1. ECONOMIC ISSUES 2014 INDEBTEDNESS AND DELEVERAGING OF SLOVENIAN FIRMS Arjana Brezigar Masten IMAD and FAMNIT (In cooperation with: G. Caprirolo, M. Hafner, J. Kušar, G. Ploj, M. Trošt) Ljubljana, July 8 2014

2. Credit and growth nexus Source: GDP growth (Eurostat); Credit growth (ECB, own calculations) Note: PIIGS (Portugal, Italy, Ireland, Greece, Spain); Others (EMU excluding PIIGS)

3. Debt structure Source: AJPES; own calculations.

4. Financial debt and number of firms according to financial debt- to-EBITDA ratio, 2013 Source: AJPES; own calculations.

5. Overall debt overhang by industries, 2013 Source: AJPES; own calculations. Top 3 sectors: (5.8 bln. €) 57 % of total overhang Top 6 sectors: (8 bln. €) 80 % of total overhang Rest: 2.2 bln. €

6. Concentration of debt overhang of common firms, 2013 (in %) Source: AJPES; own calculations. Top 30 firms hold 3.9 bln.€ (39 %) of debt overhang and 5.3 bln.€ of fin.liabilities (24 %). Top 30 firms employ 7 % of employees and generate 6 % of value added.

7. Deleveraging Source: AJPES; own calculations. Financial liabilities of surviving firms declined for the first time only in 2012, by 0.4 bln €, and by a further 0.5 bln € in 2013.

8. Main challenges International comparisons show that Slovenian companies are more indebted relative to GDP than those in economically stable euro area countries. The empirical analysis has shown that unexpected and exogenously induced corporate deleveraging during the recession adversely affects economic activity, as a general decline in demand and banking system problems exacerbate the financial constraints on companies. To minimise the negative short-term effects of deleveraging on economic activity, it is therefore necessary to use deleveraging tools that are not mostly focussed on direct loan repayment but also provide additional equity. Additional capital should be mainly obtained from private, both foreign and domestic, sources of finance, while the state’s ownership role should be reduced and an ownership structure put in place that will facilitate corporate development and improve corporate governance. The provision of fresh capital on the market and the deepening of financial markets would also be facilitated by additional financial incentives for financial investors, such as additional tax allowances for pension funds, and promoting the importance of old-age saving.