prof. dr. Franjo Štiblar,
Chief Economist NLB
The Slovenian economy performed better than most in 2002 as
GDP grew 3.2 per cent, the current account recorded a surplus
of 0.3 per cent of GDP, and inflation fell to 7.5 per cent, while
there was no increase in the budget deficit.
Table 17: Main macroeconomic indicators for Slovenia, 1997- 2002
(Area: 20.000 square km; population: 2 million; GDP: 20 billion USD)
Economic environment in Slovenia
In 2002, the Slovenian economy was less affected by recession
than most countries mainly due to a 12 per cent
increase in exports to South-East Europe, CEFTA and countries
ex-Soviet Union. This together with an increase in
government expenditure was behind GDP growth of 3.2 per
cent, with signs that the dip in growth has already passed
in mid-2002. The relatively weaker economic growth by
Slovene standards meant that employment growth slowed
to below 1 per cent and the unemployment rate stayed at
the relatively low level of 6.5 per cent by ILO standards.
Analysis of GDP growth shows manufacturing increased
by 3 per cent, construction by 2 per cent and services by
3.4 per cent. Both consumer and producer sentiment indicate
improvement in the economic climate towards the
end of 2002.
Inflation of 7.5 per cent (annual average) remains the main
economic issue as it is still off targeted EU Maastricht criteria
that Slovenia wants to comply with by 2004. Both oil
prices and domestic cost-push factors contribute to inflation
as labour costs grow faster than productivity.
Producer's prices increased by 5.7 per cent on average
while wages grew by 2 per cent in real terms.
The current account surplus was over 60 million dollars mainly
due exports exceeding imports and there was a surplus in
the capital account caused by strong net inflows of foreign
direct investments (FDI). The size of inflows at 10 per cent of
GDP is almost equal to the cumulative amount for the previous
10 years. The gap narrowed between foreign exchange
reserves and external debt reaching close to 8.2 and 8.8 billion
dollars respectively. Reserves cover 7 months of import
of goods and services and there is a low external indebtedness
where the debt service ratio remains below 10 per cent.
The public sector deficit increased to 3 per cent of GDP due
to a once off change in accounting period for revenues from
11 to 12 months. However, public sector revenues exceeded
forecasts and the share of public sector expenditures in GDP
increased again reaching over 43 per cent.
Monetary aggregates jumped twice during 2002 due to
excess inflows of foreign currency. At the beginning of the
year the inflow was created by the to introduction of euro
and at the end of 2002 inflow was caused by sale of Lek to
the Swiss pharmaceutical company Novartis. Annual monetary
aggregate growth rates were 4.2 per cent for M0, 13.8
per cent for M1, 26.1 per cent for M2 and 22.6 per cent
for M3. Financial savings grew faster than nominal consumption
with the central bank monetary target of up to
20 per cent growth in M3 being surpassed. Financial deepening
continues with total bank assets to GDP ratio reaching
90 per cent, which is still less than half of the ratio in
The financial sector continues to be in good shape with only
one small foreign bank recording losses in 2002. Banking
assets increased by 14 per cent, ROE before tax was 13.5
per cent, ROA before tax 1.1 per cent while cost/income
efficiency improved with a cost to assets ratio of 3.76 per
cent. The insurance sector in Slovenia saw total premiums
growing around 20 per cent, while the Slovenian stock
exchange index reached an all time high in November 2002.
Slovenia continued with the policy of floating exchange rate
with nominal depreciation of 3 to 4 per cent despite net
inflow of foreign exchange. With average inflation at 7.5
per cent real appreciation is around 3 per cent. Nominal
interest rates are falling with prime rate now around 10 per
cent, however they are expected to further decline.
For Slovenia, the external environment is less favourable
than a year ago with higher oil prices and recession in the
EU, however this has been offset by the expansion of
Slovenian companies to Southeast Europe.
Forecast for Slovenia
At the beginning of 2003 economic climate is improving,
inflation is decreasing towards 6 per cent, nominal depreciation
of tolar is slowing towards 2.5 per cent, and interest
rates are declining with NLB prime rate already below
10 per cent in nominal terms. Current account remains
positive, but budget deficit could grow so that re-balancing
could be necessary.
At the end of 2002, Slovenia was formally invited to join
the EU in May 2004. GDP growth is expected to accelerate
to 3.7 per cent in 2003 and 4.3 per cent in 2004, while
inflation is predicted to decline to 5.5 per cent in 2003 and
to 4.3 per cent in 2004. This is important as the exchange
rate will be fixed during the two-year preparation period
for membership in ERM-2 as precondition for joining EMU,
and will start around 2005.
On the domestic front, consensus among social partners
should keep wage growth under control, while increased
competition in the environment should help keep inflation
in check, however external inflationary pressures will be
more difficult to control. The current account is expected to
remain positive with financial inflow still a feature but less
so than in 2002.
Policy issues and uncertainties
Firstly, a balanced budget seems to be more and more difficult
to achieve, as EU membership approaches more institutions
will be established and more public servants will be
needed causing additional costs to a small two million
inhabitants country. In addition it appears that Slovenia
could be net contributor upon entering EU, which will
mean up to 1 per cent of GDP outflow to Brussels.
Secondly, external conditions could worsen if political and
military intervention in Iraq increases the price of oil but
this risk is for all economies. Revival of activity in developed
economies would change the external impact in a
Thirdly, inflation is currently at the highest among new EU
candidate countries and could be jeopardised by external
Finally, on the positive side, as EU entry approaches and
with continued expansion to the markets of central, south
and east Europe, domestic activity could accelerate.
Economies of the region
Economic activity decelerated in central and eastern Europe
in 2002 but GDP growth remains more than double the
rate in the EU. Domestic demand including public expenditure
and private consumption replaced declining exports as
the driver of growth.
Prudent monetary policy and favourable external conditions
contributed to a decline in inflation, and this coupled with
competition resulted in a lower interest rate environment.
Lower inflation and higher inflows of foreign currency led
to stronger real appreciation of domestic currencies that in
turn resulted in current account deficit remaining high
despite declining imports. The budget deficit increased due
to an increase in public spending and lower tax collection
with the reduced economic activity.
Forecast for the Region
Economic activity in the region is expected to accelerate
from 2.7 per cent average GDP growth rate in 2002 to 3.8
per cent in 2003 conditional on the revival of growth in
developed economies and demand for exports from the
region. In 2002 and beyond an additional boost is expected
to come from membership in the EU and NATO adding
up to 1-2 percentage points to the growth rate.
Unemployment rates will slowly decline and inflation will
decline further as members of EU prepare to enter ERM-2,
while monetary, fiscal and income policies will be more in
line with the EU standards.
A major policy dilemma for countries in the region is
whether to prioritise growth or stability as the primary
goal. With further integration into EU economy, cyclical
dynamics will strengthen leaving a lower degree of freedom
in economic policies with Central and East European
The most significant uncertainty is the pace of economic
development in developed economies as dependence on
exports will increase in the future.
In the Balkan transition economies the situation is continually
improving with GDP growth exceeded 4 per cent, declining
inflation, no increase in unemployment, while both
external and internal balances improve. Further growth is
expected as favourable external conditions prevail including
lower interest rates and growth in the EU and Russia. Also
it will be helped by further improvement in the political climate
and continuation of established economic reforms
should help growth in the region.
With economic stability the region becomes a potential
destination for investors in the near future as profits and
margins in developed markets continue to decline. Regional
country risk is rapidly improving, however a selective and
careful approach is still required.
Optimism for the region stems from several factors including
the signing of the Stability Pact for the region (1999),
democratic evolution Yugoslavia (2000), the Framework
Agreement in Macedonia (2001), elections in Kosovo
(2001), transformation of Yugoslavia into Serbia and
Montenegro (2002) and accelerated GDP growth in
Table 18: Forecast for Slovenia, 2000-2004