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Investment dropped substantially with the crisis

Investment dropped substantially following the 2009 crisis, dragged down by a loss of confidence, deleveraging in the corporate sector and a banking crisis. Since then, important reforms have been implemented, including fiscal consolidation, pension reform, labour market reform, restructuring and recapitalisation of banks, and initiation of privatisation procedures. These have raised the credibility of Slovenia in the financial markets, boosted confidence and helped restore competitiveness. Slovenia returned to growth in 2014.

The recovery, however, is fragile and subject to risks. While exports are the main driver, growth relies heavily on public investment funded by the EU Multiannual Financial Framework. This will come to an end in 2015, reducing public investment, while corporate investment is improving only slowly. To support private investment, further policy steps and structural reforms are needed.

Healthy banks and corporations can boost investment

Since the restructuring of the banking sector at the end of 2013, banks have returned to profit and they are now well capitalised. However, credit growth remains weak due to the still elevated share of bad assets in bank balance sheets and deleveraging in the corporate sector. All this is holding back private investment.

Swift restructuring of companies and effective liquidation of bad assets would facilitate reallocation of resources tied up in non-performing assets to new, profitable investments. An effective, independent and transparent Bank Asset Management Company can ensure this. The recent reform of the insolvency regulation should also help, which should be complemented by training judges and insolvency administrators and making out-of-court restructuring faster and more attractive.

Fiscal sustainability is important

Sustainable public finances are also crucial for preserving macroeconomic stability and sustaining investment. Excessive growth in public expenditures and debt could again raise country risk and the cost of sovereign financing, hurting private investment. A new pension reform to curb rising public pension expenditures is urgently needed. Equally important, measures to increase efficiency of spending in education, health care and public administration are also important in this regard.

Less regulation, less state ownership and lower taxes on labour

Slovenia should improve its business environment to boost investment and attract more foreign direct investment. The social security contributions and income taxes result in a high tax burden on labour, especially for high earners. This may deter investors that employ a highly educated workforce, often in high value added industries. Tax burden should move away from labour to taxing real estate and consumption.

The complexity of regulatory procedures and administrative burdens on enterprises are high and should be reduced. In particular, Slovenia should make obtaining construction permits and registering property faster.

Public ownership is widespread in Slovenia, while the profitability of stateowned enterprises is low and corporate governance and management practices are weak. Slovenia has recently privatised some enterprises and set up a public asset management strategy. Continued privatisation and improvements in corporate governance would raise profitability, make markets more competitive and attract more investment from abroad. In turn, this will raise growth, incomes and living standards.

The article is based on findings from the OECD Economic Survey of Slovenia, released in Ljubljana in May 2015 by the Secretary General.