Slovenia Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

After reaching its post-crisis peak in 2017, the pace of Slovenian economic activity started to moderate. The moderation has been gradual and mainly related to developments in the external environment, while domestic factors have remained favourable, in particular private consumption. Nevertheless, annual growth, at 4.5% in 2018, remained significantly above the eurozone average.

Favourable developments have shaped the banking system, whose standing has improved considerably since its recovery in 2013. Banks are highly capitalised, the burden of non-performing loans is reducing, and bank profits have reached record numbers in recent years. Consequently, the growth in bank lending to households has been relatively high, and bank lending to the corporate sector is gradually reviving and further supporting the domestic components of the economy. Moreover, after the privatisation process of recent years, the ownership structures within Slovenian banks have changed significantly. At end-2018 were 64.9% foreign, 25.2% public and 9.9% other domestic owned.

In line with recent developments, economic activity is expected to remain robust over 2019 and at around 3% over the medium term. However, challenges remain on two main fronts. On the one hand, adverse demographic trends and low productivity growth could significantly affect the economy's long-term growth potential if not mitigated by government policy. On the other, additional consolidation in the banking sector would strengthen its efficiency.

The demographic structure of Slovenia's population is changing rapidly and its society faces the global phenomenon of an ageing population falling working age population. The former increases pressure on public finances and will require active economic policy responses to ensure the current level of welfare, including social security and public services, for future generations. The Active Ageing Strategy, introduced by the government at the beginning of 2018, is one such step to tackle the issue.

Regarding productivity, Slovenia remains below the EU average. In nominal terms, the gap between the productivity level at purchasing power in Slovenia and the EU has remained relatively constant over the last 20 years, with no significant pattern of convergence. As such, to sustain its long-term growth prospects one of the main priorities should be reducing this gap. This requires a comprehensive approach by the government, with policy measures aimed at an efficient tax system, better education system, and increased investments in R&D.

The challenges prevalent in the Slovenian banking system are also seen in other eurozone members. Many banks operate in a small market, almost entirely oriented towards domestic activity, and this could limit the banking system's future profitability, especially when temporary factors, such a decrease in impairments and reservations, subside. These conditions demand further consolidation in the banking system, adjustments in banks' business models and other measures to improve cost-efficiency and ensure a sufficient level of profitability in the long-term.

Slovenia remains in the group of the fastest growing economies within the eurozone. While this is partly a result of the Slovenian economy converging towards more advanced economies, the remaining fraction pertains to the structural adjustments enacted in the past few years. The recovery of the banking system, and the adjustments to the labour market and pension system, have played a role in shaping solid economic growth dynamics. However, further steps are being prepared to address key challenges in the most effective way possible in order to maintain the current pace of growth.