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Document 52013SC0122
COMMISSION STAFF WORKING DOCUMENT In-depth review for SLOVENIA in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances
COMMISSION STAFF WORKING DOCUMENT In-depth review for SLOVENIA in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances
COMMISSION STAFF WORKING DOCUMENT In-depth review for SLOVENIA in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances
/* SWD/2013/0122 final */
COMMISSION STAFF WORKING DOCUMENT In-depth review for SLOVENIA in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances /* SWD/2013/0122 final */
TABLE OF CONTENTS Executive summary
and conclusions............................................................................................... 3 1........... Introduction.................................................................................................................... 5 2........... Macroeconomic
situation and potential imbalances.......................................................... 5 2.1........ Macroeconomic
scene setter........................................................................................... 5 2.2........ Sustainability
of external positions.................................................................................... 6 2.3........ Competitiveness
and export performance........................................................................ 9 2.4........ Private
sector indebtedness........................................................................................... 15 2.5........ Asset
market developments.......................................................................................... 17 3........... In-depth
analyses.......................................................................................................... 19 3.1........ Banking
sector vulnerabilities......................................................................................... 19 3.2........ State-owned
enterprises: a key source of macroeconomic imbalances and impediment to private
investment 27 4........... Policy
challenges........................................................................................................... 36 References and
sources............................................................................................................... 40 Executive
summary and conclusions In May 2012,
the Commission concluded 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. In the
Alert Mechanism Report (AMR) published on 28 November 2012, the Commission
found it useful, also taking into account the serious imbalances identified in
May, to examine further the risks involved and progress in the unwinding of
imbalances in an in-depth analysis. To this end this In-Depth Review (IDR)
takes a broad view of the Slovenian economy in line with the scope of the
surveillance under the Macroeconomic Imbalance Procedure (MIP). The main
observations and findings from this analysis are that the negative economic
trends and imbalances identified in the 2012 IDR have aggravated. Notably: ·
The
levels of total private debt are below the euro area average and the alert
thresholds of the scoreboard, but many corporates remain over-indebted, leading
to further rises in non-performing loans. 23.7% of this segment of bank credit
is now in arrears of 90 days or over. ·
The
size of the Slovenian banking sector is relatively small and less than half the
euroa area average, but major domestic banks face continued deterioration of
their credit portfolios, which puts sustained pressure on capital buffers,
which remain low in regional comparison. Further
recapitalisations are likely to be needed. ·
Credit
is contracting and the interaction between weak banks and the sovereign has
intensified. The nominal stock of bank credit to the private, non-banking
sector is shrinking at an annual rate of more than 5%. The state has de
facto become the main source of capital and remains a sizeable, though
declining, source of deposits for the banking sector. At the same time, the
state itself has to consolidate and yields on government bonds remain elevated.
Public debt amounted to 54% of GDP in 2012 and is forecast to exceed the
60%-of-GDP threshold by 2014. ·
The
deleveraging challenge is accentuated by a double-dip recession and growth
forecasts have been revised downwards. Real GDP is now 8% below the peak
reached in 2008 and this situation is forecast to persist through to 2014.
Economic contraction hinders corporate balance sheet repair and makes it
difficult for new firms to grow, inevitably leaving banks increasingly exposed
to legacy portfolios. ·
Net
external debt is relatively contained and the current account has turned into
surplus. However, this is due to reduced imports from lower economic activity
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. ·
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 and distorts resource
allocation, especially as regards new investment. It also seems to keep
foreign-direct investment lower than in peer countries. State-controlled funds
and enterprises also impact public finances through the interaction of elevated
debt levels, recapitalisation needs and significant government guarantees. ·
Framework
legislation for bank restructuring and privatisation was passed but still needs
to be implemented effectively. Periods of
policy uncertainty and legal obstacles to reforms have prevented Slovenia from addressing its imbalances adequately and enhancing its adjustment capacity, thus
increasing its vulnerability at a time of heightened sovereign funding stress
in Europe. A comprehensive reform strategy accompanied
by a credible implementation path would stabilise the financial sector, unleash
Slovenia´s growth potential and increase employment. The IDR thus also
discusses the policy challenges stemming from these developments and possible
policy responses. A number of elements can be considered: ·
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. 1. Introduction On 28
November 2012, the European Commission presented its second Alert Mechanism
Report (AMR), prepared in accordance with Article 3 of Regulation (EU) No. 1176/2011
on the prevention and correction of macroeconomic imbalances. The AMR serves as
an initial screening device helping to identify Member States that warrant
further in-depth analysis to determine whether imbalances exist or risk
emerging. According to Article 5 of Regulation No. 1176/2011, these
country-specific “in-depth reviews” (IDR) should examine the nature, origin and
severity of macroeconomic developments in the Member State concerned, which
constitute, or could lead to, imbalances. On the basis of this analysis, the
Commission will establish whether it considers that an imbalance exists and
what type of follow-up it will recommend to the Council. This is the
second IDR for Slovenia. The previous IDR was published on 30 May 2012 on the
basis of which the Commission concluded that Slovenia was experiencing severe
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.
Overall, in the AMR the Commission found it useful, also taking into account
the serious imbalances identified in May, to examine further the risks involved
and progress in the unwinding of imbalances in an in-depth analysis. To this
end this IDR takes a broad view of the Slovenian economy in line with the scope
of the surveillance under the Macroeconomic Imbalance Procedure (MIP). Against this
background, Section 2 of this IDR looks more in detail into these developments
covering both the external and internal dimensions. This is followed by a
specific focus updating the assessment of the banking sector in Section 3.1 and
a specific focus on the special position of state-owned enterprises in Section
3.2, which has been a recurring issue since pre-accession negotiations.[1] Section 4
discusses policy considerations. 2. Macroeconomic
situation and potential imbalances 2.1. Macroeconomic
scene setter Slovenia is
experiencing a double-dip recession. Real GDP contracted by
2.3% in 2012 and will contract by 2% in 2013 according to the Commission
services’ 2013 Winter Forecast. As a result, GDP is about 8 pps. below the peak
reached in 2008 and this gap is not expected to close over the forecast
horizon; the corresponding gap for the euro area as a whole is about 1½ pps. in
2012, closing to zero in 2014. As a consequence, and in contrast to most other
European economies, the recovery in 2010-11 was so short-lived and modest in Slovenia that real GDP has now fallen below the previous trough. Graph 1: Gross domestic product and gross fixed capital formation, €bn at constant 2005 prices || Graph 2: General government deficit and debt, % of GDP || Source: Eurostat and Commission services’ 2013 Winter Forecast || Source: Eurostat and Commission services’ 2013 Winter Forecast Demand
remains weak, employment is still in decline and the financial situation of
firm continues to deteriorate. Weak demand and capital support measures
continue to drive the deterioration of Slovenia’s public finances. The
excessive deficit will probably not be corrected in 2013, the deadline set by
the Council, according to the Commission services’ 2013 Winter Forecast, which
foresees a deficit of 5.1% of GDP. Debt is expected to approach the 60% of GDP
threshold by 2013, even without including additional measures necessary to
stabilise the financial sector. Employment is still contracting and is forecast
to remain on a downward path until 2014, the period covered by the Commission
services’ 2013 Winter Forecast. Many companies, especially those oriented to
the domestic market, struggle to service debts. The transmission of financial
distress from firms to banks has intensified, leading to substantial further
loan losses. Slovenia’s accessed
sovereign debt markets in 2012. Slovenia has maintained an investment
grade rating (Moody's Baa2, S&P A-, Fitch A-), despite a downgrade, whereas
throughout most of the year yields on Slovenian government bonds rose in tandem
with those for Italy and Spain. Market access was eventually reconfirmed
through a sizeable US-dollar issue in October. Nevertheless, funding
vulnerabilities remain as reform progress is uneven. Uncertainty as to the true
scale of contingent fiscal liabilities in the banking sector and possible
further downgrades[2] have the
potential to make Slovenia’s re-financing programme more challenging in 2013,
with potential knock-on implications especially for the banking sector. 2.2. Sustainability
of external positions Weak domestic
demand has allowed the current account to move into surplus. Final data
for 2011 show the impact of the trade surplus on reducing net borrowing.
Despite the sizeable general government deficit, the current account has moved
from balance in 2011 to a surplus of 2% of GDP in 2012, according to the Commission
services’ 2013 Winter Forecast. It is expected to remain in surplus over the
forecast horizon, even once adjusted for the very weak stage in the cycle,
whereas the current account norm for Slovenia is a slight deficit according to
Commission internal estimates.[3] This
development can be attributed primarily to weak domestic demand, with a
secondary role through the income balance for profits and earnings of foreign
workers. The role of weak domestic demand since 2009 is driving a gap between
imports and exports. Indeed, internal estimates suggest that Slovenia may be one of the relatively few EU Member States where current account
improvement can primarily be attributed to cyclical factors.[4] While these
estimates are sensitive to the specific calculation methodology adopted, they
nonetheless point to underlying structural weaknesses. Graph 3: Imports and exports of goods and
services, €bn at current prices Source:
AMECO and Commission services’ 2013 Winter Forecast The
relatively benign level of the net international investment position (NIIP)
hides underlying weaknesses. Historical NIIP data have been revised, leaving
Slovenia slightly above the 35% of GDP NIIP threshold in the AMR scoreboard –
still the lowest reading for a new Member State. As this is primarily due to
the very low FDI stock, it is in fact a consequence of features of Slovenia’s business environment and history of state-ownership. Consequently, the structure
of Slovenia’s external debt, comprising essentially portfolio and other
investment,[5] makes this
position more vulnerable to abrupt changes in investor confidence than the
headline indicators would suggest. The need for rapid repayment of wholesale
borrowing by domestic banks, which has contributed to deleveraging, exemplifies
this vulnerability (see section 3.1). The 2012 IDR analysis in this respect
remains valid. More success in attracting FDI to finance Slovenia’s catching-up
process would initially imply current account deficits and in the longer run a
more negative but more sustainable NIIP. Graph 4: Net lending/borrowing by sector (% of GDP) || Graph 5: Components of net lending/borrowing (% of GDP) || Source: EUROSTAT || Source: EUROSTAT * indicates estimated figure using quarterly data. Graph 6: Financing of net lending/borrowing (% of GDP) || Graph 7: Net external debt and composition of Net International Investment Position (% of GDP) || Source: EUROSTAT * indicates estimated figure using quarterly data. || Source: EUROSTAT * indicates estimated figure using quarterly data. Creating a
good investment climate, including for FDI in productive sectors, would reduce
external vulnerabilities by promoting a beneficial shift towards equity and
less volatile debt in Slovenia's overall financing. Despite its
high-quality workforce and location close to main EU markets, Slovenia's inward FDI stock stood at only 31% when the crisis hit in 2009, compared to 78% in Hungary and 58% in Slovakia. Slovenia scores "below expectations" on the basis of
comparison of the FDI Attraction Index with the FDI Potential Index.[6] This
confirms it is among the catching-up economies that have received less FDI than
would be expected based on economic determinants. Significantly increased FDI
would be beneficial, for growth and external sustainability. FDI in productive
activities could provide much-needed equity to the real sector and bring fresh
capital and improved risk management to banks, thereby allowing credit growth
to resume in the future. FDI could also reinforce corporate governance and
promote external balance by bringing higher technology content manufacturing,
strengthening integration into international supply chains and opening up
access to growth or niche markets. Finally, FDI is a key portfolio
diversification tool for a small open economy such as Slovenia, allowing a wider range of investors to shoulder Slovenia-specific risks and
opening up space for diversification of Slovenian balance sheets. 2.3. Competitiveness
and export performance Slovenia’s
competitiveness remains to be re-established. This is in line with the
2012 IDR assessment. With wage growth still low, nominal unit labour
cost (NULC) growth has decreased, with the indicator falling below the
scoreboard threshold. This is reflected in a slight depreciation in the
ULC-based measure of the real effective exchange rate (REER ULC). However,
sustained NULC and price growth below that of Slovenia’s trading partners will
be necessary to repair previous cost-competitiveness losses, especially from
the 2007-09 period. Necessary corporate balance sheet repair could also absorb
initial labour cost reductions by improved profitability, thus helping in the
sectoral allocation of capital. Lack of competitiveness will hold back exports
and disincentivise FDI. Moreover, as policy currently stands, there are strong
built-in dynamics in both public and minimum wages that could reignite adverse
trends in the coming years. Pressure on wages is to be expected 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. Graph 8: Decomposition of developments in ULCs || Graph 9: Developments in Real Effective Exchange Rates || Source: Eurostat & Commission services 2013 WF || Source: Eurostat & Commission services 2013 WF Improving
cost competitiveness, notably in terms of labour costs, could make a key
difference in preventing the return of external imbalances. Competitive
labour cost levels would contribute to positive trade and current account
developments and help Slovenia become a more attractive investment location.
The government has cut nominal public sector wages by around 3% in net terms in
2012 and has envisaged cutting the wage bill by 5% in 2013. Although this only
indirectly affects the tradable sector, this is one of the government's main
levers in containing wage costs. There are currently no plans to pull the other
main lever available – alteration of minimum wage adjustment (see Box 1). Box 1: The minimum wage in Slovenia[7] A hike of the minimum wage in 2010 contributed to the loss in price competitiveness and was ill-timed given rising unemployment. In March 2010, the minimum wage increased by about one quarter, from 597 to 734 Euros per month. At the same time, the number of minimum wage recipients more than doubled. The large discretionary adjustment in the minimum wage coincided with the period of economic slowdown and interrupted the on-going deceleration in the wage growth.[8] The increase in the minimum wage was exceptionally high not only compared to its developments in the last decade but also compared to average yearly increases in inflation and labour productivity over the same period. The minimum wage was also pushed well above the basic wages negotiated in some sectoral collective agreements, even for tasks requiring medium education. At the beginning of 2011, 2012 and 2013 the minimum wage was adjusted by the inflation rate in the previous year, resulting in a further increase of the minimum wage by 6.7% to the level of 784 Euros per month in 2013. In 2011, Slovenia was placed among the EU countries with the most expensive minimum wage workers compared to the average wage workers, measured both in gross terms and in terms of the labour costs. The high level of the minimum wage is estimated to have a significant negative impact on employment and to delay employment recovery.[9] Graph 10: Unit labour costs, compensation per employee, labour productivity, y-o-y growth rate || Graph 11: Minimum wage, inflation and labour productivity, y-o-y growth rate || || || Source: AMECO || || Source: Ministry of Labour, Family and Social Affairs || Graph 12: Minimum wage and the number of minimum wage recipients || Graph 13: Costs of the minimum wage worker compared to the average wage worker, 2011 || || *The lowest amount set in the legislation Source: Institute of Macroeconomic Analysis and Development (2012). || Source: Eurostat (wages in gross terms); Commission services; Joint European Commission-OECD project, using OECD Tax-Benefits models (labour costs) || Although the
minimum wage is below the relative poverty threshold, the risk of poverty
among the employed is low. Net income of minimum wage workers is not
sufficient to reach the relative poverty threshold (60% of median equivalised
disposable household income); however, net income of minimum wage workers is
among the highest in the EU when compared with average wage workers. The
at-risk-of-poverty rate of employed persons is low in Slovenia compared to other EU countries, including of the workers with primary education
who tend to be low-paid. The main cause of poverty is unemployment, thus
increases in unemployment as a result of inadequately high minimum wages may
actually increase overall poverty. Graph 14: Net income of the minimum wage worker as a % of net income of the average- wage worker, 2011 || Graph 15: In-work at-risk-of-poverty rate, 2010 || Source: Commission services; Joint European Commission-OECD project, using OECD Tax-Benefits models, Eurostat || Source: Eurostat, Commission services Employment protection legislation in Slovenia used to be among the
most rigid in the EU, which may also have limited the attractiveness of Slovenia as a production location and imply upward pressure on wages.
Using the OECD indicator, Slovenia stood out in its tight regulation of
permanent contracts, notably in case of individual dismissals. In addition,
outcomes on the labour market point at labour market segmentation, above all
among the young, stemming from a very high and increasing share of newly
concluded contracts for a definite period and relatively low transition rates
from temporary to permanent contracts. Graph 16: Employment protection legislation, individual dismissals, 2008 || Graph 17: The share of temporary employees in total number of employees aged 15-24 || Note: Scale from 0 (least stringent) to 6 (most restrictive) Effects of reforms after 2008 are not taken into account. Source: OECD, Commission services || Source: Eurostat, Commission services Strict
employment protection legislation reduces the adjustment capacity of the
economy and causes labour market segmentation. Rigid
employment protection legislation may have hampered the necessary re-allocation
of labour across firms and sectors, including away from state-owned enterprises.
By hindering adjustment in the quantity of labour inputs, strict employment
protection also transmitted output falls during recessions into falling labour
productivity. In contrast, when labour demand recovers, it will favour wage
growth over employment growth. By reducing labour turnover and by boosting the
wage bargaining power of insiders, rigid employment protection legislation may
accentuated wage pressures throughout the economic cycle. Furthermore, to the
extent that employment protection legislation increased the effective labour
costs borne by employers, it could also have translated into a loss of price
competitiveness and reduce investment, including FDI. Slovenia
recently revised employment protection legislation with a view to fostering job
creation, tackling segmentation, and enhancing the adjustment capacity of the
economy. The key measures aim at strengthening incentives for firms to use
permanent contracts as a rule. To this end, the regulation of permanent
contracts has been relaxed by streamlining dismissal procedures in case of
individual and collective dismissals, and reducing dismissal costs for workers
with longer tenures. Conversely, protection of fixed term contracts
is increased to curb abuse. The reform also introduces temporary/mini jobs for
retired persons and financial support to both employers and employees during
the notice period in case of consensual dismissals. While
the reform goes in the right direction, it may not be sufficiently ambitious to
have a substantial impact on the labour market and flexibility. In addition,
new restrictions on the chaining of fixed term contracts may have a negative
impact on job creation. Finally, the reform does not address the
problems associated with the extensively used and under-regulated “student
work” status. Over
burdensome regulation of professional services has been identified as
detrimental to the business environment. Slovenia has over 300 regulated professions (the EU average per country is below 200). Slovenia is also among the member states which relatively frequently impose specific
qualification requirements not linked to professional titles (notably in the
areas of tourism and security services). Unjustified qualification-related
entry barriers in professional services, such as reserves of activity, can
hinder competition and increase costs for businesses and households. A reform
process was launched in 2012, with legislative changes foreseen for the craft,
tourism and construction sectors in early 2013 and other sectors due to follow.
In parallel as a tool for improving the overall business environment, efforts
are being made to develop a fully operational Point of Single Contact for
online completion of administrative procedures in the services sector by 2015. Slovenia has not yet
adopted a plan for the transition to e-procurement and is one of the EU Member
States with the least developed infrastructure in this area. This means
that the significant economic benefits of e-procurement (including greater
transparency, faster procedures and more competition) are currently not being
fully exploited in Slovenia. After years
in which Slovenia did not keep up with the gains in export market shares of
other catching-up economies, adverse cost trends have coincided with a decline
in export market shares. Slovenia now breaches the AMR scoreboard
threshold with a cumulative three-year loss of market shares of 6.4%,
principally because of losses incurred in 2010. In that year the country failed
to benefit proportionally from the sharp rebound in world trade and the minimum
wage saw a large upward adjustment. The overall pattern of trade has remained
similar in 2012, with early signs of some strengthening of exports beyond the
EU which have previously been weak. Modest gains in export market shares are
forecast until 2014, the period covered by the Commission services’ 2013 Winter
Forecast. The impact of weak export performance, including on account of losses
in competitiveness, is significant as exports are the largest demand component
in the Slovenian economy, amounting to over 75% of GDP. As a result, even if
economic reforms were to lead to only small increases in exports, these can
have significant positive effects on external balance, growth and employment. Graph 18: Export growth net of global import growth (in pps.) || Graph 19: Export market share growth (% y-o-y) || Source: Commission services' calculations based on UN COMTRADE data || Source: EUROSTAT Weak export
performance also reflects weaknesses in non-cost competitiveness. As described
in the 2012 IDR, Slovenia’s industrial structure is still largely dominated by
low-to-medium technology and labour intensive products. There is also a
structural services surplus based on tourism and road haulage. Relevant factors
that may play a role in non-cost competitiveness are Slovenia’s niche in global
supply chains together with other factors such as product marketing and
quality. ECFIN estimates for exports and imports disaggregated by product show
no strong trend in Slovenia compared to other countries during the interval
1995-2007; there has been neither a substantial increase in the success of
exports in foreign markets nor a substantial increase in the proportion of
domestic production seriously challenged by imports.[10] This may
indicate a failure to capitalise sufficiently on European integration and the
catching-up potential. New ECFIN estimates[11] indicate
that Slovenia ranks relatively high in the EU in terms of the import content of
exports and of investment, as might be expected from a small
manufacturing-oriented country with limited natural resources and a sizeable
intermediate goods sector. This is especially the case as regards goods. Given Slovenia's position in the supply chain, cost-competitiveness and adjustment capacity are
key to responding to demand shocks. 2.4. Private
sector indebtedness Private
sector debt levels (as a percentage of GDP) remain below the euro area average,
but still contribute disproportionately to the weakness and adjustment needs of
the Slovenian economy. As described in the 2012 IDR, debt levels
increased fast during the boom but remained below the AMR scoreboard threshold
given the low starting level as well as the stalling credit growth since 2009.
Slovenian households have only moderately participated in the credit boom.
Lending to households for housing purchases continued to grow in 2009-10 but
has since faded. In contrast, the indebtedness accumulated by non-financial
corporations in only a few short years before the crisis was frequently out of
proportion with their debt-service capacity. Commission estimates of
deleveraging pressures based on corporate assets confirm that Slovenia is in the group of countries where rapid corporate debt build-up has led to
deleveraging pressures even in the absence of high debt-levels in absolute
terms.[12] Graph 20: Decomposition of debt (% of GDP) || Graph 21: Sectoral contributions to credit growth (%) || || || Source: EUROSTAT || || Source:
ECB Slovenia continues to face corporate and
bank over-indebtedness and the deterioration in asset quality triggered by the
recessionary environment. While these imbalances
are not signalled in the AMR scoreboard, where no indicator exceeds the
threshold, the 2012 IDR diagnosis remains valid. The fallout from the 2009
recession continues to put the balance sheets of thinly capitalised banks under
considerable strain. The state has already had to step in several times to
recapitalise the banks it owns. The fact that the economy is in a double-dip
recession is aggravating these trends. The economy is therefore undergoing a
necessary but difficult deleveraging process, with the stock of non-financial,
private sector credit shrinking at around 5% on an annual basis in nominal
terms. Credit to non-financial corporations continues to fall, as banks write
down loans and readjust their lending volumes to their domestic deposits base.
Despite this, corporate debt-to-equity ratios remain high at 144%. Composite
indicators rank Slovenia alongside countries where strong deleveraging
pressures arise from both lending supply and demand factors.[13] The in-depth
analysis in section 3.1 provides an update on the situation in the banking
sector and the state-of-play of the policy response. Access to credit from Slovenian banks has
deteriorated for non-financial corporations. Credit
to non-financial corporations declined by 10.2% in 2012. Corporate credit (for
loans above EUR 1m) is more than 2 pps. more expensive in Slovenia than in the euro area as a whole and this margin has increased again in 2012.
Non-financial corporations' demand for loans has amounted to around 130% of new
loan volumes over the last two and a half years according to the Bank of
Slovenia (BoS survey results). However, the same source reports a decrease in
creditworthy demand, which can be related to the poor financial prospects of
the corporate sector. Credit transactions fail to be concluded mainly due to
banks' stricter credit standards and corporations' rejections of credit
conditions. For these reasons, some non-financial corporations have resorted to
issuances of short-term commercial papers. This replaces long-term corporate
bonds and credits from abroad, although the latter funding source has
stabilised recently. 2.5. Asset
market developments Activity on financial asset markets
remains very subdued with little issuance of bonds or shares. Stock market valuations remain depressed and liquidity at the Ljubljana stock exchange remains limited. Corporate bond issuances, which had provided a
measure of relief from the credit crunch for larger companies, are down from
EUR 77m in 2009 to zero as of October 2012. Graph 22: Slovenian blue-chip stock market index (SBITOP) || Graph 23: Activity on the Ljubljana stock exchange || Source: Bloomberg Note: All companies in the index are at least partially state controlled. || Source: Bank of Slovenia House prices,
which had seen only a small correction since the crisis, may now be falling in
a more sustained manner. As of
2012Q3 Slovenian house prices were about 24% below the 2008 peak in
inflation-adjusted terms. About half of this adjustment came from a nominal
reduction, while the rest was due to consumer price inflation. The
inflation-adjusted house-price fall is moderate compared to other new Member
States (e.g., -31% in Hungary and Poland, -44% in Estonia, -64% in Romania). The nominal adjustment continues to be volatile: a slight nominal increase in Q2
followed a fall in Q1. Transaction volumes on the real estate market in Q2 were
significantly reduced relative to the 2007 average, down 59% for newly built
dwellings and down 30% for existing dwellings. This reduced housing market
liquidity could suggest that any ongoing price adjustment is slowed down by
institutional and behavioural frictions. Such frictions could arise when banks
opt against disposal of their property holdings at market-clearing prices that
would imply recognition of significant losses. Graph 24: Housing and Mortgage Market (levels) || Graph 25: Housing and Mortgage Market (growth) || Source: EUROSTAT, ECB, OECD || Source: EUROSTAT, ECB, OECD House price valuation methods signal a substantial additional correction
potential.[14]
As of 2011Q4 the price-to-rental and the price-to-income ratios were above
their averages over the period 2003-11 (by about 8% and 7%, respectively).
However, the effective overvaluation might be higher, as the sample available
for calculating the Slovenian long-term average does not cover one full cycle.
The corresponding bias is probably above 11%, approximated by the average of
the price-to-rental ratio for the euro area over the period 2003-11 compared
with the long-term average over 1996-2011. Given that the pre-crisis upturn in
the euro area as a whole was probably more moderate than in the new Member
States, this estimate would be a conservative lower bound for the bias. An
adjustment potential is also signalled from a fundamental model of relative
house prices.[15]
Based on the Commission services’ forecast for GDP growth, the current
long-term trend for house prices is about 10% below 2011 levels, and could drop
further if fundamentals continue to deteriorate in 2013. A caveat due to the
short data history applies here as well, and leads probably to an
underestimation of the gap.. This has potential implications for loan
collateral values and banks´ soundness. Characteristics of the housing market, such as Slovenia’s high home
ownership rate, do not explain house price resilience, since potential buyers
are likely to be affected by credit constraints.
Arguably, the home-ownership rate is high, at around 81%. In the Slovenian
housing market price resilience could point to the fact that marginal
transactions on the market rely on specific parts of the population, such as
younger, first-time buyers, that could be particularly sensitive to
developments in the credit market. Credit tightness, coupled with stocks of dwellings
that might ultimately need to get on the market, is therefore increasing the
chances of a housing price correction and corresponding adjustments to real
estate collateral. Housing investment has receded significantly, but adjustment is not such
as to lower pressure on house prices.
The current fall of 33% below 2007 levels (40% in real terms) does not seem to
fully reflect the fall in transactions in new homes (as discussed above). It is
thus likely that some of the newly built dwellings are currently kept out of
the market as a result of various institutional and behavioural mechanisms at
play (e.g. strategy of developers, relationships between banks and construction
sector borrowers). Building permits are down about 70% from the 2007 level and
have thus fallen considerably deeper. This sharp fall possibly reflects the
absorption of the backlog of old permits and suggests that the pipeline will be
adjusting over the coming period. 3. In-depth
analyses 3.1. Banking
sector vulnerabilities Slovenian banks
face increasing challenges. The large, state-owned banks, and possibly some
other banks, need additional capital again. The necessary deleveraging process
is accelerating as wholesale lenders are repaid and the deposit base has
reduced.[16] Credit
quality has deteriorated further, leading to higher loan-losses now and, due to
the lagged booking of impairments, also in 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. Repeated and
increasing recapitalisation needs are concentrated in state-owned banks, Some of the
smaller, privately owned domestic banks also face challenges. Additional
capital would strengthen confidence in the banking sector. If required for
regulatory reasons, as already repeatedly done in the past (see Box 2) the state is likely to provide this at least for the largest three banks which are
majority state-owned.[17] A durable
return of confidence would benefit from banks resolving distressed loans and
demonstrating a viable business model, including solving the governance
challenges in state-owned banks (see section 3.2 for the implications of
continued state ownership of the three largest banks). Box 2: Recapitalisation of NLB, NKBM and Abanka The Nova Ljubljanska bank (NLB) continues to generate substantial fiscal costs. NLB Group is by far the biggest banking group in Slovenia, with assets amounting to around 23% of the total assets of the banking system and (25% for total loans and advances to non-banks) as of the end of 2012, down from 29% at the end of 2009. NLB Group is experiencing sustained deterioration of the quality of its loan book, which resulted in a net loss for the fourth consecutive year in 2012. NLB Group's insufficient capital base was identified by European Banking Authority (EBA) in 2011. To address the situation, further strengthening of the core Tier I base was recommended. On 2 July 2012 the Commission temporarily approved, under EU state aid rules, an additional capital injection to the NLB for reasons of financial stability. A contingent convertible bond (CoCo) worth EUR 320m, direct cash injections worth EUR 63m from state-owned funds and restructuring of existing subordinated instruments yielded a capital increase of around €500m. This increase, together with some restructuring of risk weighted assets, increased the Core Tier 1 capital ratio to 9.5% to comply with the EBA recommendation of autumn 2011. The state's share (direct and indirect) increased by 5pps. to around 64%, while the share of erstwhile strategic investor KBC declined to 22%. At the end of 2012, KBC sold its remaining shares to the Slovenian state at a substantially reduced price (less than 1% of what it paid in 2002) as part of its restructuring under state-aid rules.[18] Losses recognised since the recapitalisation brought Core Tier 1 capital excluding the CoCo below 7% thus triggering conversion[19]. Further capital needs would be exposed in the process of transferring assets to a Bank Asset Management Company (BAMC, see below). Moody’s downgraded NLB’s credit ratings with negative outlook on 12 March, citing capital needs, ongoing material losses and the expectation of further losses in 2013. Recapitalisation needs also emerged for NKBM and Abanka, banks whose shares trade at low price-to-book ratios. NKBM, the second biggest bank in the country and majority state-owned, raised fresh capital of EUR 104m in April 2011, which allowed it to successfully pass the EBA stress test of summer 2011. Nevertheless, after posting losses as a result of further deterioration of its asset quality, the need for fresh capital re-emerged in 2012. In October a further increase was launched, producing a net positive effect of EUR 182m on capital position for regulatory purposes through a mix of measures including the sale of a subsidiary insurance company (see also Box 3), buy-back of subordinated instruments, the sale of assets pledged as collateral and further scaling down of risk-weighted assets. With a hybrid loan by the government,[20] the Core Tier 1 ratio reached 9%, thus meeting the requirement by the EBA, before the end of 2012. On 18 March 2013 NKBM announced it would trigger conversion of this instrument, subject to the approval of the supervisory board in April.[21] Meanwhile, Abanka, the third biggest and also majority state-owned bank,[22] is also looking to raise new capital. An initial attempt to issue new shares in summer 2012 failed due to insufficient interest at the high asking price. The exercise was re-launched in December at a significantly lower asking price, but again failed to attract sufficient investor interest. After these two failed-attempts, the BoS has accorded Abanka a further extension to raise the required capital by 31 July 2013. There are also long-standing merger talks with Gorenjska banka, a somewhat smaller but better capitalised, majority privately-owned bank in which the state holds a blocking minority share. The viability of such a merger would need to be assessed by the owners of both banks. The shift
away from foreign wholesale funding has continued, but further deleveraging
will be needed in the absence of new sources of replacement funding. After the
onset of the crisis, banks issued bonds, some of which were backed by government
guarantees, and competed to attract more deposits. Help from the government and
from the ECB, whose LTROs now amount to 8.5% of the sector balance sheet,[23] together
with cumulative deleveraging of around 10% over 2009-2012, have enabled banks
to repay around half of their foreign liabilities. However, other sources of
replacement financing will be difficult to mobilise. Banks under majority
foreign ownership previously reliant upon funding from their parent
institutions intensify competition for retail deposits.[24] As a result,
interest margins are being squeezed, raising risks to profitability.
Furthermore, in a new development since the 2012 IDR, domestic deposits have
started contracting on aggregate, declining 4.8% in nominal terms in the first
nine months of 2012.[25] This
development is principally observed at domestically-owned banks. It has so far
been explained by one-off factors, notably the contraction of government
deposits,[26] but still
requires close monitoring, particularly on a bank-by-bank level. Finally, the
balance sheet of the development bank SID, which was used to partially offset
deleveraging over the past three years, has been significantly expanded. With
wholesale funding opportunities unlikely to return and given the time limits on
the ECB’s extraordinary LTRO policy, funding pressures are likely to push the
sector into further deleveraging on an aggregate level and potentially also
rationalisation such that, bank-by-bank, funding needs and funding sources
(particularly deposits) come closer into alignment. Graph 26: Financing of the Slovenian banking
sector Source:
ECB, Commission services
calculations Credit
quality has deteriorated further since spring 2012 with the decline
concentrated in the impaired balance sheets of the state-owned banks.
Non-performing loans (NPLs), defined as arrears over 90 days, ran at a rate of
5.4% at the end of 2009. By the end of 2011 this had risen to 11.2% and by the
end of 2012 still further to 14.4%. In the corporate segment, NPLs were at 24%
by the end of 2012, up from 18.5% a year earlier. NPL trends have remained the
most negative in the large state-owned banks. The construction sector remains
the most afflicted, with NPLs now standing at 61%, but the increase in NPLs from
11.1% to 17.4% for the manufacturing sector also has a large impact as the
sector accounts for over a quarter of the non-financial corporate sector (NFC)
portfolio. NPL ratios pertaining to smaller segments such as financial services
and real estate activities have also continued rising. Indeed, all sectors now
show NPL ratios in excess of 10% with the exception of primary industries and
utilities. These ratios are understated, to the extent that they are reported
in proportion to total exposures[27] rather than
total loans. Furthermore, some of the loans classified as performing have
formally been restructured or rescheduled, and the data on households have not
been refreshed since end-2011.[28] Graph 27: Non-performing loans, % of gross loans || Graph 28: Overdue 90 days+ classified claims by sector, €m || || || Notes: NPL ratio definitions vary between banks and between annual reports and statistical returns to the Bank of Slovenia (which compares NPLs to classified claims, which is a broader concept than gross loans) Abanka Vipa: from Annual Reports, 2012 H1 from semi-annual report NLB: from Annual Reports, 2012 H1 from Fitch NKBM: from Annual reports, 2012 Q3 from interim report Majority foreign-owned: from Bank of Slovenia (classified claims concept) || *Includes sole traders but other households not yet available Source: Bank of Slovenia reports, Commission services calculations || Credit
quality deterioration has led to a further acceleration of losses. Impairment
costs of EUR 1,206m in 2011 drove a before-tax loss of EUR 539m. The trend
continued in 2012, with impairment costs up by around 32% according to
unaudited figures, driven by a 32% increase at NLB and a 92% increase at NKBM.
This led to losses in 2012 over 40% larger than in 2011, despite one-off
factors boosting income.[29] As discussed
in the 2012 IDR, loan losses are recognised with a significant lag after the
materialisation of loan arrears. In part, this is due to how provisioning rules
are specified. In this respect, NPL increases observed in 2012 would drive the
recognition of further losses in 2013 and 2014. At the same time, the scope for
banks realise one-off profits seems to be largely exhausted after the
discounted buy-back of hybrid instruments in 2012. Graph 29: Banking system P&L (€m) Note:
Pre-impairment profit is calculated as gross income minus operating expenses.
2012 gross income is boosted by one-off profits on buy-back of hybrid
instruments, so the graph also shows pre-impairment profit arising from net
interest income (calculated as net interest income minus operating expenses) to
strip out these one-off effects. Source:
Bank of Slovenia reports, Commission services
calculations The key
question for the Slovenian banking system is how far credit quality
deterioration and loss increases will go given the worsened economic climate. Banks are
deleveraging by scaling back new lending, which is partly demand-driven, so
they are increasingly reliant only on legacy portfolios. Furthermore, migration
matrix analysis based on Slovenia’s A-E classification system reported by the
Bank of Slovenia (BoS) shows a distinct negative trend in loan ratings in the
year to September 2012. 15.9% of doubtful, so-called C-classified, loans became
non-performing (D classified), with ratings downgrades outweighing upgrades by
a balance of 22.7%. For non-performing D claims, the trend was even more
distinct, with 44.9% of them migrating to the E category, which usually
corresponds to write-off – with downgrades outweighing upgrades by a balance of
40%.[30] Credit
quality in the corporate segment will either improve or deteriorate depending
on the balance of two effects: (i) a mechanical reduction of the NPL ratio as
loans to the main corporate casualties of the 2009 recession are written off[31] and (ii) a
second wave of defaults caused by the double dip. A second wave could involve
previously stronger firms that fully used their shock absorbers in 2009-2011
(cost cutting, bank forbearance and lower interest rates) and therefore can be
tipped into default more easily compared with the previous downturn.[32] Several new
assessments point to potential future losses. The BoS and the IMF
performed stress tests in April 2012 as part of the Financial Sector Assessment
Programme (published only in December, and therefore not available in time for
the 2012 IDR, IMF 2012a). These estimates pointed to a Core Tier 1 capital
shortfall of approximately 3½% of GDP by 2013 in the baseline scenario, rising
to around 5% in an adverse scenario (with slight variations depending on
methodology). For the subset of large, domestically-owned banks, the stress
scenario suggested a shortfall of approximately 4½% of GDP under an adverse
scenario to reach the EBA threshold of 9% core equity tier 1 set by the 2011
Recapitalization exercise. Separately in mid-2012, third-party due diligence
exercises were conducted in the three main state-owned banks which constitute
the bulk of the domestically-owned, large banks. This corresponded to the
country specific recommendation to obtain third-party verification of
stress-loan-loss estimates. The government subsequently earmarked EUR 1bn for
recapitalisations (around 2¾% of GDP) in the Act on Measures of the Republic of Slovenia to Strengthen Bank Stability. This is understood to correspond to
the need for write-downs identified in the due diligence reports, net of the
July 2012 NLB recapitalisation of slightly below 1½% of GDP (see Box 2). The due diligence-based figure of 2¾% of GDP and the IMF/BoS figure of 4½% of GDP for
large domestic banks can therefore be usefully compared and seem to point to
additional capital needs of a similar order of magnitude. While some
recapitalisation has taken place since these alternative estimates were
produced (also in NKBM), the underlying macroeconomic outcomes and forecasts
have also been revised significantly downwards. Asset
work-out is at the heart of a solution for the banking sector. The factors
highlighted in the 2012 IDR remain problematic, notably dealing with bankrupted
construction and holding companies and their associated real estate and share
collateral, managing loans in arrears and enforcing claims, if necessary
through frequently unsatisfactory insolvency proceedings. After previous
attempts to co-ordinate the resolution of claims and shareholdings within bank
consortia stalled, the government has legislated to create legal instruments
allowing the removal of problematic legacy assets from the banking system.[33] The Stability
of Banks Act came into force in December 2012. It provides a framework
for issuing state-guaranteed securities to fund the transfer of legacy assets
from banks to an asset management company (BAMC) or a special purpose vehicle
(SPV) together with recapitalisations to address the losses crystallised as a
result of transferring assets at long-term economic value (generally below book
value). In line with state-aid rules on asset valuations, the transfer of these
troubled assets into a state-guaranteed fund would crystallise a capital
shortfall in participating banks which the government intends to simultaneously
cover through cash recapitalisations. After transfer of these assets, the BAMC
would be responsible for asset work-out until 2017 when the assets would revert
to the Slovenian Sovereign Holding (SSH). The BAMC would aim to consolidate
claims and shareholdings and achieve substantial financial restructuring of the
corporate sector. The government currently foresees funding the transfer of
assets with up to EUR 4bn of government-guaranteed bonds and making good any
capital shortfalls with up to EUR 1bn of cash contributions. Implementation
of the BAMC (or separate special-purpose vehicles, SPVs) is at an early stage,
with challenges lying ahead. The by-law adopted on 13 March 2013 specifies
some operational processes, particularly around the modalities of asset
selection and granting of government guarantees. Furthermore, it provides a
methodology for determining the long-term economic value of loans and some
criteria for admissible valuations for other risk items. It lists the types of
assets that can be transferred: besides standard loans, the by-law specifies
capital stakes and real assets acquired through enforcing collateral rights;
capital stakes that together with loans form a business whole for the
transferring bank; a wide range of off-balance-sheet risk items; and any other
assets that may reduce the participating bank’s ability to meet its capital
adequacy requirements. The wide range of types of risk item eligible for
transfer means significant flexibility and discretion are retained. The
selection of participating banks and the basis for opting between transfer to
the BAMC and transfer to an SPV also remain subject to administrative
discretion. It is anticipated that guidelines will be issued providing
additional details pertinent to a more complete economic assessment of the
policy and it may well be that the policy, its costs and its effects become
clear only after selection and valuation of specific assets has occurred. Some
of the important open questions pertain to: (i) the nature of the assets
actually to be transferred (as opposed to just eligible to be transferred),
(ii) impairments accounted for to-date on these assets. (iii) which banks will
be involved, and when, (iv) the number and frequency of transfers planned, (v)
the structure of debt instruments to be issued by the BAMC, and (vi) the BAMC
business plan on maximising recovery value and asset management solutions. In the short
term, the BAMC (or SPVs) can strengthen banks’ balance sheets. It aims to
achieve this through purging a lot of risky assets from bank balance sheets,
replacing them with potentially ECB-eligible BAMC debt instruments, thus easing
funding pressure on the banks. [34] The transfer
of assets to the BAMC would also crystallise losses, thus bringing forward and
revealing capital shortfalls. The transfer value may, according to the bylaw
approved mid-March, also be reduced by up to 3% of the asset value to cover the
administrative and operational costs of the BAMC for managing the assets. Bank profits
and losses would further be affected going forward, losing the revenue streams
associated with transferred assets in return for interest on BAMC bonds and
possible further remunerations to the BAMC to cover costs.[35] In all cases,
the sovereign-bank feedback loop is maintained or strengthened. Banks retain
government bonds (in all cases), gain state-guaranteed assets and contingent
claims on the state (in case the BAMC or the APS is applied) while the
government increases its substantial direct and indirect ownership stakes in
the sector (in all cases). Banks will also be subject to restructuring
requirements under state-aid rules. In the
medium-to-long term, recapitalised banks with cleaned (or guaranteed) balance
sheets could become more attractive to potential investors. The
attractiveness is crucially contingent on a wider set of factors, including the
will of the government to reduce ownership below the "blocking
minority" threshold of 25%+1 share as well as Slovenia’s growth prospects
and the appetite of investors for European banks more generally. Whether banks
sustainably return to profit will also depend on improved management while the
Stability of Banks Act gives the Ministry of Finance strong powers to shape the
business planning of banks transferring their legacy assets. These powers could
be used to strengthen the banks but it should be avoided to use these powers to
promote credit flows to favoured categories of borrowers with inadequate
creditworthiness. The success
of the work-out phase will depend inter alia on the speed at which the BAMC can
become fully operational. The BAMC will need to quickly ensure key
operational prerequisites including skilled staff, the availability of banks'
restructuring plans, IT infrastructure, asset documentation and legal
prerogatives. The more numerous the assets, the more critical these
institutional underpinnings will be. The practicalities of substituting for
in-bank management of what might be a very diverse corporate portfolio finally
selected for transfer adds to the magnitude of the challenge facing the
Slovenian BAMC. The BAMC’s ability to break even will ultimately reflect the
realism of transfer prices, market conditions, the efficiency of the BAMC and
the trade-off between minimising losses to the taxpayer and exercising
forbearance to keep companies in business. Given the lifespan of the BAMC and
the potential shortfall of realisable values below long-term economic value
within this period, policymakers face a choice between actively running off the
portfolio, even at the cost of realising losses, or transferring a sizeable
rump of legacy assets to the SSH[36] in five
years’ time. Fiscal costs
for recapitalisations could exceed EUR 1bn over time and will likely be
deficit-increasing. The EUR 1 billion currently earmarked for
recapitalisations (which can be increased if necessary), according to the
explanatory memorandum, may well be needed in its entirety given the potential
capital shortfalls discussed above. To recapitalise with cash, Slovenia will need to raise the corresponding amounts on financial markets. The
government-guaranteed bonds that would be used to pay for transfers are likely
to be debt-increasing, subject to a Eurostat decision. If the BAMC makes losses
during its lifetime (or losses are incurred on guaranteed assets in an APS),
the guarantees could also generate future deficits. The adequate
use of the new supervision and resolution powers of the BoS are key to ensure
stabilisation of the financial system. The bank supervision
framework has been modernised. Changes to the Act on Banking entered
into force in December 2012. The wide powers of the BoS (the supervisor)
had not been extensively used previously as they were considered blunt,
ineffective and lacking in credibility. In addition to addressing drafting
defects, the changes allow the BoS to intervene faster, with more of a
forward-looking justification. The BoS also gets new powers termed
‘extraordinary measures’, including the power to transfer a bank’s assets. The
amendments to the Act on Banking, together with legacy asset measures described
above give policymakers in Slovenia new tools to intervene in failing banks. 3.2. State-owned
enterprises: a key source of macroeconomic imbalances and impediment to private
investment State
ownership has a significant role in the Slovenian economy with many features
remaining unchanged since the transition period of the 90s. The
privatisation and corporate restructuring tools adopted during the 1990s
resulted in the state remaining dominant, especially in the financial sector.
This is particularly evident in the area of large-scale privatisations and
corporate governance, where Slovenia has fallen considerably behind its peers.
Compared with other EU and euro-area Member States in Central and Eastern
Europe for the period 2004-2010, Slovenia has generated around 75% less in
privatisation revenues. Moreover, the state’s share of the banking sector is
now around three times as large as the average for this comparison group.[37] European
Commission pre-accession reports on Slovenia already highlighted the role of
these features in holding back development and competition, and hindering FDI
inflows.[38] This
in-depth section draws on publicly available information to provide a fresh
analysis of the state-owned segment[39] of the
Slovenian economy, from the perspective of economic performance and contingent
fiscal liabilities.[40] The size and
weakness of the state-owned enterprise (SOE) sector hold back economic
development and contribute to existing imbalances. State dominance and
frequently malfunctioning governance of state assets impede private domestic
and foreign investment. Cross-ownership of financial institutions and
corporates limits the adjustment capacity of the economy and delays the
restructuring process. A number of SOEs classified both inside and outside
general government accounts are facing challenging financial conditions. These
might even aggravate given the expected continued economic downturn.[41] Several are
accumulating losses and reducing equity value. Most companies are highly
levered and total debt of non-bank SOEs amounts to over 30% of the Slovenian
GDP. Recapitalisations of SOEs in 2011 weighed on government's budget by close
to EUR 0.5bn (1.4% of GDP, a large portion of which arose in the banking
sector) and SOEs and funds classified within the general government have gross
debt amounting to 5.4% of GDP on a non-consolidated basis. Also going forward,
SOE's subdued performance and delayed restructuring result in fiscal risks related
to further state recapitalisations and government guaranteed debt of SOEs. The
cross-ownership of SOEs in the non-financial sector with state-owned financial
institutions creates contagion risks and prevents the economy from adjusting. State
ownership encompasses a complex matrix of frequently financially-troubled and
debt-burdened banks, insurance groups and non-financial corporations,
which own each other. Some of these companies emerged weakened from the recent
economic and financial crisis and contribute to the increase of impaired assets
in the banking sector. Debt-to-equity conversions enforced on SOEs' defaulted
obligations strengthen the fiscal loops with the banking sector and the
sovereign. The density of these inter-linkages is manifested in the
state-bank-corporate nexus, with reciprocal risks for SOEs reliant upon
loss-making banks and banks exposed to loss-making SOEs.[42] Furthermore,
cross-ownership, cross-subsidy and cross-recapitalisation of SOEs and
state-owned banks combined with state influence and frequently sub-optimal
corporate governance soften budget constraints and create a business
environment where the normal allocative function of capital markets is
distorted. This impedes the deleveraging of banks and the required
restructuring of the corporate sector. Graph 30 illustrates the complex
cross ownership of SOEs and financial institutions. Graph 30: State ownership shares (%) – the
example of Intereuropa Notes: The
companies inside the general government (KAD and SOD) are shown with a solid
border line. The
computation of state ownership (shown in brackets) may not be fully exhaustive
due to complexity of shareholding structures and lack of publicly available
data. See also footnote 40. Source:
2011 AUKN report, 2011 Annual company reports, Commission services calculations The origin of
these inter-linkages can be traced back to the transition of Slovenia from planned to market economy in the 1990s. Privatisation in Slovenia was gradual and allowed for both paid and non-equivalent (i.e. voucher-based)
privatisation with the intention to start the development of capital markets in
the economy (Simoneti, 2001). The distribution of the shares followed the
envisaged final split as stipulated in the Ownership Transformation Act[43] (see Table 1). However, the overall bias in favour of
insiders' control, which could be explained by the business culture existent at
the time, predetermined considerable influence of managers and employees and
left ownership in the hands of highly fragmented but collectively powerful
internal groups with little incentives to improve profitability and restructure
companies. A secondary privatisation at a later stage aimed to consolidate
ownership interest over time and increase the share of strategic investors.
However, given the existence of powerful internal owners, strategic external
investors (both foreign and domestic) had difficulty in acquiring a controlling
share. The emphasis was instead on internal management buy-outs supported by
high levels of debt provided mainly by the state-owned banks, and on
distributing the remaining shares to state-owned funds. Thus, neither primary
nor secondary privatization attracted enough strategic investors or foreign
participation to allow for the restructuring of financially troubled companies
during the transition.[44] Table
1: Split of privatisation shares in Slovenia according to the Ownership Transformation Act Source:
Simoneti et al. (2001) State
dominance in key sectors such as finance, energy and transport is not conducive
to FDI, thereby delaying required internal rebalancing of the economy. All 10
companies included in the Ljubljana Stock Exchange’s benchmark SBI TOP index
are to a greater or lesser degree state-owned or state-controlled, with
potentially negative impacts on minority shareholders. This dissuades
investment and prevents equity financing from playing its full role in Slovenia’s development. A market environment open for private competition and welcoming for
investment is one of the main prerequisites for FDI. Instead, in Slovenia,
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 (e.g. banks, see Box 3 and 4 for a recent examples).
This thwarts the privatisation process required to boost productivity, deepen
capital markets and enhance technological spill-overs from FDI. Indeed, under
31% of GDP, the Slovenian inward FDI stock is one of the lowest among new EU
Member States (Graph 31 and section 2.2). Bulgaria, for example, has attracted
3 times as much FDI as Slovenia. Graph 31: Inward FDI stock comparison across countries
(% of GDP) Source:
United Nations Box 3: An example of maintaining state ownership Recent consolidations in the insurance sector may provide an insight into how access to the resources of better-performing SOEs can potentially be used to reshuffle assets among state-owned entities, to indirectly recapitalise state-owned banks under strain, and to maintain state ownership. NKBM, the second largest bank in Slovenia and 51.2% state owned, tried in autumn 2012 to sell its 51% share of the insurer Zavarovalnica Maribor (ZM) to reach a sufficient capital adequacy level. According to numerous reports various private, including foreign investors were interested in buying these ZM shares. One of these offers seem to have been higher than the successful bid but was conditioned on taking over at least 75% of ZM, i.e. reducing the public ownership below the blocking minority threshold, implying that reinsurer Sava Re (47.1% state-owned) would sell part of its 49% share.[45] However, Sava Re, instead of selling own shares in ZM, made also an offer for the NKBM share in ZM. In order to arrive at a sufficient amount Sava Re made this offer together with SOD (100% state-owned restitution fund, recapitalised by the Republic of Slovenia in 2011 and 2013 and itself one of Sava Re’s owners). In the end, Sava Re purchased 11.8% of ZM for EUR 15m and SOD spent EUR 50m for a 39.2% stake. SOD aims at withdrawing from ownership and Sava Re intends to buy the share from SOD after its IPO planned for spring 2013[46]. With a share
of at least 11% of total employment, SOEs have a material effect on labour
productivity and competitiveness of the Slovenian economy overall.[47] Taking into
account employment shares in the public and private sector (21% and 68%,
respectively), at least one out of eight employees in the corporate sector is
employed by SOEs. Graph 32: Employees in private, public and SOEs
sectors, December 2011 Notes:
Employment in SOEs captures employees in the 46 largest SOEs analysed so far
plus those in the state-owned banks. Public sector employees are those who are
employed in the government administration, health and education sector. Private
sector employees are calculated as a residual (total employment net of those
employed in the SOEs and in the public sector). Source:
National Statistical Office of Slovenia, 2011 AUKN report, 2011 Annual company
reports, Commission services calculations. A number of
SOEs are accumulating losses and debt, reducing their equity value and will
face viability risks if they are not restructured and recapitalised.[48] Debt and losses of the four entities consolidated within the GGA
(three funds and part of the railway holding) have a direct negative impact on
public finances. All four of these SOEs are highly levered and with gross debt
equivalent to over 1% of GDP each, with the exception of DSU, whose debt is
lower in absolute terms but equivalent to over 20 times its 2011 earnings. KAD
reported both negative EBITDA[49]
and a net loss in 2011 due to impairments on its portfolio companies. The
Railway holding also had to report a loss in 2011 following a prolonged period
of underperformance. These losses reduce equity and may raise recapitalisation
needs in the future. The negative or low levels of return-on equity (ROE)
reported by KAD, the Railway holding and D.S.U. suggest poor investment returns
for the state. About half of
the non-bank SOEs outside GGA are assessed as highly indebted. About one
quarter reports negative EBITDA and double digit negative return on equity.
Some have already been recapitalised by the state and several may need to be
recapitalised (again), absent an improved outlook. A further half of these
companies report net losses and negative ROEs. The remainder of these highly
indebted companies report low earnings and return on equity, which could
indicate either a general squeeze in profitability margins in the relevant
industry possibly due to the economic crisis, an inefficient management of the
underlying businesses, or debt-burdened capital structures (i.e. high interest
expenses). Conversely, the companies with relatively high ROEs may operate in
environments where firm-level efficiency is not the only determinant of
profitability.[50]
Furthermore, some of these firms may be less exposed to cyclical developments. The
state-owned insurance companies reviewed demonstrate reasonable profits and
coverage ratios of premium income over claims. Nevertheless, profits
may slow down going forward, with claims relating to the 2012 floods reducing
profits. According to the AUKN report, the Slovenian insurance sector in
general is marked by a reduction in demand for some insurance products,
particularly due to lower economic activity in the construction industry and
transportation. The report also states that financial investments represent a
greater proportion of the total assets of Slovenian insurance companies without
going into details on specific exposures. So far no significant direct exposure
of the insurance sector to risks coming from the banking system was discovered
(e.g. big CDSs and other credit insurance instruments exposures). However,
insurance companies are exposed to risks given tightening conditions in capital
markets and the industry's close link to both the banking sector and the rest
of the SOEs. Recapitalisations,
called state guarantees and other capital transfers to loss making SOEs
contributed 1.4 pps. to the budget deficit of 6.4% of GDP in 2011 (Table 2,
Graph 33).
This figure refers to deficit increasing capital injections as reported in the
October 2012 EDP notification tables. In addition, the figure captures only
direct recapitalisations and not the indirect recapitalisations (see Boxes 3 and 4); therefore it is underestimating the fiscal impact. Half of this amount (EUR
243m or 0.7 pp.) is attributable to the first recapitalisation of NLB, the
largest banking group in Slovenia. The remainder was distributed amongst other
loss-making SOEs in smaller capital injections, called state guarantees and
other claims as described in Table 4 (disaggregated information is not
available for the smaller transfers). Some of the recapitalisations were
carried out through the SOD holding, which is the only holding within the
general government that has officially been recording accounting profits over
this period, reporting EUR 115m of net profit for 2011; however, this profit
was mostly due to non-recurring items amounting to EUR 180mn on revenue level.[51] In addition,
SOD was recapitalised in 2011 by EUR 60m and KAD by EUR 90m. An additional EUR
20m of capital increase into SOD was done in 2013. KAD and SOD capital
increases are not classified as public deficit increasing one-off measures as
the two funds are consolidated with GGA.[52] Deficit
increasing recapitalisation needs apparently were lower in 2012; however they
may increase in 2013 (Table 2, Graph 33). For 2012, the
government has reported one direct capital injection of EUR 63m for the second
NLB recapitalisation. An additional EUR 37m of called state guarantees (less
repayments) appears in the government accounts in the October 2012 EDP
notification tables. Known potential recapitalisations in 2013 are related to
banks. In addition, NLB issued a contingent convertible (CoCo) bond of c. EUR
320m which was subscribed by the government in 2012 and was triggered in
February 2013. Conversion of NKBM’s EUR 100m hybrid instrument subscribed by
the government in the absence of immediate private interest was now also
triggered in early 2013 according to the bank’s management. Conversion of these
instruments is likely to be deficit increasing (see also Box 2).[53] Graph 33: SOE recapitalisations and other capital
transfers, 2011- YTD2013*, as % of GDP Source: October 2012 EDP
tables, Ministry of Finance, news releases. Commission services calculations. * 2013 figure includes all
transfers known as at mid-March including conversion of the NLB and NKBM
hybrids. Table 2: State aid and non-state aid SOE
recapitalisations and other capital transfers, 2011-2013 Source:
October 2012 EDP notification tables, Ministry of Finance, news releases
Notes:
The 2011 NKBM recapitalisation involved significant participation of
unaffiliated private investors, who acquired shares at precisely equal terms to
state-controlled entities. This amount is therefore not fully reflected in the
total.
CoCo bonds issued in 2012 for the NLB in the amount of EUR 320m Euros were
triggered in February, 2013.
Conversion of the NKBM hybrid instrument is announced for April and has been
taken into account in the calculations. Box 4: Indirect public recapitalisations of banks and impact of cross-ownership NKBM, the second largest banking group in Slovenia, has so far received c. EUR 170m in recapitalisations by state-owned undertakings. In 2011, it raised EUR 104.3m by means of public offering. The state participated indirectly by transferring its pre-emptive rights to acquire new share in the bank to three 100% state owned SOEs. In their capacity of pre-emptive right holders, those three SOEs acquired new shares in NKBM proportionately to the state's participation at the time, i.e. just enough to avoid diluting the overall state ownership below the initial 51%. In 2012, one of those companies, Posta Slovenije, which now holds a 6.6% stake in NKBM as a result of the above transaction, attributed EUR 5m of expected losses to devaluation of NKBM shares.[54] This compounds the financial pressure for the main universal service provider in the postal sector. In 2012, as described in Box 3, NKBM succeeded in improving its capital basis by EUR 65m through the sale of its insurance subsidiary to an SOE. Together with the 2013 hybrid loan of EUR 100m, this brings state involvement for the past three years to around EUR 218m. Accumulation
of losses indicates more recapitalisations of SOEs and banks will be required
beyond 2013. In 2011, a total of EUR 415.4m of net losses were generated
by a third of the SOEs reviewed. This is equivalent to 1.1% of GDP (Table 3, of
which 0.4% of GDP was consolidated with the general government deficit). The
amount increases to EUR 924.8m or 2.5% of GDP (no direct change in general
government deficit)[55]
including the three largest banking groups (NLB, NKBM and Abanka, as discussed
in section 3.1). The bulk of these losses were generated in companies outside
the general government. Continuing losses could be expected to deplete capital
to an extent that would require additional recapitalisations. Further
recapitalisations of SOEs and banks would likely be recorded as deficit
increasing one-off capital transfers.[56] Table 3: Overview of key non-bank SOE figures,
2011 Notes: In EUR millions (except
if stated otherwise), Employees: absolute number and share in total employment. Debt of insurance
companies is not included in the summary due to differences in business models.
Total net losses (net
profits) is the sum of losses (profits) of all loss (profit) making SOEs, both
inside and outside AUKN. * Total inside GG
comprises 100% of entities classified within general government but figures are
available only on a non-consolidated basis, so the impact on GG deficit and
debt after consolidation will be less. Furthermore the entire Slovenian Railway
holding is included even though only part of it is classified in the general
government due to data unavailability. SOEs covered by AUKN (a
subset of the companies included in the total) by sector: (i) ENER - Energy sector
(37.1% of book value of total government portfolio) (ii) TRAN - Traffic,
Transport and Infrastructure sector (32.0% of book value of total government
portfolio) (iii) CF - Capital Funds,
Companies of Special Significance (12.0% of book value of total government
portfolio) (iv) COMM - Post and
Telecommunications sector (8.6% of book value of total government portfolio) (v) FIG - Financial and
Insurance Groups Sector (8.5% of book value of total government portfolio) (vi) PI - Portfolio
Investments (1.4% of book value of total government portfolio) ** Companies with
leverage above 4 times EBITDA, i.e. reporting high levels of debt when compared
against their ability to produce cash flows. Some of them also have net losses
or even a negative operating profit (EBITDA). Source: 2011 AUKN report,
2011 Annual company reports, Commission services calculations. See also
Georvieva and Marco Riquelme (2013) for more details. Total debt of non-bank
SOEs is at least 30% of GDP, with a majority of this debt (26% of GDP) being
concentrated in highly levered companies. SOEs consolidated with
General Government Accounts (GGA) have debt equivalent to 5.4 of GDP (Table 3)
compared with the total government debt of 46.9% of GDP in 2011.[57] Debt of SOEs
outside GGA is 24.7% of GDP, with highway operator DARS being the largest
contributor with 8.1% of GDP. DARS poses a relatively high risk to the state
budget as its high level of debt, both in absolute and in relative terms, is
100% state guaranteed (Table 4). The government is exposed to other companies
on a smaller scale as it owns less than a 50% stake. Contingent
liabilities in the form of state guarantees are equivalent to 25% of GDP, and
SOEs are the main beneficiaries. This number covers various
types of state guarantees, e.g. for financing international trade, construction
and improvement of infrastructures, corporate restructuring etc. It excludes
state guarantees for interest payments and state guarantees outside the central
government. In addition to existing contingent liabilities, the envisaged BAMC
would increase state guarantees by up to a further 11% of GDP (EUR 4bn). The main risk in terms of contingent liabilities lies with the
loss-making Railway holding (and, as mentioned above, with DARS). Graph 34: Government debt, non-bank SOE debt and
contingent liabilities, 2011, as % of GDP *GGA:
General Government Accounts. Debt is reported on a non-consolidated basis. Source:
2011 AUKN report, 2011 Annual company reports, European Commission services
calculations Table 4: Main SOE beneficiaries of state
guarantees, debt principal, 30 June 2012 Source:
Ministry of Finance calculations, November 2012 The
government has decided on a new structure to manage its capital stakes. The Slovenia
Sovereign Holding (SSH) Act came into force in December 2012. The aim of the
SSH is to centralise the management of all investments owned by the Republic of Slovenia and the state funds. It requires the development of a classification
of investments, target stakes in capital investments and methods of sale. The
classification was adopted by the outgoing government and has not been approved
by parliament, where the process is currently suspended. It remains to be seen
how the SSH can achieve greater success than its predecessor, the Capital
Assets Management Agency (AUKN), in terms of privatisations and efficient portfolio
management. The 13 March coalition agreement foresees revisions to the
structure and operations of the SSH. 4. Policy
challenges Based on the
analysis in sections 2 and 3, a number of broad challenges can be highlighted
for Slovenia: (i) 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; (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 in relation to state ownership and labour
market institutions. 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 ensure sustainable public finances in the long-term. Challenges
identified under the MIP in the 2012 IDR and relevant policy responses were
reflected and integrated in the country-specific recommendations issued for Slovenia in July, 2012. The assessment of progress in the implementation of those
recommendations will take place in the context of the assessment of Slovenia's National Reform Programme and Stability Programme under the European Semester.
Against this background, this section discusses different avenues that could be
envisaged to address the challenges identified in this IDR. Banking
system and financial stability The
government has accelerated its policy response to the banking sector’s problems
since May 2012, but efficient implementation will require a sound strategy and
patient work on important technical details. As assessed in the
in-depth section, current policies include the establishment of (i) a range of
tools including an asset management company to carve problematic legacy assets
out of banks’ balance sheets, (ii) further state recapitalisations prompted by
regulatory requirements and (iii) an upgrade to the legal framework for banking
and bank supervision. As Slovenia moves into the implementation phase,
strategic and technical questions remain. Efficient implementation will be
challenging and technical expertise will be key. To regain
credibility and stabilise the financial sector, a new, independent and
transparent assessment could usefully form the basis for a comprehensive
strategy.
The strategic imperatives are regaining credibility and market access,
improving banks’ governance and profitability, and right-sizing and
strengthening banks’ balance sheets, while minimising fiscal cost and risk. A
new third-party asset quality review and a new thorough stress test are needed
to quantify the challenges and ensure that the strategy, the overall fiscal
envelope and the selection of tools are appropriate. These assessments would
ideally be conducted by internationally recognised consultants under the
guidance of a steering committee comprising the relevant international
financial institutions and the Slovenian authorities. The asset quality review
and stress test should cover the entire banking system (with the systemically
relevant banks constituting an absolute minimum) and would inform a system-wide
viability assessment. Publishing the approaches used, with underlying
assumptions and main findings, would help to maximise credibility. Based on
these findings, a strategy could usefully articulate how the fiscal resources
can be mobilised most efficiently in order to constitute a clear and quantified
roadmap. The fresh assessment can also provide information on legacy portfolios
that could help in selecting the most efficient legal tools, especially if a
mixed approach is required to cater for the diverse nature of legacy
portfolios. Strengthened
balance sheets alone are not sufficient to safeguard the soundness of the banks
concerned; privatisation would help improve corporate governance of these banks
and could potentially also provide fresh capital.[58] Privatisation
would help to address manifest corporate governance and credibility
deficiencies and would reduce implicit fiscal liabilities and sovereign-banking
contagion in the future. The former coalition agreement on retaining a blocking
minority in banks and insurance companies was a major obstacle in this respect,
while the 13 March 2013 coalition agreement is silent on bank privatisation. As
an interim measure while the bank equity market remains depressed, it is of the
utmost importance that governance of state-owned banks is improved
substantially and that a framework to ensure that banks operate at arm’s length
is put in place. Continued
strengthening of the supervisory framework and, where necessary, promptly using
the new powers for supervisory action are vital. A stronger, more
active supervisor can guide banks through the challenging period ahead,
involving dealing with legacy assets, deleveraging, shoring up capital
positions, improving management and internal processes and developing
sustainable business models. Strict provisioning requirements are essential. A
supervisor with a strong reputation, underpinned by strong powers will also
lend credibility vis-à-vis investors. Finally, it will safeguard against a repeat
of asset price bubbles and reckless leveraging-up of firms and banks. Improving
the business environment Policy
progress on key business environment issues remains slow. In the area
of regulated professions different sectors will be reviewed in the course of
2013 and 2014. The need for improved insolvency and receivership legislation
has been recognised and amendments are now under discussion. State-involvement
in the economy remains high and deters FDI, as shown in section 3.2 (see also
adjustment capacity below). The fast
implementation of an ambitious plan to reduce state involvement in the economy
and to improved corporate governance could stimulate private and foreign
investment. Tackling the multiple challenges identified in the business
environment in the context of the European semester, such as the rigidities
around regulated professions, the problem of payment indiscipline, the
inefficiency of civil justice, including bankruptcy procedures and contract
enforcement, and the complexity of spatial planning procedures, would also be
key components for a strategy to improve the investment context. Cost
competitiveness Policy action
to improve cost-competitiveness has been limited so far. As described
in section 2.3, the 2010 hike in the minimum wage has
compressed the bottom of the wage distribution. As a result there is the risk
that upward wage pressures in sectoral collective agreements will increase in
the future to re-establish wage differentials. If maintained, regular automatic
adjustment of the minimum wage each year is expected to magnify these tensions.
To the extent that public sector wage policies indirectly affect cost
competitiveness, the currently negotiated wage cut is likely to be beneficial,
at least in the short term. A range of
measures relating to the labour market can help reverse cost competitiveness
losses.
Wage growth consistent with recovery in cost competitiveness can be sought in
conjunction with social partners. The government also has more immediate levers
to influence wage developments, including public sector wages and minimum
wages. Adaptation of minimum wage setting seems particularly needed in light of
the analysis in section 2.3. Adjustment
capacity Enhancing Slovenia’s economic adjustment capacity is an urgent priority in order to minimise the cost
of the crisis and set the foundations for future growth. Reallocation
of labour and capital from firms that over-expanded in the boom phase is
needed. As described in the 2012 IDR, the extent of resource misallocation in
the years preceding the crisis stems from both over-investment in certain
sectors and unwise lending and investment choices by banks and firms. The
adjustment process will be significantly less costly and disruptive in terms of
bankruptcies and unemployment if frictions can be removed. There is a
particular risk of labour market rigidities interacting with deleveraging to
cause firm failures and hence abrupt employment losses in the private sector.[59] In this IDR,
the analysis of the state-owned enterprise sectors provides evidence of the
many shortcomings of Slovenia’s extensive state-ownership nexus. Most
importantly, this nexus compromises the allocative efficiency of capital and
labour markets and generates repeated recapitalisation needs. Funds of better
performing state-owned companies appear to have been used in several cases to
exclude potential foreign investors. Slovenia has created
a new holding structure (SSH) for managing the state’s capital stakes,
replacing the former agency (AUKN). A restricted list of
companies for privatisation was adopted by the former government and is pending
approval by parliament. The success of the privatisation process and the
intended improvements to the corporate governance of enterprises remaining in
state ownership will largely depend on political determination and the
professionalism of the implementation process. A significant
withdrawal of the state from Slovenia’s corporate sector, combined with
arms-length governance of enterprises that remain in state ownership, could
improve the adjustment capacity of the real economy and limit the fiscal burden
of SOEs.
A successful privatisation drive, which in in the current economic environment
may take several years to complete, ideally going beyond the currently envisaged
list of enterprises, could yield substantial improvements in the credibility of
the banking sector, corporate governance, fiscal costs, adjustment capacity and
FDI.[60] To enable
the envisaged privatisation it probably will prove necessary to reduce public
ownership at least below the "blocking minority" threshold of 25%+1
share. Success will also depend on the efficiency of the regulatory framework
and the promotion of competition in the sectors concerned. The
recent labour market reform is an important first step towards reducing
frictions in the labour market. Labour market functioning
will only be improved significantly if reforms are sufficiently ambitious and
address labour market segmentation without introducing new elements of
rigidity. The recent reform does not change the regulation of students'
occasional work (i.e. the status of “student work”), which therefore remains to
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2011. 4 traders, “Sava Re dd, Sava Reinsurance
Company makes binding offer for Zavarovalnica Maribor”, 7 November 2012. [1] See European Commission (2000), p. 58 and p.81,
European Commission (2003), pp. 5-9 and p. 59, and also Lindstrom and Piroska
(2004), pp. 6-7. [2] The ratings outlooks of Moody’s and Fitch remain
negative. [3] The current account norm describes the 'average'
current account balance that would prevail in a country with similar structural
characteristics such as ageing profile, fiscal deficit, degree of energy
dependence, etc. A comparison of a country's business-cycle-adjusted current
account balance with the current account norm indicates in how far the former
deviates from the 'norm'. Estimated current account norms are based on a panel
regression of 68 countries and available data for the period 1970 to 2012. For
details on the methodology, see Salto and Turrini (2010). [4] See Salto and Turrini (2010). [5] The structure of this has changed over the past two
years, with a shift from wholesale funding to ECB lending. [6] UNCTAD (2012). [7] See also Stoviček (2013). [8] According to Brezigar-Masten et al. (2010), the
increase in the minimum wage in 2010 (without any transition period) was
estimated to contribute 2.1pps. to growth in gross wages in 2010. An additional
0.4 to 0.9 pp. to growth in gross wages is attributed to wage pressure just
above the minimum wage in the sectors with the highest share of minimum wage
workers. The size of wage pressures would increase if all sectors were taken
into account. [9] According to Brezigar-Masten et al. (2010), the
increase in the minimum wage in 2010 was estimated to reduce employment by 5150
workers in the short run and by 17,170 workers in the longer run. For
comparison, in two years until 2012Q3 the number of unemployed according to the
Labour Force Survey increased by about 20.000 (to 93.000). Registered
unemployment increased by about 10.400 to 110.900 since 2010. [10] ECFIN (2012a). [11] ECFIN (2012b). [12] See Cuerpo
et al. (2013). [13] The overall supply and demand pressures indicators are
based on the average rank of a Member State (MS) on each supply or demand
variable. Specifically, the rank (percentile) of each MS for each supply/demand
variable is calculated. Then, the average rank of a MS is calculated separately
for supply variables and demand variables, and this is scaled between 0 and 10.
See Cuerpo et al. (2013). [14] In order to identify unsustainable developments in
housing markets, affordability (price-to-income) and dividend (price-to-rent)
ratios can be compared to their long-term averages; the gaps between the actual
value of the former and the corresponding long-term averages provide indicators
of the degree of over- or under-valuation of house prices. Conclusions based on
such indicators must be treated with caution due to the underlying assumptions.
Meaningful comparisons with long-term averages generally require stationary
series. However, unit root tests point to non-stationary affordability and
dividend ratios in many countries. [15] This estimate is based on a four-variable VECM system
of the relative house price, the total population, the real disposable income
per capita and the long-term interest rate, building on a study prepared by ZEW
for the EC. The model is estimated on pooled data of Euro Area countries with
fixed country effects over 1972-2011. See European Commission (2012). [16] Bank of Slovenia (2013) [17] Including also indirect state
ownership through state-owned companies and funds. [18] The transaction is reported to have included a
provision granting all past KBC representatives in NLB an unconditional
discharge for their entire terms, with the government committing not to launch
any civil proceedings (STA 13 March 2013). [19] Cumulatively, these transactions have brought the
state’s ownership share to over 90%. [20] This loan was granted as an emergency measure to comply
with capital requirements at year-end 2012. The amount of the loan is EUR 100m,
and conversion to equity is triggered if the bank’s Core Tier 1 ratio drops
below 7%. The NKBM management initiated to procedure to trigger conversion in
March 2013. [21] NKBM, 18 March 2013. Together with the other
transactions, conversion of the hybrid loan will bring the state’s ownership
share to over 80%. [22] The state’s ownership share is
over 50%, including indirect state ownership through state-owned companies and
funds. The bank is not considered systemically
important by the EBA and was not part of the EU-wide stress tests. [23] There is (on aggregate) thought to be sufficient
eligible collateral to significantly expand borrowing from the ECB at least in
the short term, provided banks remain sufficiently capitalised. [24] Several of these banks have high loan-to-deposit ratios
and are covered by the Austrian bank supervisor's requirement to observe the
limit of 110% loan-to-deposit ratio on new lending. The Bank of Slovenia has
sought to manage competition for deposits using an add-on capital requirement
under its Pillar II supervisory powers for deposit interest rates considered
excessive. [25] Afterwards, some recovery to a decline of 3.2% in
December has been observed on the back of the October dollar bond issue which
translated into increased state deposits (Bank of Slovenia 2013). [26] Other factors include the disincentive for households
to hold deposits in domestic banks into which the state has insight for the
purposes of means-testing social transfers and the impact of bank credit
ratings downgrades on the treasury management decisions of insurance firms and
pension funds. Declines are also observed for non-financial corporations. [27] Total exposures, encompassing on and off-balance sheet
items is a larger denominator than loans. [28] Impairments on restructured loans are maintained for a
transitional period, providing additional security. [29] The May Financial Stability Report from the Bank of
Slovenia presented model estimates for 2012 suggesting a fall of impairment
costs between 9% and 16%. [30] The corresponding averages for the 2005-2011 period
are: 14.6% transition from C to D, with downgrades outweighing upgrades by a
balance of 10.6 pps. and 26.8% transition from D to E, with downgrades
outweighing upgrades by a balance of 19.2 pps. Source: Bank of Slovenia (2013). [31] To prevail, this effect would have to be realised
rather abruptly, as it is not discernible in the current trends, which rather
show a 5.5pps. increase in the NPL ratio over 2012. [32] The incidence of this second wave will also depend on
the extent to which firms have been able to repair their balance sheets. [33] Alongside these legal tools (discussed in detail in the
following paragraphs), the government still has at its disposal alternative
means of safeguarding banks, namely straightforward internal work-out and/or
internal work-out with the added security of government guarantees for legacy
assets (an asset protection scheme, APS). These different legal tools have
somewhat different fiscal implications, particularly regarding timing, and the
choice among them will depend on the characteristics of particular bank assets
that needs to be dealt with and the bank concerned. Like in other countries
facing similar situations, a combination of these tools is likely to be
applied. All options are likely to require state recapitalisations sooner or
later. [34] In an APS, risky assets stay on the banks’ balance
sheet but the risk to the banks is reduced while with internal work-out the
main means of cleaning the balance sheet are impairments and write-offs. [35] In an APS the bank would pay for government guarantees and would still be
liable for some part of the losses. [36] This Holding structure is designed for arms’ length
management of its portfolio and may need to adapt in order to be able to
continue work-out activities. [37] See EBRD transition and structural indicators (data
available 1989-2012). Comparisons are on the basis of Slovenia's average position during the entire transition period and its position according
to latest data (2012). Slovenia was compared against the average of three
groups of CEE countries: (i) all 8 EU Member States from the CEE region
(Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak
Republic) and Croatia, (ii) all 6 EU Member States which entered the EU in 2004
(Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic) and (iii) the
two euro area members from the region (Estonia and Slovak Republic). [38] See European Commission (2000), pp. 58 and 81, European
Commission (2003), pp. 5-9 and 59, and also Lindstrom and Piroska (2004), pp.
6-7 and IMF (2012c). [39] State influence extends far beyond companies under
majority, direct state ownership. Throughout this section, “state-owned” is
used for brevity but should be interpreted as referring to companies that are
majority directly or indirectly state-owned and/or otherwise state-controlled
notably through blocking minority shareholdings (giving the state a veto over
most strategic corporate transactions) or as a result of the fragmentation of
the non-state share. The computation of
state ownership in SOEs is complex and the resulting aggregates may not be
fully exhaustive. This is due to the intricacy of shareholding structures and
subsidiary networks, circular ownership structures as well as the lack of
transparent data. See Georgieva and Marco Riquelme (2013) for more details. [40] See also Georgieva and Marco Riquelme (2013), providing
more detailed information on the analysis presented here, based on a review of
46 non-bank SOEs. [41] See European Commission 2013. [42] Examples are the cases of the retail chain Mercator and
the brewery Pivovarna Laško, in which the state’s overall share has increased
from below to above the blocking minority share threshold as a result of
state-owned banks seizing shares pledged as collateral. The impact of SOE
performance on banks can also be seen in debt-restructuring and rescheduling
deals in 2012 and 2013 (i.e. not reflected in the 2011 financial data that form
the basis for this in-depth chapter) between prominent SOEs and banks (see e.g.
SeeNews 27 February 2013 and STA 4 March 2013). These restructuring deals
appear to emerge from an initiative of the Bank of Slovenia encourage banks to
revitalise certain companies that are thought to be able to return to viability
subject to lower debt burdens. [43] The Act was adopted in early 90s, stipulating the
regulation and rules according to which the privatisation was implemented
during the transition. [44] See Simonetti et al. (2001). [45] See: Viblia Business Portal, Sava Re submits an offer
for Zavarovalnica Maribor, 8 October 2012; Finance, Unofficially: Grawe offers
the highest price for Insurance Maribor, 10 October 2012; FriedlNews, Grawe
Bids for Zavarovalnica Maribor, 10 October 2012; Börse Express English, Grawe
said to bid for Zavarovalnica Maribor, 10 October 2012; 4 traders, Sava Re dd,
Sava Reinsurance Company makes binding offer for Zavarovalnica Maribor, 7
November 2012; Alta Invest, NKBM's Zavarovalnica Maribor sell process under
way, 29 October 2012; Reuters, KD Group dd Re-Submits Non-Binding Offer for
Acquisition of Majority Stake in Maribor Zavarovalnica dd; 7 November 2012; The
Slovenia Times, Three Bids for Zavarovalnica Maribor, 8 November 2012; STA,
NKBM Receives at Least Three Bids for Zavarovalnica Maribor, 8 November 2012; Xprimm,
Zavarovalnica MARIBOR sale: SLOVENIA under pressure, 28 November 2012. [46] See: NKBM, €65 million for a 51 percent stake in
Zavarovalnica Maribor, press release of 11 December 2012. [47] This figure derives from the (minimum of) 90,000
employees in the 46 largest non-bank SOEs analysed so far and those employed by
state-owned banks as of December 2011. The figure is expected to increase when
including additional SOEs not analysed so far. [48] This assessment is based on a review of 46 non-bank
SOEs in total, of which four are consolidated in the General Government
Accounts (GGA) and the remaining 42 are outside GGA. The ownership and
management of most of the companies outside of the general government as well
as the Railway holding are centralised under the umbrella of the Capital Assets
Management Agency (AUKN), which was established following the OECD guidelines
as part of the requirements for Slovenia's accession in 2010. The three main
insurance groups are reviewed separately due to the difference in business
model and reporting standards. All financial data is as of financial year 2011
and thus the impact the conjuncture on business performance should also be
considered. See also Georgieva and Marco Riquelme (2013), providing more
detailed information on the analysis presented here. [49] Earnings Before Interest, Tax, Depreciation and
Amortisation, an indicator for cash flow available to measure the company's
capacity to honour its financial obligations. [50] This could include firms in network or regulated industries.
Furthermore, end February 2013 the Competition Protection Agency has started an
investigation of 16 gas suppliers and their association, suspecting the
exchange of sensitive business information to agree on prices and preventing
competition. [51] SOD explained the profit in 2011 with c. EUR 180mn
one-off reimbursement by the state following changes in legislation with
regards to certain restitution compensation that SOD was paying to the
government annually in the past decade (2001-2010). [52] Final decision is taken ex post by Eurostat during
their review of government accounts (in March and October). [53] Final decision is taken ex post by Eurostat during
their review of government accounts (in March and October). [54] STA 18 December 2012 [55] Indirectly, these losses are partially reflected in the
general government deficit through subsequent state recapitalisations such as
the 0.7 pps. of GDP for NLB in 2011. [56] Final decision is taken ex post by Eurostat during
their review of government accounts (in March and October). [57] There is insufficient public domain information on
financial claims between general government units to calculate the precise
share of these SOEs in general government debt on a consolidated basis. To the
extent that e.g. KAD has obligations to the public pension system, SOEs
contribute less than 5.4 pps to the general government debt level in
consolidated terms. [58] See also e.g. European Commission (2000), (2003), OECD
(2009, 2013), IMF (2012b). [59] Simulations using the
Commission’s QUEST model identify the macroeconomic costs of deleveraging are
significantly amplified by rigidities. See Cuerpo et
al. (2013). [60] See also e.g. European Commission (2000), (2003), OECD
(2009), IMF (2012b).