This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries.The economic situation and policies of Slovenia were reviewed by the Committee on 6 March 2013. The draft report was then revised in the light of the discussions and given final approval as the agreed report of the whole Committee on 19 March 2013.The Secretariat’s draft report was prepared for the Committee by Rafał Kierzenkowski and Olena Havrylchyk under the supervision of Pierre Beynet. Research assistance was provided by Desney Erb. The Survey also benefited from external consultancy work.The previous Survey of Slovenia was issued in February 2011.

The economy is in a deep recession. Slovenia has been hit hard by a boom-bust cycle, compounded by reform backlogs and the euro area sovereign debt crisis. The reduction of public and private sector indebtedness is significantly weighing on growth amid tight financial conditions, growing unemployment and stalling export performance. Although important reforms have been adopted in 2012 and early 2013, additional and far-reaching reforms are needed as soon as possible to restore confidence and head off the risks of a prolonged downturn and constrained access to financial markets.

Slovenia has entered a double-dip recession and faces growing unemployment and heightened financial market stress (, Panels A, B and C). The pre-crisis boom, driven by easy access to external funding and excessive risk taking by banks and businesses, has led to a protracted bust, which is compounded by domestic structural weaknesses and the European debt crisis. Banks’ and firms’ balance sheets have been severely impaired and their necessary deleveraging is depressing growth, as credit is declining (, Panel D). Key banks, which are mainly state-owned, have required repeated recapitalisations to meet the regulatory solvency ratio for Tier 1 capital at 9% and their market value has collapsed. Public debt has surged from 22% of gross domestic product (GDP) in 2008 to 47% of GDP in 2011 and is expected to rise significantly more in the short term, partly driven by the rising costs of rescuing banks.

Slovenia is facing the legacy of a boom-bust cycle that has been compounded by weak corporate governance of state-owned banks. The levels of non-performing loans and capital adequacy ratios compare poorly in international perspective and may deteriorate further, which could require significant bank recapitalisation. Updated bottom-up (i.e. loan by loan) stress tests are needed to evaluate the extent of the problems, as the situation has deteriorated rapidly since a similar exercise was done for the two main state-owned banks in mid-2012. To foster the credibility of the new tests, the main results and underlying assumptions should be made public. The creation of the Bank Asset Management Company (BAMC) should allow recognition of problems by ring-fencing impaired assets, which would create conditions for an orderly resolution of non-viable banks and a rapid privatisation of viable banks. To that end, the process of asset transfer and their management has to be transparent and isolated from political influences by ensuring full independence of the BAMC. To achieve smooth deleveraging of the non-financial sector, viable but distressed enterprises should be restructured while insolvent firms should be swiftly liquidated. The main challenge is to improve inefficient insolvency procedures that are too long and result in low recovery rates. Development of equity markets can also facilitate smoother corporate deleveraging by facilitating equity raising through privatisation and entry of foreign investors. Finally, to prevent future crises, banking supervision should be enhanced further.

Restoring fiscal sustainability is a major challenge in Slovenia. Yet, the performance in terms of expenditure control is poor and public expenditure on social spending increased briskly during the crisis, significantly more than on average across the OECD. Despite recent progress in reforming the pension system, Slovenia continues to face major age-related spending pressures. Reforming the welfare state would help achieve fiscal consolidation, increase the quality of fiscal adjustment and address long-term fiscal sustainability challenges. This could be done without significantly worsening income inequality, which is low in Slovenia. Despite recent progress, cash transfers do not seem to be sufficiently means tested. Partly driven by generous social transfers, average effective tax rates on returning to work from inactivity and unemployment are high and could be further cut gradually. Efficiency frontier analysis suggests there is scope to improve spending efficiency without undermining the qualityof in-kind services on secondary education, health care and public administration. There is excess capacity in pre-school and compulsory education and the allocation of tertiary education services is regressive. The delivery of health care could be improved by rationalising inpatient care and enhancing cost-effective primary care, which would generate savings in the medium term. Further increasing the effective retirement age and reforming the financing of health and long-term care are the main policy priorities to contain the pressure of population ageing on expenditure.