Slovenia and the EU at a crossroad – the changes needed to update the economic model Ljubljana, 5 June 2015 Martin Löffler Directorate-General for Economic and Financial Affairs

Unprepared for the crisis, Slovenia suffered more than peers …. and investment dropped by 40% 2 Slovenia's output still 7% below peak level…

From boom to bust to sustainable growth? 3 Slovenia's economic development since the end of the transition

Burst of bubbles implied high costs for state and economy… House prices plunged The stock index crashed Int. funding withdrawn 4

…represented a threat to maintaining market access… 5 Increase of refinancing costs

… and brought Slovenia at the verge of requiring a programme 6 The next domino? Markets fret that little Slovenia could be next. (13 April 2013) Is Slovenia another Spain? The next few months will determine whether Slovenia will be the next EU country to request an international bailout. (7 October 2013) Stalled reform and poor governance fuel Slovenia bailout talk (25 April 2013) After Cyprus, is Slovenia next euro zone domino? (10 April 2013) Slovenia Totters Toward Euro-Crisis Brink (10 April 2013) Is Slovenia the next Eurozone domino to fall? (5 April 2013)

Excessive credit growth, weak corporate governance and lack of early corrective measures underpin the imbalances Increasing corporate sector leverage and distress High state involvement in the economy and weak corporate governance Large increase in public debt and unsustainability of debt Banking sector vulnerabilities Loss of competitiveness and export performance Lack of private investment and growth 7 Illustration emerging imbalances

8 Situation stabilised, economy adjusting… …but action plan not yet completed (1) Banking SOE management Fiscal Banking sector profitability improved NPLs started to decrease (but remain relatively high) Financing cost decreased considerably. Public debt stabilised (but remains elevated). Long-term sustainability improved marginally. 8 companies recently privatised - 5 from list of others Successful privatisation stories attract strategic foreign investors Progress achievedAdjustments observed AQR / stress test completed in Dec major domestic banks recapitalised and restructuring on track BAMC established and fully operational Privatisation of NKBM in final phase Bank regulatory framework reviewed Correction of the excessive deficit projected for 2015 Fiscal Rules Act in consultation 2013 pension reform –white book Expenditure review in the healthcare sector Health care/long-term care reform in 2016 Management and ownership of state owned assets centralised in SSH List of 15 SOEs approved by parliament Asset Management Strategy New corporate governance code

9 Situation stabilised, economy adjusting… …but action plan not yet completed (2) Corporate leverage decreased. Export orientated companies are performing well. Cost and price competitiveness improved. Slovenia gained export market shares in 2013 and FDI resumed in Progress achievedAdjustments observed New insolvency legislation adopted in Efficiency of the Courts improved. Restructuring master plan was set up. Corporate restructuring task force established. Restructuring of the most urgent cases and large corporates well progressed. Wage restraint and increased productivity. Social agreement concluded in Jan labour market reform. Student work regulation amended in Youth guarantee program on track. Scholarships awarded based on 2014 Scholarship Act. 25% of measures in Single document to reduce administrative burden were implemented. The number of regulated professions decreased from 323 to 242. Competitive- ness Corporate restructuring Business environment

2015 Recommendation reflect the outstanding challenges 10 Banking Ensure a durable correction of the excessive deficit in 2015, and achieve a fiscal adjustment of 0.6% of GDP towards the medium-term objective in Adopt the Fiscal Rule Act and revise the Public Finance Act. Fiscal policy Healthcare and pension reform Labour market Corporate restructuring, SOEs Judicial Continue corporate restructuring and maintain strong corporate governance in the BAMC. Take measures to improve access to finance for SMEs and micro companies. Adopt a strategy for the SSH with a clear classif. of assets, implement an annual asset management plan and apply performance criteria. Ensure that the reforms adopted to improve the efficiency of civil justice help reduce the length of proceedings. Advance long-term reform of the pension system. By end of 2015 adopt a healthcare and long-term care reform. Review the mechanism for setting the minimum wage in light of the impact on in-work poverty, job creation and competitiveness. Increase the employability of low skilled and older workers. Provide adequate incentives to extend working lives. Bring down the level of non-performing loans in banks by introducing specific targets. Improve credit risk monitoring capacity in banks.

Banking and corporate restructuring to be completed Cash flow capacity and profitability not improving Lending to the real economy remains constrained 11

Fiscal challenges remain Slovenia targets balanced budget in medium-term 12 Debt to remain elevated and above 60 % threshold

Exit of EDP only first step on journey to fiscal sustainability 13 EDP (<3% headline) MTO (0% SB) Fiscal sustainability Path towards fiscal sustainability Year SB targets -2.2% -2.5% -2.4% -1.8% -1.2% -0.6% 0% 0% ?

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