Slovenia needs urgent reforms to skip recession: government institute

Reuters News
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Posted: Apr 20, 2012 8:20 AM
Slovenia needs urgent reforms to skip recession: government institute

By Marja Novak

LJUBLJANA (Reuters) - Slovenia will be facing a long period of low or negative economic growth unless it urgently implements reforms that will reduce budget spending and increase the competitiveness of the economy, the government's macroeconomic institute said.

"Immediate action is needed ... or we will be caught in a trap of low or even negative economic growth," the head of the institute Bostjan Vasle told a news conference on Friday.

He said the euro zone member's access to international finances will remain "very difficult" until it takes measures that would reduce the budget deficit, which soared to 6.4 percent of GDP in 2011 from zero in 2007, amid lower tax income and high government spending.

Slovenia postponed plans to issue a 1.5 billion euro ($1.97 billion) sovereign bond earlier this month as the yield demanded was above 5 percent.

"The access to financing on international markets is very difficult (for Slovenia) and ... as a consequence financing for the banking system is also difficult and companies find it hard to get loans from banks," said Vasle.

He also said Slovenia should simplify its tax system, reduce taxes and cut red tape to attract more foreign investment which could give a boost to the economy.

At present accumulated foreign direct investment in Slovenia represents only about 30.4 percent in GDP, the fourth-lowest level in the European Union, behind Greece, Italy and Germany, the institute said.

The new centre-right government of Prime Minister Janez Jansa, which took over in February following a December snap election, hopes to cut the budget deficit to 3.5 percent of GDP this year mainly by cutting public sector wages and benefits.

But public sector trade unions on Wednesday staged the biggest strike since Slovenia's independence from Yugoslavia in 1991, demanding that the government eases the austerity package which is due to be adopted by parliament in early May.

Trade unions are also threatening they may demand a national referendum on the issue of wage and benefits cuts which could prevent the implementation of the austerity measures.

Slovenia's banking sector is expected to post a loss for the third year in a row this year while the country's largest bank, state-owned Nova Ljubljanska Banka, needs a capital injection of 400 million euros by the end of June in line with demands from the European Banking Authority.

Slovenia was the fastest-growing euro zone member in 2007 when its economy expanded by 6.9 percent but was badly hit by the global crisis due to its dependency on exports and its economy contracted by 8 percent in 2009.

After a mild recovery in 2010 the economy slipped into recession again in 2011 as export demand and domestic spending weakened. The government expects the economy to contract by 0.9 percent in 2012 after a contraction of 0.2 percent in 2011.

($1 = 0.7609 euros)

(Reporting By Marja Novak; Editing by Susan Fenton)