By Prof. Dr. Franjo Štiblar,
Chief Economist, NLB

The Slovenian economy performed better than predicted in 2001 with the current account almost in balance for the first time since 1997; inflation was down to 7 per cent at the year end, GDP growth a little above 3 per cent, and unemployment remained close to 7 per cent. Slovenia experienced some deceleration in its rate of growth in 2001, although less intensively than in most developed economies.

Sustaining Growth in 2001

Growth continued to be export led with components of domestic final demand decelerating. Personal consumption fell due to slower growth of disposable income and higher indebtedness of the population from the 1999 consumption stampede, which was caused by the anticipated effect of introducing VAT; and business fixed investment was also lower due to imported pessimistic economic climate. As a result of lower activity in the global economy, Slovene exports as the driver of growth began to slow, especially in the last quarter of the year, and this led to the overall GDP rate decreasing to 3.0 per cent by the year-end. Imports also fell, resulting in an improvement in the balance of trade deficit.

Industrial production in Slovenia increased by 2.9 per cent (6.2 per cent in 2000), construction fell by 0.9 per cent (0.4 per cent in 2000), while tourist overnights increased by 6 per cent (11 per cent in 2000), transport of goods increased by 1.2 per cent (7.1 per cent in 2000), transport of persons was lower by 12.9 per cent (10.2 per cent in 2000) as use of private cars increasingly replaced public transport. The active working population increased by 1.8 per cent, while the rate of unemployment held steady.

Costs of living, the official measure of inflation, averaged 7.0 per cent, while industrial prices increased on average by 7.5 per cent. Wages increased by 13.2 per cent, that is 4.4 per cent in real terms with the public sector showing the largest rises.

Slovenia' s current account deficit declined significantly in 2001 due to its smaller trade deficit. With exports growing by 6 per cent and imports by only 0.3 per cent, the trade deficit declined from USD 1,384 million in 2000 to USD 893 million in 2001, which is the best result since 1994.

During the year a strong inflow of foreign exchange was seen due to increased Foreign Direct Investment of USD 442 million as well as the anticipatory effects of the introduction of euro. As a result, Slovenia experienced the second largest yearly surplus (net supply) on foreign exchange market since 1994.

The nominal exchange rate of the tolar against the euro lagged by less than by 2.5 per centage points behind the domestic average inflation rate; this was largely due to intervention by the Central Bank. External debt increased in 2001 by USD 494 million to USD 6,711 million, while foreign exchange reserves increased even more, by USD 1,376 million to USD 5,738 million.

Monetary policy was less restrictive than in preceding years. M1 grew by 17 per cent, bank credits by 16 per cent, while M3, the official Central Bank target, grew by 23.7 per cent. Although monetary expansion has not yet affected price inflation there is the risk of further increase of wages, prices and other expenditure in the public sector in the future. The large increase in primary money was offset by conservative lending of banks (under deceleration of activity), increased financial savings of the population, and by new instruments of the Central Bank.

The Government is attempting to keep the nominal goal of the deficit below 3 per cent of GDP (one of the Maastricht criteria) by increasing revenues (and sale of state owned property, enterprises, and banks) together with decreasing expenditures. One of the measures in that direction was to increase the rates of VAT from 18 per cent to 19 per cent and from 8 per cent to 8.5 per cent at the beginning of 2002. In September 2001, Central Government Debt was 1,148 billion tolars, which is 10 per cent more than a year ago and accounts for 25.3 per cent of 2001 GDP (but well below the Maastricht limit of 60 per cent). Increased tax burden and slight appreciation of domestic currency dampened export competitiveness, as they could not be countered by productivity growth (relative to growth in other countries).

Interest rates declined significantly both in nominal and real terms. Both active and passive declared interest rates on the tolar declined by almost one sixth to 12 -15 per cent (active bank rates), and 9 -12 per cent (passive bank rates) with average interest margin falling to 3.6 percentage points. At the beginning of 2002, the trend of declining interest rates remains unchanged. It is reinforced by announcing the elimination of the indexation clause for deposits and loans with maturity of up to one year, which will be enacted in July 2002.

Despite the strong performance of the domestic stock exchange, indirect financing of the economy through bank credit has remained dominant over direct financing through capital markets. The size of banking assets is still almost three times the market capitalization of the stock exchange and turnover on the stock exchange in 2001 was 22 per cent of the volume of extended bank loans at the end of the year. Net increase in banking loans in 2001 was, however, only 62 per cent of the turnover of the stock exchange.

In 2001, banking assets increased by 21.3 per cent to 3,986 billion tolars (almost 88 per cent of 2001 GDP). The banking sectorÕs performance was satisfactory with only 4 banks incurring losses (3 were foreign owned banks). Increased competition is illustrated by the rapidly decreasing interest margin, which fell from 4.0 per cent in 2000 to 3.1 per cent.

At the same time, the market capitalisation of the Ljub-ljana Stock Exchange increased by 23.8 per cent to 1,380 billion tolars (23.4 per cent in 2000) to exceed a 30 per cent share of GDP. Turnover increased by 79 billion tolars or 29.3 per cent to 349 billion tolars (1.3 per cent in 2000), which is 7.7 per cent of GDP in 2001. The aggregate stock exchange index, which remained roughly unchanged in 2000, increased by 19 per cent in 2001. The index reached 2,159 points in December and continued to rise to 2,450 points by mid-March 2002.

Institutional Changes

Slovenia is a front-runner among the European Union (EU) transition countries not only measured by its level of economic growth (71 per cent of the EU average) but also through closing more chapters of the Accession Treaty and with the fewer financial problems than any other candidate country at this time. There are likely to be few obstacles with the remaining negotiations, which relate principally to agriculture (small size with prices already above EU average) and regional structural funds for under-developed regions (not qualified for them). Negotiations are due to be completed by the end of 2002 with membership targeted for 2004.

Slovenia' s government is expected to remain in power for its whole mandate until 2004 providing continuity into the planned membership of the EU. Privatisation of state enterprises and banks remain high on the governmentÕs agenda, and will also be facilitated by the likely continuity of the government to the end of its mandate.

Economies of the Region

The international focus of the Group is Central and Eastern Europe, with special emphasis on Southeast Europe. Following the cessation of military activities in the Balkans, there was strong domestic demand and capacity growth in that region and as a result, GDP growth in 2001 averaged 3 to 4 per cent.

In Southeast European countries the average GDP growth rate was 4 per cent, slightly lower than in 2000. Albania, Bulgaria, Croatia and Romania achieved faster growth in 2001, while Bosnia and Herzegovina, Yugoslavia and Macedonia slowed.

Inflation rates declined throughout Southeast Europe to below 10 per cent with exception of Romania and Yugoslavia. Unemployment rates remained very high (around 24 per cent on average) and the current account deteriorated significantly towards a deficit of 8 per cent of GDP on average (only Bosnia and Herzegovina improved). Inward FDIs and receipts from tourism were helpful but could not cover the trade deficit.

In 2002, GDP growth in the Southeast subregion is expected to be between 3 per cent and 4 per cent except for Macedonia, where stagnation will be an achievement considering the political situation. Slight improvement to 4 per cent average growth is expected for 2003. Inflation is expected to calm down further in 2002, especially in Romania and Yugoslavia, which have the highest rates. The employment picture is unlikely to improve in 2002, moderate decrease of unemployment rates are expected for 2003. Similarly, small declines in the current account deficit are expected for most countries in 2002- 2003.

Countries in the territory of former Yugoslavia expect positive capacity growth, but severe problems are still present: Croatia has a large external deficit (with appreciating domestic currency), Macedonia underwent an economic setback fuelled by international conflict, Bosnia and Herzegovina is trying to develop its market economy but will need to be dependent on foreign direct financial support. Yugoslavia needs to solve its structural problems and implement further economic transformation.