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Slovenia - Economy

Unlike other countries in Central/Eastern Europe, Slovenia never underwent mass privatization, which resulted in a higher percentage of state owned enterprises (SOE) that are either owned or controlled directly or indirectly by the state. Slovenia was the only former communist state to refuse to sell most of its state-owned banking system after the fall of communism. State meddling in the economy was at the heart of the crisis that began when the 2008 global economic downturn hit Slovenia's vital exports. Bad loans exposed years of reckless lending and an economic model that had largely avoided the privatization schemes pursued by other countries in Eastern Europe after the Cold War ended.

The country's banks made disastrous loans to politically connected business interests, threatening to drag the country into the eurozone debt crisis. By 2013 taxpayers alone had to foot the bill of healing lenders after years of political influence and bad management loaded them down with bad loans equal to about a fifth of the economy. In December 2013, the government poured 3.3 billion into the banking system to keep it afloat, and avoided becoming the latest member of the 17-nation euro zone to seek a bailout from the European Union and International Monetary Fund.

Slovenia's economy is highly dependent on foreign trade. Accordingly, the economy suffered from the recessions in export markets, primarily Germany. About three-quarters of Slovenia's trade is with the EU. Additionally, the country has penetrated successfully the Balkan and eastern European markets, including the former Soviet Union region. This high level of openness makes Slovenia extremely sensitive to economic conditions in its main trading partners and changes in its international price competitiveness. Historically, economic management in Slovenia is relatively good, but suffered greatly during the recession. Slovenia's public budget deficit rose to 5.5% of GDP in 2009 and exceeded 6% in 2010, exceeding the 3% limit set in the European Union's Growth and Stability Pact. As a percentage of GDP, Slovenia's total public debt remains at a manageable 30%, well under the 60% limit set by the Growth and Stability Pact.

As the most prosperous republic of the former Yugoslavia, Slovenia emerged from its brief 10-day war of secession in 1991 as an independent nation for the first time in its history. Since that time, the country has made steady but cautious progress toward developing a market economy. Economic reforms introduced shortly after independence led to healthy economic growth. Slovenia's economy has benefited from the country's embrace of liberal trade, following the rule of law, and rewarding enterprise. The country has a well-educated and productive work force as well as dynamic and effective political and economic institutions. Despite recent declines in GDP growth, Slovenia is one the best economic performers in central and eastern Europe, with a 2009 GDP per capita of $23,800. The current government is actively introducing measures to shore up Slovenian businesses in light of the global economic crisis. The biggest influence on the Slovene economy in 2010, however, will be the ability of Slovenia's export markets, notably Germany, to recover quickly from the recession.

Slovenia's legacy of worker self-management continues to be felt in the economy. A high degree of decentralization and a tendency to discourage the flow of resources from declining firms to growing ones has led to large gaps between top and bottom performers in all sectors. These performance disparities are likely to disappear as the privatization process continues and resources are allocated more efficiently among sectors. For the time being, however, it is difficult to identify specific sectors where growth is likely to be concentrated. Given cost factors, viable businesses of the future are likely to have the following characteristics: moderate to low reliance on manual labor input; moderate to low use of real estate; and "environmentally friendly" undertakings.

Slovenia already enjoyed a relatively prosperous economy and strong market ties to the West when it gained independence in 1991. Although it comprised only about one-thirteenth of Yugoslavia's total population, Slovenia was the most productive of the Yugoslav republics, accounting for one-fifth of its GDP and one-third of its exports. Since independence, Slovenia has pursued diversification of its trade toward the West and integration into Western and transatlantic institutions vigorously, becoming party to a number of bilateral and regional free trade agreements. Slovenia is a founding member of the World Trade Organization (WTO) and joined the Central European Free Trade Agreement (CEFTA) in 1996. Slovenia also participates in the Southeast European Cooperative Initiative (SECI), the Central European Initiative, the Royaumont Process, and the Black Sea Economic Council. Slovenia became an EU member state on May 1, 2004 and joined the Euro Zone in January 2007.

Slovenia's economy is highly dependent on foreign trade. About three-quarters of its trade is with the EU, and the vast majority of this is with Germany, Italy, Austria, and France. The country has successfully penetrated the south and east markets, including the former Soviet Union region. This high level of openness makes Slovenia extremely sensitive to economic conditions in its main trading partners and changes in its international price competitiveness. Keeping labor costs in line with productivity is a key challenge for Slovenia's economic well-being.

Gross domestic product growth fell to 3.5% in 2008 after experiencing a growth rate of about 6.1% the prior year. Due to the recession in Slovenia's export markets, GDP fell by about 7.8% in 2009. Services contributed the most to the national output in 2009, accounting for 61% of GDP. Industry and construction comprised 37% of GDP, and agriculture, forestry, and fishing accounted for 2% of GDP. While the service sector is the largest part of the economy as a percentage of GDP, manufacturing accounts for most employment, with machinery and other manufactured products comprising the major exports. International Labor Organization (ILO) statistics put unemployment at 7% (March 2009). Inflation, after declining from 3.6% in 2004 to 2.5% in 2005 and 2006, returned to 3.6% for 2007, and spiked to 6.4% in 2008, but has decreased to 1.8% since the onset of the global economic crisis.

Although Slovenia has taken a cautious, deliberate approach to economic management and reform, with heavy emphasis on achieving consensus before proceeding, its overall record is one of relative success. Economic management in Slovenia is relatively good. Public finances project a deficit of 1.8 billion euros ($2.4 billion), which corresponds to 5% of GDP in 2010. The Slovenes have pursued internal economic restructuring with caution. The first phase of privatization (socially-owned property under the Socialist Federal Republic of Yugoslavia, or S.F.R.Y., system) is now complete. However, sales of several remaining large state holdings, planned for several years now, have yet to come to fruition.

There are several factors that make Slovenia an attractive location for Foreign Direct Investment (FDI), including modern infrastructure, a major port on the Adriatic Sea, a highly-educated professional work force, access to Central/Southeastern European and EU markets, and membership to the EU and Eurozone. However, despite these benefits, potential investors have at times faced challenges in Slovenia as a result of inconsistent transparency and unclear procedures for foreign investments. Share of inward FDI stock in GDP in 2012 in Slovenia stood at 34%, below the EU-28 average of 48% and lowest among the newer EU members.

Due to its macroeconomic stability, favorable foreign debt position, and successful accession to the EU, Slovenia consistently received the highest credit rating of all transition economies--receiving the top regional honors in a recent Dunn & Bradstreet survey. Slovenia's ability to meet its growth rate objectives will largely depend on the state of the world economy, since export demand in Slovenia's primary market has stalled.

Foreign direct investment (FDI) will take up the slack to some extent, as analysts forecast FDI levels will continue to increase with further privatization of state assets, including portions of the telecommunications, financial, and energy sectors. Slovenia must carefully address fiscal, monetary, and FDI policy, in light of the high deficit in pension accounts, its vulnerable Western export markets, and inflation concerns. Slovenian enterprises have a tradition of market orientation that has served them well in the transition period, as they moved energetically to reorient trade from former Yugoslav markets to those of Central and Eastern Europe.

However, in many cases under the Slovenian brand of privatization, managers and workers in formerly "socially owned" enterprises have become the majority shareholders, perpetuating the practices of "worker management" that were the hallmark of the Yugoslav brand of socialism. Difficulties associated with that model were expected to decrease under competitive pressures, as shares in these firms change hands, and as EU reforms introduce more Western-oriented governance practices.

Due to its macroeconomic stability, favorable foreign debt position, and successful accession to the EU, Slovenia consistently receives the highest credit rating of all transition economies--receiving the top regional honors in a recent Dunn & Bradstreet survey. Slovenia's ability to meet its growth rate objectives will largely depend on the state of the world economy, since export demand in Slovenia's primary market has stalled. Foreign direct investment will take up the slack to some extent, as analysts forecast FDI levels will continue to increase with further privatization of state assets, including portions of the telecommunications, financial, and energy sectors.

Slovenia must carefully address fiscal, monetary, and FDI policy, in light of the high deficit in pension accounts, its vulnerable Western export markets, and inflation concerns. Slovenian enterprises have a tradition of market orientation that has served them well in the transition period, as they moved energetically to reorient trade from former Yugoslav markets to those of Central and Eastern Europe. However, in many cases under the Slovenian brand of privatization, managers and workers in formerly "socially owned" enterprises have become the majority shareholders, perpetuating the practices of "worker management" that were the hallmark of the Yugoslav brand of socialism. Difficulties associated with that model are expected to decrease under competitive pressures, as shares in these firms change hands, and as EU reforms introduce more Western-oriented governance practices.

Government efforts and reforms designed to attract foreign direct investment have proven somewhat successful--FDI is continuing to slowly grow. Slovenia's traditional anti-inflation policy in the past relied heavily on capital inflow restrictions. Its slow privatization process favored domestic investors and prescribed long lag time on share trading, complicated by a cultural wariness of being "bought up" by foreigners. As such, Slovenia has had a number of impediments to full foreign participation in its economy. However, a number of these barriers to FDI were fully removed in 2002.

Despite these improvements, Slovenia scored poorly in a 2010 World Economic Forum report on FDI openness (116 out of 139 in two categories: prevalence of foreign ownership and rules impacting FDI) and has a relatively low level of FDI in comparison to the region. U.S. investments in Slovenia have been modest; Goodyear is the largest American investor. Even with these successes, much of the economy remains in state hands and foreign direct investment in Slovenia is one of the lowest in the EU on a per capita basis. American companies looking to do business in Slovenia face a challenging environment, particularly if they are interested in selling goods and services to the government.

The public procurement process, although compliant with most EU regulations and international treaties, remains opaque and often characterized by favoritism and corruption.





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Page last modified: 21-09-2014 18:35:55 ZULU