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Country Commercial Guides for FY 2000: Slovenia Report prepared by U.S. Embassy Ljubljana, Released July, 1999 Note*

Chapter II Economic Trends and Outlook

Major Trends and Outlook

Slovenia's recovery began in 1993, as it completed the process of reorienting its trade away from the troubled region to its south and toward Central and Eastern Europe. Since that time, growth has averaged about 4 percent annually. Slovenia' openness to trade (with total trade equivalent to about 115 percent of GDP) has been instrumental in perpetuating this growth, and maintaining export competitiveness has consistently been at the focus of policymakers' attention. Throughout, Slovenia's budget and current account have been in rough balance, and inflation has been on a steady, if sometimes slowing, downward trend.

The Slovenian economy grew 3.9 percent in 1998, just slightly below analysts' original predictions of 4.0 percent. Unlike 1997, the healthy GDP growth in 1998 was partially fueled by a boost in domestic demand, while export demand slackened, due to residual effects of the Asian and Russian financial crises. Total exports grew at a 6.8 percent pace, but an increase of almost 10 percent in imports assured another trade deficit of $775 million (4 percent of GDP). The Slovenian services balance shrank, due primarily to a falloff in demand for tourism services, and was not large enough to stave off a negligible current account deficit of $3.8 million (less than 1 percent of GDP).

Real growth in government consumption remained level around 5 percent, led by a 12.9 percent boost in transfers to the business sector and an 11 percent increase in investment expenditure. Public wage growth and social transfers were kept in check, acting as a drag on total public consumption.

Consumer prices rose by 6.5 percent (end-year inflation) in 1998, down from an 8.8 percent rise in 1997. Analysts point to the strong tolar, increased domestic competition, and price liberalization as keys to the lower inflation rate. Regulated prices (which contribute 17 percent of the CPI basket) rose by almost twice as much as free market prices, but their 12.2 percent increase was still down from 1997.

The rate of registered employment registered a 0.1 percent increase - from 14.4 percent in 1997 to 14.5 percent in 1998. When measured according to ILO standards, unemployment was lower (7.7 percent) but rose more rapidly - up from 7.4 percent in 1997. Of greater concern, especially in light of Slovenia's interest in compliance with EU employment directives, is the increasing share of structural unemployment in the total ranks of the unemployed.

With an eye toward slippage in export demand from the EU - Slovenia's primary markets - analysts expect a slowdown in growth next year, with a current estimate of approximately 3.5 percent. This lag combined with the after-effects of 1998's drop in tourism will be outweighed by a further increase in investment, forecasted at 7 percent for 1999.

Principal Growth Sectors

Most major sectors posted growth again in 1998. Production of consumer durables rose by 9.8 percent. Services provided almost half of the value added to all commercial companies, and agriculture's contribution to value added rose by 2.2 percent.

Of particular concern is the drop recorded in tourism in 1998. Overnight hotel stays were down as was the total number of tourists to visit Slovenia. As tourism has been a prop for the Slovenian service balance, which has served to counteract the growing trade deficit, it will remain a vital sector for the economy. Forecasts for next year suggest that this sector may continue to shrink due to instability in the region.

Net profits in manufacturing soared from SIT 2 billion in 1997 to SIT 28.7 billion in 1998, driven by a 27 percent decrease in real net losses. In 1998, productivity rose in manufacturing due to an increase in production, as opposed to previous years in which employment reductions had played the primary role in boosting productivity levels. The sector may face difficulty maintaining competitiveness with the combined real appreciation of the tolar and decreasing unit labor costs in important foreign trading partners.

Government Role in the Economy

Slovenia has a relatively large public sector, accounting for roughly half of total output. This is illustrated most clearly by the public accounts, which show the overall tax burden in 1998 stood at 40.5 percent of GDP, while expenditures reached 46.3 percent. That said, virtually all prices in Slovenia are determined by market forces, and the government plays a relatively minor role in allocating savings among sectors of economic activity. Its influence is greatest in allocating licenses to operate in certain highly-regulated sectors and in public procurement at all levels of government.

General government revenue increased in 1998 by 6.1 percent compared to 1997. Social security contributions were up 4.1 percent and the government benefited from two new taxes - one on the balance sheet totals of banks and savings banks and the other a special reconstruction tax - which together provided SIT 8.6 billion, or 0.6 percent of total revenues. The terms of the Association Agreement between the EU and Slovenia led to a reduction in customs revenues by 25 percent from 1997.

On the expenditure side, total real expenditure was up 5.2 percent but a tight fiscal policy led to a slowdown in the real rise of public sector wages (1.7 percent) and social transfers. Most significant was growth in public investment, reaching a high equaled in 1994 of 2.8 percent of GDP.

Overall the government balance in 1998 was a deficit of SIT 18 billion, or 0.6 percent of GDP, a decrease from the 1.1 percent deficit of 1997. Thanks primarily to the boost in tax and non-tax revenues the government brought the deficit well under 1 percent of GDP, the original goal at the end of 1997.

Balance of Payments Situation

Slovenia posted a negligible (0.02 percent of GDP) current account deficit of $4 million at the end of 1998. The trade deficit of $775 million was mitigated by positive balances in services and factor services but as both of these surpluses declined, the current account slipped slightly from its small overall surplus in 1997.

Both imports and exports grew in 1998, thanks to improved foreign demand and the rise in domestic industrial and manufacturing production. The EU remained the primary market for Slovenia's trade, with over 65 percent share of exports and almost 70 percent of imports. Austria, Germany, Croatia, France, and Italy held their positions as Slovenia's top trading partners. The United States' share of total Slovenian exports continued its steady decline since 1994, with a decrease from 2.9 percent to 2.8 percent of the total export structure. Imports from the United States declined as well, from 3.0 percent to 2.9 percent. These totals made the United States Slovenia's eighth largest trading partner in 1998.

The counterpart capital and financial accounts showed a net outflow of $204 million in 1998, up by $64 million from 1997. Two primary factors caused the increase in net outflow:

- foreign direct investment in 1998 was down almost 50 percent from 1997, at $165 million, although this was somewhat mitigated by a decrease in Slovenian direct investment abroad, from $25 million in 1997 to $11 million in 1998.

- borrowing from abroad decreased while net commercial loans jumped by $250 million.

Infrastructure

Slovenia's infrastructure is relatively well-developed, and the government is investing ever more in it in an effort to take full advantage of the potential Slovenia's geographic, trade, and cultural setting offer. Construction of highways is a top priority, with $4 billion earmarked for 700 km of highways to be completed by the year 2000. Upgrading Slovenia's rail links will command an additional $2.5 billion by the year 2005, with priority given to the five (east-west) and ten (northwest-southeast) corridors.

The extensive rail system links the Slovenian port of Koper, one of the largest in the region, to all neighboring countries; construction of a direct railroad from Koper to Hungary is in the planning stages. The port of Koper serves as the principle port for Austrian and Hungarian exporters and as an essential port for Czech, German, and Slovak exporters. The port has 20 berths on 2,284 meters of operative quays, 55 hectares of open storage, and over 250,000 square meters of closed warehouses and numerous specialized warehouses.

In information technology, Slovenia has been at the forefront of the Internet revolution, with the highest concentration in Europe of Internet connection per inhabitant or per server. Slovenia is well-served by its telecommunications infrastructure, with a second GSM service provider joining the front-runner Mobitel, which currently covers about 95 percent of the market, in 1998. In classical telecommunications, the national monopoly, Telekom Slovenije, will invest about $700 million in expansion and modernization, in preparation for full privatization by 2003.