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Slovenia Country Risk Report Q4 2016

  • September 2016
  • -
  • Business Monitor International
  • -
  • 41 pages

Core Views

The short-term economic outlook has improved in light of accelerating household consumption and robust external demand, though structural problems will continue to weigh on domestic demand. Short-term fiscal stability has been largely restored after two years of impressive deficit reduction, though more consolidation is required to tackle a precariously high public debt load and set public finances on a sustainable long-term trajectory. After the snap elections of 2013/2014, the country is enjoying a return to short-term political stability, though we note that the governing coalition could come under more strain as the 2018 elections come into view. Major Forecast Changes We have lowered our forecast for average inflation in 2016 to -0.1%, from a previous 0.3%, as price pressures are taking longer to emerge than previously expected. Our forecast for the current account surplus in 2016 has risen to 8.2% of GDP (from 7.7%) after strong growth in goods and service exports led to a dramatic improvement in the external position in H116.

Table Of Contents

Slovenia Country Risk Report Q4 2016
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Solid Growth Ahead As Economic Health Improves...................................................................................................................8
Slovenia is set to record steady yet unspectacular economic growth in the coming years. The country's economic health has improved
considerably since the 2012-2013 recession but the legacy of that period will continue to weigh on domestic demand. Exports will
remain a key driver of headline growth but external demand will be constrained by a weak regional outlook.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS......................................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS....................................................................................................................................................9
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................10
Fiscal Policy And Public Debt Outlook.................................................................................................................. 11
Deficit Reduction Plan Likely To Face Increased Resistance...................................................................................................11
The Slovenian government has successfully reduced its budget deficit to below 3.0% of GDP and will continue on a path of
consolidation in the coming quarters. However, we expect attempts to impose the structural reforms necessary for long-term fiscal
consolidation to face pushback from unions and the political opposition.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................12
TABLE: GOVERNMENT REVENUE/SPENDING SOURCES.................................................................................................................................13
External Trade And Investment Outlook................................................................................................................ 13
Positive Outlook For External Position.......................................................................................................................................13
Slovenia's external position has improved further with a sharp increase in the current account surplus in 2016. We expect this year to be
the high point, but resilient external demand and a strong tourism sector should ensure the current account surplus remains relatively
robust over the medium term.
Outlook On External Position.................................................................................................................................. 14
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................14
TABLE: TOP 5 IMPORTS and EXPORTS...................................................................................................................................................................15
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE....................................................................................................................................15
Currency Forecast.................................................................................................................................................... 16
EUR: Heading To Parity As Fiscal Woes Take Their Toll..........................................................................................................16
We have revised down our forecast for the euro, now seeing the currency weakening gradually over the coming years. The euro is caught
between the risk of rising inflation expectations on the one hand and a rising risk premium over the future of the eurozone on the other.
TABLE: BMI EUROZONE CURRENCY FORECASTS............................................................................................................................................16
TABLE: DOWNWARD REVISIONS TO USD/EUR FORECASTS...........................................................................................................................17
Monetary Policy........................................................................................................................................................ 18
ECB Policy: Looser For Longer...................................................................................................................................................18
The economic slowdown caused in part by the UK's vote to leave the European Union in June has increased the chances that monetary
policy tightening in the eurozone will be pushed back even further. But even more importantly, the potential for systemic crises and
the long-term debt outlook increasingly suggest that the path of least resistance for the ECB will be to keep short-term rates as low as
possible for as long as possible, while extending quantitative easing.
TABLE: ECB REFINANCING RATE FORECASTS, %............................................................................................................................................18
Monetary Policy Framework.................................................................................................................................... 21
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................21
Chapter 2: 10-Year Forecast................................................................................................................... 23
The Slovenian Economy To 2025........................................................................................................................... 23
Convergence To Slow Markedly..................................................................................................................................................23
We expect Slovenia's real macroeconomic convergence with Western European developed states to continue through our 10-year
forecast period, though at a far reduced pace to the decade leading up to 2007. While continued capital market and trade integration
with the eurozone following the adoption of the euro in 2007 will remain a core factor underpinning productivity gains, we caution that
reduced foreign capital flows resulting from the 2008-2009 financial crisis and domestic banking sector woes will stem trend growth over
the long term. That said, this should result in reduced external asymmetries as a healthy current account surplus helps unwind the precrisis
debt build-up.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................23
Chapter 3: Political Outlook................................................................................................................... 25
SWOT Analysis......................................................................................................................................................... 25
BMI Political Risk Index........................................................................................................................................... 25
Domestic Politics .................................................................................................................................................... 26
Tests For Coalition Unity Ahead..................................................................................................................................................26
Slovenia continues to enjoy a period of relative political calm, supported by an improving macroeconomic backdrop. Nonetheless, the
government coalition will face key tests to stability in the coming quarters as attention begins to slowly shift towards the 2018 elections.
TABLE: POLITICAL OVERVIEW TABLE.................................................................................................................................................................26
Long-Term Political Outlook................................................................................................................................... 27
Fiscal Consolidation A Test For Stability....................................................................................................................................27
Although the EU will remain a policy anchor for Slovenia over the long term, significant economic pressures will be a major test for the
country's political institutions. A structural shift in policy and/or governing institutions is unlikely, though we caution that failure to develop
a sustainable long-term growth model will raise challenges to governance, potentially exacerbating political party divisions.
Chapter 4: Operational Risk................................................................................................................... 29
SWOT Analysis......................................................................................................................................................... 29
Operational Risk Index............................................................................................................................................ 29
Operational Risk....................................................................................................................................................... 30
TABLE: OPERATIONAL RISK.................................................................................................................................................................................30
Market Size And Utilities.......................................................................................................................................... 31
TABLE: EMERGING EUROPE - MARKET SIZE AND UTILITIES RISK................................................................................................................31
Labour Costs............................................................................................................................................................ 34
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE............................................................................................... 35
Chapter 5: BMI Global Macro Outlook................................................................................................... 37
Global Macro Outlook.............................................................................................................................................. 37
EMs Past The Worst, But Structural Problems Persist.............................................................................................................37
TABLE: GLOBAL ASSUMPTIONS..........................................................................................................................................................................37
TABLE: DEVELOPED STATES - REAL GDP GROWTH, %..................................................................................................................................38
TABLE: EMERGING MARKETS - REAL GDP GROWTH, %.................................................................................................................................39
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................41

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