managing these assets. In the absence of the key elements of this
strategy, it is difficult to judge whether this plan will be sufficient to
address the challenges identified in this area in the IDR. The conduct of any privatisation process is likely to
face numerous obstacles, such as thwarted previous processes over the past two
decades.
Regulatory, administrative and political obstacles are all potentially present.[44] These could be
reduced by ensuring a competition-friendly environment[45] and by abstaining
from restrictive criteria relating to the identity of purchasers, purchase
prices and future business conduct when approving sales. There is currently no
regularly published, detailed register of the financial interests of
parliamentarians, ministers and senior officials involved in state-owned assets,
which risks undermining the transparency and public trust in
privatisation-related decisions. Such a register could be a basis for enforcing
strict rules on managing possible conflicts of interests and prohibiting
interference by ministers in ongoing commercial transactions. Pending the elaboration of an overall strategy, the
NRP announces that the government will declare some first companies for
privatisation in May 2013. Accordingly, the government announced on May 8 a list
of 15 companies to be privatised and submitted it to Parliament. The letter
states that the state's stakes in these companies will be put on sale in their
entirety and that parliamentary adoption is expected by the end of the second
quarter of 2013. This list includes larger and smaller companies, majority and
minority stakes, including the second largest bank NKBM and the
telecommunications incumbent. No detailed timetable is suggested. Rapid
progress with these privatisations would send a strong signal to investors that
Slovenia is open for business and moving towards a new way of operating.
However, the NRP also stresses there may be reasons to depart from commercial
considerations when deciding on privatisations. While there may be
justifications for some limited departures from commercial considerations in
specific instances like network industries, it would be economically
problematic if such considerations were also present in other decisions. Basing
decisions on such considerations would also be problematic under the state-aid
rules. There is no new detail in the NRP regarding the
strategic orientation for companies that will remain in state ownership. In this respect,
it would have been useful to consider sector-specific strategies and measures
for improving profitability by realising efficiency gains and streamlining
business models where possible. Efficient, transparent and professional
management would be important to ensure for all core state assets. In this
regard, there is currently no obligatory and publicly available register of
appointments, with requirements for disclosure of interests (e.g. real and
financial property, business relationships). Efficient budgeting and auditing
processes under the control of the Ministry of Finance might also help. Corporate restructuring The
NRP asserts the need to rescue and restructure non-financial corporations in
financial distress. While corporate over-indebtedness in Slovenia is
problematic and specific firms certainly face financial distress, important
details have not been described in the NRP. Ideally, existing impediments to
successful restructuring deals would be identified and overall restructuring
needs quantified[46].
Outside of the NRP, the authorities have described the situation in general
terms and highlighted the contributory problem of 'passive owners', unwilling
or unable to inject fresh capital and prepared to 'wait and see' rather than
accepting dilution of their ownership interests by new investors or filing for
insolvency[47].
Such an approach is permitted by banks that may be prepared to 'wait and see'
rather than negotiate haircuts (e.g. in a distressed sale context), and to
refrain from initiating proceedings against non-payers (see section on the
legal framework below). The extent of tax and social security contribution
arrears may indicate that the tax authorities also refrain from initiating
proceedings against non-payers. If confirmed, such a behaviour would be
problematic under the state-aid rules. The
NRP presents a three-step approach to restructure illiquid and thinly capitalised
but ostensibly deserving companies. In the first step, existing owners and
creditors would be responsible for agreeing appropriate restructuring deals (as
is already the case). In the second step, external private investors would, if
necessary, be sought, including among international institutions such as EBRD
and IFC (as is in principle already the case; these institutions would have
their own procedures to satisfy before going ahead with further investments in
Slovenia). In the third step, the state would intervene and provide additional
financial support[48]
to stimulate restructuring negotiations between market players and to ensure
sufficient resources. Despite the overlap in terms of counterparts and aims,
the necessary co-ordination between this three-step approach and the BAMC (see
section 3.2) is not explained in the NRP. E.g. it is not explained if companies
are to be restructured following this three-step approach prior or after the
transfer of related assets to the BAMC. The
NRP provides limited details regarding the granting of potential state aid. The legislation on
state aid was amended and relaxed in April 2013 in order to provide more types
of aid, in larger amounts, including to state-controlled companies. According
to the NRP, these amendments introduce non-cash equity investments as a form of
state aid, in addition to other forms of aid previously authorised (such as
loans and guarantees) within the EU legal framework. Rescue aid has already
been notified to one 'pilot' company and further notifications are in the
pipeline. The NRP sets out some welcome guiding principles on limiting such
state aid but does not clarify how the government will bind itself to these
principles. However, the reference to the SP in this respect is not reciprocated
in the SP itself. The SP does not include specific compensating measures to
ensure compliance with fiscal targets, if guarantees are called, while amounts
might be macro-economically significant. In this respect, the letter states that any additional outlays arising from
newly granted guarantees will be offset against other expenditure items,
without detailing how sufficient budget flexibility would be achieved within a
given fiscal year. Affordability
considerations, fiscal discipline and the rules governing state aid all place
constraints on granting aid via state guarantees, loans or fresh capital to
non-financial corporations. With Slovenia in EDP, recapitalisations already weigh
on the public deficit and debt levels as described above. In addition, Slovenia's
sovereign guarantees are the third highest in the EU as a percentage of GDP[49]. A number of rating
agencies and international investors have identified this as one of the main
factors threatening the sustainability of public finances and international
investor confidence in Slovenia. Cross ownership and inter-linkages between
SOEs, state-owned banks and insurance companies amplify the fiscal and other
risks related to sovereign funding. Any discretionary expenditure and callable
guarantee increases related to state aid add to the pressure on other areas of the
general government budget. Overall, the policy challenge and the policy response
regarding corporate restructuring need further elaboration. The currently
envisaged policies entail significant risks and could run counter to the
objectives of consolidating the public finances and reducing the state's role
in the economy. The NRP implicitly acknowledges this risk, by stressing the
principle that the state should accelerate the sale of any shares acquired in
this process, but the NRP provides no information on how this principle is to
be operationalised. FDI could play a key role in unblocking current bottlenecks
to corporate restructuring, and there is insufficient focus in the NRP on how
to attract such FDI. Public intervention needs to be duly and transparently
justified while ensuring that bail-in would diminish moral hazard, preserve
taxpayer resources, prevent the perpetuation of ownership models that have
proven problematic and instil correct incentives for other companies. In
general, the appropriate objective for such a policy would be sale of
restructured companies, without involvement of state resources, rather than
maintaining given employment levels, or keeping 'viable cores' of businesses in
domestic ownership. Legal framework “Passive”
owners, shortcomings in the insolvency framework and deficiencies in the
enforcement of insolvency rules increase the repayment risks for creditors of
over-indebted companies. The insolvency
framework has insufficient incentives and sanctions to ensure companies file
for insolvency at an early stage. The compulsory settlement procedures
(in-court reorganisation) are complex and debtor-friendly, particularly for
SMEs and micro companies. There are insufficient incentives for early,
out-of-court, settlement. Early debt settlement (out-of-court or in-court),
which could help ensuring the continuation of viable businesses, are not being
pursued (by debtors or by creditors), and companies tend to file for insolvency
at a late stage. This is due to the absence of a fully credible threat from
insolvency proceedings. Correspondingly, recovery rates are relatively low, the
number of insolvency procedures with insufficient assets is large and the repayment
risks for creditors of over-indebted companies are elevated. An effective reform
would facilitate a timely rehabilitation of viable companies, speed up the
cleaning of banks' balance sheets, facilitate access to finance and give a
second chance to entrepreneurs. Slovenia is in the process of amending legislation to
increase the efficiency of insolvency procedures. The amendments to the
Financial Operations, Insolvency Proceedings and Compulsory Dissolution Act
(ZFPPIPP) adopted in April 2013 aim at refining the definition of insolvency
and incentivising management to file for insolvency on time. As regards
compulsory settlement, the main changes aim at strengthening the role of
creditors, by modifying the voting rules, improving access to debtors'
documentation, and facilitating debt-to-equity conversion and appointment of
new management. For micro companies, the draft law envisages fast-track,
simplified compulsory settlement procedures. Relevant measures have been
announced to speed up and increase the efficiency of insolvency procedures such
as falling price ("Dutch") auctions and regulation of mediation for
settlement of disputes arising from insolvency. However, further measures may be needed to improve
enforcement of the legal obligation to file for insolvency. Key areas are
changes in the criminal law (and law enforcement) and obligations for managers
to provide evidence that they have not filed for insolvency too late.
Additionally, as the initiative for starting compulsory settlement procedures
stays with debtors, the reform may fail to substantially increase take-up.
Appropriate prioritisation of pending litigation directly related to bankruptcy
could be an additional way to expedite ongoing procedures (see also Section
3.5). Close monitoring will be important to determine the impact of the reform. Early financial restructuring of over-indebted
companies is not currently regulated and new legislation has been announced to
fill the gap. According to the NRP, legal changes to facilitate out-of-court
restructuring and debt conversion will be proposed by the Ministry of Justice
end of May 2013. The NRP does not provide details about the intended changes.
It is thus not possible to assess whether the new legislation can achieve its objectives.
A legal framework with compatible incentives for creditors, owners and
management would be essential for starting any urgent restructuring of illiquid
and thinly capitalised but viable companies.
4.
Overview table
2012 commitments || Summary assessment Country-specific recommendations (CSRs) CSR 1: Implement the 2012 budget, and reinforce the budgetary strategy for 2013 with sufficiently specified structural measures, standing ready to take additional measures so as to ensure a correction of the excessive deficit in a sustainable manner by 2013 and the achievement of the structural adjustment effort specified in the Council recommendations under the excessive deficit procedure. Thereafter, ensure an adequate structural adjustment effort to make sufficient progress towards an appropriate MTO for the budgetary position, including meeting the expenditure benchmark. Strengthen the medium-term budgetary framework, including the expenditure rule, by making it more binding and transparent. || The CSR has been partially implemented. The May 2012 Act on Balancing Public Finances underpinning the 2012 supplementary budget has contributed to a significant improvement in the structural balance by 2.0% of GDP in 2012 and its positive budgetary implications continue into 2013. Key measures limited compensation of employees and social transfers, but many measures are not of a structural nature. The 2013 budget introduced new revenue increasing measures. According to the Commission's 2013 Spring Forecast, Slovenia is not expected to correct the excessive deficit by 2013. Limited progress has been achieved in other components of CSR1. The authorities have not set an appropriate MTO. Parliament adopted a constitutional basis for establishing a general government budget balance/surplus rule in structural terms, but no other action has been taken to strengthen the medium-term budgetary framework, including the expenditure rule, by making it more binding and transparent. CSR 2: Take urgent steps to ensure the long-term sustainability of the pension system, while preserving the adequacy of pensions, by: (i) equalising the statutory retirement age for men and women; (ii) ensuring an increase in the effective retirement age, including through linking the statutory retirement age to life expectancy; (iii) reducing early retirement possibilities; and (iv) reviewing the indexation system for pensions. Increase the employment rate of older workers also by further developing active labour market policies and lifelong learning measures. || The CSR has been partially implemented. The pension reform was passed in December 2012 and entered into force in January 2013. The reform was adopted following intensive negotiations with social partners. Different intervention acts have frozen or reduced pension indexation over 2012-2014. The reform addresses challenges identified in the CSR though not sufficiently. It increases and equalises the statutory retirement age for both genders; however it does not introduce an automatic link between the increase in life expectancy and statutory retirement age. It reduces early retirement possibilities and proposes changes to the indexation of pensions. The reform goes in the right direction but is supposed to have a visible curbing effect on pension expenditure increases only in the short-run (up to 2020). Further reform steps are needed to ensure sustainability also in the medium and long-run. No tailor-made lifelong learning or active labour market measures have been adopted to increase employment of older workers. CSR 3: Take the required steps to build sufficient capital buffers in the banking sector and strongly promote the cleaning of balance sheets so that appropriate lending to productive activities can resume. Obtain fully-fledged third party verification of systemically important banks' stress loan-loss estimates. || The CSR has been partially implemented. Following adoption of reform bills on the recovery of the banking sector, the government has set up the Bank Assets Managing Company (BAMC) and the Bank Stabilisation Fund to repair the state-owned banks. However, the selection of banks and balance sheet cleaning tools still needs to be specified. An asset quality review is planned in 2013. Jurisdiction of Bank of Slovenia was strengthened so that the Bank of Slovenia can intervene faster, with more of a forward-looking justification, though implementation of the new powers of the bank of Slovenia is yet to be demonstrated. The supervisory and resolution framework has been strengthened, but more measures are required on some of the supervisory tools (e.g. provisioning) and effective action has to follow. Third party due diligence was concluded in the two largest banks (state-owned NLB and NKBM) in summer 2012 and in autumn 2012 for the third largest bank (state-owned bank Abanka), however these reports are now outdated and a more cautious assessment is required to dispel market doubts. NLB was recapitalised with a EUR 320mn contingent convertible bonds (CoCo bonds, a hybrid debt-equity instrument) in July 2012, which was triggered and converted into equity in February 2013, and further recapitalisation needs for 2013 were announced by the bank in the amount of c. 367 m EUR. NKBM was recapitalised with a EUR 100mn contingent convertible bonds (CoCo bonds, a hybrid debt-equity instrument) in January 2013, which was also triggered and converted into equity soon after. In addition recently the management board of NKBM have proposed to shareholders to approve a capital injection of up to EUR 400m over the next five years. Both banks were recapitalised in order to meet European Banking Authority capital requirements. CSR 4: Adjust employment protection legislation as regards permanent contracts in order to reduce labour market segmentation, in consultation with social partners and in accordance with national practices. Further tackle the parallel labour market caused by student work. || The CSR has been partially implemented. A reform of employment protection legislation was adopted in March 2013 to reduce labour market segmentation and increase its flexibility. The reform reduces protection of permanent contracts by simplifying dismissal procedures. However, dismissal costs remain broadly unchanged for the majority of workers, i.e. they are reduced noticeably only for workers with contribution periods above 25 years and less than a year. At the same time the protection of fixed-term contracts is increased to prevent abuse and increase the rights stemming from such contracts. Whereas the reform goes in the right direction, it remains to be seen whether the reform is sufficiently ambitious to have a significant impact on the labour market segmentation and flexibility, also in light of Slovenia's needs to attract FDI. New restrictions on temporary agency work contracts may have a negative impact on job creation. The NRP announces monitoring the impact of the reform on the labour market and, if needed, to enact legal changes. While no systemic measures have been taken to address the widespread and unprotected student work available to pupils and students, student allowance for personal income tax was cut by one quarter in 2013. In addition, regulation of student work similar to other types of work is announced in the NRP without providing details, on basis of an announced analysis to reduce labour market segmentation and prevent its abuses. CSR 5: Improve the matching of skills with labour market demand, particularly of low-skilled workers and tertiary graduates, and continue reforms of vocational education and training. || The CSR has been partially implemented. A pilot project on how to evaluate labour market needs is being carried out at the Public Employment Service. The first results, which will be used as a basis for policy design, are expected for the second half of 2013. The newly-adopted Industrial Strategy could also be used for assessing labour market needs. Additional career orientation measures with the aim of strengthening the human resource management function in small and medium size enterprises are also being implemented. There is only some progress in addressing the skills gap in tertiary education; links with enterprises have not been strengthened. Reforms of vocational education and training show limited progress and the role of employers has not been strengthened. CSR 6: Take further steps to strengthen market opening and speed up the reorganisation of professional services. Improve the business environment through: (i) implementing the reform of the Competition Protection Office (ii) establishing a framework for state-owned enterprises guaranteeing arms-length management and high standards of corporate governance (iii) improving bankruptcy procedures, in particular in terms of timeliness and efficiency. || The CSR has been partially implemented. A reform of professional services has been launched mid-2012. An inter-ministerial group was setup in September 2012 to review regulated professions. A first set of laws in the field of craft, tourism and construction was due to be adopted by Parliament early 2013. However, the reform is behind schedule except for the craft sector. As to the tourism and the construction sectors, the adoption of revised legislation is now tabled for June and end-September 2013, respectively. By end-September 2013 Slovenia plans also to adopt revised legislation for a number of other activities and professions including those related to private investigation, real estate brokerage, driving schools, lawyers and surveying activities. The revision of other sectors will follow in the second half of 2013 and in 2014. The swift de-regulation and a significant reduction of entry barriers are of importance given the expected positive effects on employment and competition. (i) The Competition Protection Agency (CPA) was established on January 1, 2013 and replaced the previous Competition Protection Office. Whilst additional staff was transferred to the CPA, the authority suffers from limited financial resources, also in light of budget cuts for 2013. Further measures are warranted to ensure its sufficient and autonomous financing. (ii) The government abolished the Agency on Managing Capital Assets and replaced it with the new Slovenian Sovereign Holding (SSH). The new holding is intended to consolidate management and ownership of all investments by the Republic of Slovenia and the state funds under one structure and allow for privatisation of some of these assets. To this purpose, the asset classification underpinning the privatisation strategy of the SSH was adopted by the outgoing government in early 2013, though not approved by parliament. The NRP announces amendments to the SSH Act, in line with the 13 March coalition agreement, to withdraw centralisation of ownership, i.e. while management of state assets would remain centralised under the SSH the ownership would be dispersed across Republic of Slovenia and various funds. These amendments risk repeating the slow privatisation outcomes achieved by previous state ownership structures over the years, such as the Capital Assets Management Agency (AUKN, the immediate predecessor of the SSH). The state’s withdrawal from the economy is important not only for decreasing debt, but also for ensuring the more efficient performance and corporate governance of companies. There would be also a positive impact on market functioning and FDI. (iii) The government adopted an amended law on Financial Operations, Insolvency Proceedings and Compulsory Dissolution Act (ZFPPIPP) in April 2013. The amendments aim at refining definition of insolvency and incentivise management to file for insolvency on time. However, further measures may be needed to improve enforcement of the legal obligation to file for insolvency. As regards compulsory settlement, main changes aim at strengthening the role of creditors, by modifying the voting rights, improving access to debtors’ documentation, and facilitating debt-to-equity conversion and appointment of new management. For micro companies, the draft law envisages fast-track simplified compulsory settlement procedures. Relevant measures have been announced to speed up and increase the efficiency of insolvency procedures such as falling price ("Dutch") auctions and regulation of mediation for settlement of disputes arising from insolvency. CSR 7: Following consultation with social partners and in accordance with national practice, ensure that wage growth, including minimum wage adaptation, supports competitiveness and job creation. || The CSR has been partially implemented. The government has cut nominal gross wage per employee in the public sector by around 3% in 2012 and agreed with social partners to cut the wage bill further in 2013. The real average wage decreased in 2012 compared to 2011 while the nominal unit labour cost (NULC) registered a moderate positive growth in 2012 (0.7%) due to negative productivity growth (-1.1%). However, until Slovenia can sustain NULC growth below that of its trading partners it will not repair previous cost-competitiveness losses, especially from the 2007-2009 period. No measure has been taken to adapt the minimum wage. The NRP announces adjustments in the minimum wage setting in 2013 in consultation with social partners to support competitiveness and fairness, however, no detailed measures are reported. There are strong built-in dynamics in both public and minimum wages that could reignite adverse trends in the coming years. Pressures on wages are expected to pick up 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. Europe 2020 (national targets and progress) Employment rate target: 75% || The employment rate fell from 71.9% in 2009 to 68.4% in 2011 and stagnated in 2012 (68.3%). Slovenia is moving away from the target. R&D target: 3% || Spending on R&D rose significantly from 2.11% in 2010 to 2.47% in 2011, so clear progress is being made towards the EU 2020 target. Greenhouse gas (GHG) emissions target: +4% (compared to 2005, ETS emissions are not covered by this national target || Change in non-ETS greenhouse gas emissions between 2005 and 2011: -1%. According to the latest national projections submitted to the Commission and based on existing measures GHG emissions are projected to increase by 5% (compared to 2005) by 2020, leading to a shortfall of the target by 1pp. Renewable energy target: 25% Share of renewable energy in the transport sector: 10% || Share of total renewable energy in gross final energy consumption was 18.8% in 2011 and 2.1% in the transport sector. (Source: Eurostat. April 2013. For 2011, only formally reported biofuels compliant with Art. 17 and 18 of Directive 2009/28/EC are included). National indicative energy efficiency target for 2020: 10,809 GWh savings by 2020 || Slovenia has set an indicative national energy efficiency target in accordance with Articles 3 and 24 of the Energy Efficiency Directive (2012/27/EU). However, it has neither expressed it, as required, in terms of an absolute level of primary and final energy consumption in 2020, nor has it provided information on the basis on which data this has been calculated. Early school leaving target: 5% || Early school leaving, measured by the percentage of the population aged 18-24 with at most lower secondary education and not in further education or training, fell from 5.3% in 2009 to 4.4% in 2012. Slovenia is the best achiever in terms of preventing early school leaving. The target has been achieved. Tertiary education target: 40% || Tertiary educational attainment rose markedly between 2009 and 2012, from 31.6% to 40%. The target has therefore been achieved. Target for reducing the population at risk of poverty or social exclusion (in number of persons): 40,000 || The number of people at risk of poverty or social exclusion, which is relatively low compared to the EU average, rose markedly between 2010 and 2011, from 366 000 to 386 000. This indicates that Slovenia is moving away from the target.
5.
Annex
Table I. Macroeconomic indicators Table II. Comparison of macroeconomic
developments and forecasts Table III. Composition of the budgetary
adjustment Table IV. Debt dynamics Table V. Sustainability Indicators Table VI. Taxation indicators Table VII. Financial market indicators
Table VIII. Labour market indicators Table IX. Product market performance and policy indicators Table X. Green Growth [1] COM (2012) 321 final of 30 May 2012. [2] OJ C 219 of 24 July 2012. [3] COM (2012) 750 final. [4] COM (2012) 751 final. [5] 13 in-depth reviews were published on 10 April 2013.
While selected for an in-depth review in the AMR, Cyprus was ultimately not
reviewed under the Macroeconomic Imbalance Procedure in view of the advanced
preparations for a financial assistance programme. [6] Internal projections for growth beyond 2014, underpinning the EDP,
include consolidation measures. [7] Cyclically adjusted balance net of one-off and temporary measures,
recalculated by the Commission services on the basis of the information
provided in the programme, using the commonly agreed methodology. [8] The Commission services calculated the MTO for Slovenia at ¼% of
GDP in autumn 2012. The EPC reviewed the Slovenia's pension reform enacted in
2012 on 28 May 2013. Thus, the Commission services intend to recalculate a MTO
for Slovenia in the following weeks. [9] The October 2012 EDP notification revised the 2012 deficit target
upwards to 4.2% of GDP mainly because of a downward revision in taxes on income
and wealth and upward revisions in compensation of employees and intermediate
consumption. [10] This and further references to the headline deficit target for 2013
in the fiscal section mean the headline deficit excluding bank
recapitalisations. [11] Projected interest expenditure at 3.0% of GDP will have nearly
tripled by 2013 relative to 2008 when they stood at 1.1% of GDP. [12] These were revenue increasing super-dividends from energy companies
amounting to 0.15% of GDP. [13] Recapitalisation of the largest bank increased expenditure by 0.2%
of GDP. [14] The list of envisaged revenue and expenditure consolidation
measures up to 2014 is attached in the Annex to the programme. [15] For instance, the Act on Balancing Public
Finances projected in May 2012 annual revenue of €160m from the new crisis real
estate tax, which was temporary introduced in July 2012, but this projection
was later on revised to revenue of around €5m. [16] Parliament approved constitutional amendments, which tighten criteria
to call and win a referendum on 24 May 2013. These amendments ban referenda
about inter alia tax and other revenue increasing measures, but it
remains to be seen how they will impact possible calls for referenda against potential
expenditure consolidation measures. [17] The programme explains (see Section 5.2.) that a relatively high
share of guarantees granted to private companies in difficulties is being
called. [18] On a no-policy change assumption, the Commission's 2013 Spring
Forecast projects adjustments of 0.3% and -0.9% of GDP in 2013 and 2014,
respectively. [19] The 2011 stability programme announced that the government started
a project of "target-oriented budgeting" for the central
government budgets for 2010 and 2011. However, no concrete information on its
actual implementation and budgetary impacts are publicly available. [20] The December 2012 Banking Stability Act caps these transfers to EUR
4bn (11.4% of GDP). [21] Usual pre-financing of bonds maturing in following years only
front-loads the debt profile without impacting its size (interest impacts
excluded). [22] See Fiscal Frameworks across Member States: Commission services
country fiches from the 2011 EPC peer review. European Economy, Occasional
Paper 92, European Union, 2012. [23] These are mainly public institutes operating in areas of education,
health, social care, culture and sport and are part of the general government. [24] The Fiscal Council has not published the Annual Report for 2013 by
30 April 2013 as stipulated in the Public Finance Act. [25] Around 20% of total expenditure in the central government budget in
cash terms is used for transfers to public institutes established by the state. [26] The national document Exit Strategy 2010-2013 from February 2010
envisaged a reform of the system for provision of non-commercial public
services, including of their financing. Information on this reform has not been
communicated. [27] European Commission (2012), Tax Reforms in EU Member States 2012,
European Economy 6/2012. [28] The IDR discussed the changes arising from the modifications to the
Act on Banking that came into force in December 2012. These changes are
beneficial in that they allow for more forward-looking action, but it still
remains to be seen how these new powers will be used. Furthermore, the recovery
and resolution powers available in this law could require further
strengthening, as discussed also in the OECD's 2013 Survey of Slovenia. [29] Along the lines of the proposed Directive on Recovery and
Resolution of Credit Institutions, which emphasises the importance of effective
tools to ensure preparation, prevention, early intervention and resolution. [30] See Stoviček, K. (2013), "Minimum wages in Slovenia",
Country Focus, DG ECFIN, European Commission, and European Commission ,
Macroeconomic Imbalances: Slovenia 2013, European Economy, Occasional Paper142,
(forthcoming). [31] For the impact of the pension reform on the sustainability of
public finances see section 3.1. [32] These are largely co-financed by the European Social Fund. [33] The reform converted the minimum pension support into the
means-tested income support. [34] European Environmental Agency greenhouse gas emission projections
2013. [35] The EU Justice Scoreboard: a tool to promote effective justice and
growth, COM(2013) 160 final, p. 6. [36] The EU Justice Scoreboard: a tool to promote effective justice and
growth, COM(2013) 160 final, p. 8. A rate below 100% means that the backlog of
unresolved cases in the court systems keeps growing. [37] The EU Justice Scoreboard: a tool to promote effective justice and
growth, COM(2013) 160 final, p. 10. [38] Business Dynamics (2011). The analysis is based on a sample of
selected companies. [39] See European Commission (2013), Macroeconomic Imbalances: Slovenia
2013, European Economy, Occasional Paper142, April 2013. [40] See Georgieva, S., D. Marco Riquelme (2013), "Slovenia: State
Ownership Holding Back Development", Country Focus, European Commission (forthcoming),
and European Commission (2013), Macroeconomic Imbalances: Slovenia 2013,
European Economy, Occasional Paper142, April 2013. [41] Comparative analysis with peers has been done on the basis of EBRD
transition and structural indicators. Comparisons are based on Slovenia's
average position during the transition period and its position according to
latest data (2012). Slovenia was compared against the average of three groups
of CEE countries: (i) Eight EU Member States from the CEE region and Croatia,
(ii) Six EU Member States which entered the EU in 2004 and (iii) the two
euro-area members from the region. [42] See Georgieva, S., D. Marco Riquelme (2013), "Slovenia: State
Ownership Holding Back Development", Country Focus, European Commission
(forthcoming), and European Commission (2013), Macroeconomic Imbalances:
Slovenia 2013, European Economy, Occasional Paper142, April 2013. [43] The statement that this strategy would be modelled on similar
strategies in OECD countries does not say what is actually envisaged. Pending
the adoption of such a strategy, a clear statement of principles and objectives
would have added greater credibility. [44] See section 3.2 in European Commission (2013), Macroeconomic
Imbalances: Slovenia 2013, European Economy, Occasional Paper142, April 2013. [45] E.g. Slovenia has not fully transposed the 3rd Energy
Package. [46] Ideally, there would be a current and forward-looking assessment of
the financial situation of companies not in state ownership that are reportedly
in need of urgent financial restructuring, using independent and transparent
criteria when assessing the viability of companies. [47] In addition, it is worth noting that the state as owner can rectify
over-indebtedness only within the applicable fiscal and state aid constraints –
i.e. it is not in a position to be an active owner itself. [48] This element was not known at the time the IDR was drafted. [49] Eurostat (2011),
Structure of Government Debt in Europe. Please note that data refers to the
guarantees given by the central government only and does not include guaranteed
interests.