Economy and Trade
Wedged between the Alps and the Adriatic Sea, Slovenia was the only one of the former Yugoslav republics to be in the first wave of candidates for membership of the European Union. It joined in May 2004, having a few months earlier become a member of NATO. Slovenia was fortunate in experiencing a relatively bloodless divorce from Yugoslavia. In addition, Slovenia was always the most prosperous region of the former Yugoslavia, and found the transition from a socialist economy to the capitalist free market relatively easy. Politically, Slovenia was the most liberal republic within Yugoslavia. In January 2007, it became the first former communist state to adopt the euro.
An open, trade-dependent economy, Slovenia exports some 70% of its production. EU states (mainly Germany, Italy, France, and Austria) account for three-quarters of its exports. The country benefits from an excellent infrastructure, and a highly educated workforce.
Economic Policy over 12 Months
Slovenia has pursued conservative fiscal and monetary policies in recent years in order to attain membership of the Eurozone, which it achieved in 2007. In the same year, the government embarked on an ambitious tax-reform program, which will lower revenues over a few years. The reforms included eliminating the payroll tax in 2008, and reducing the corporate tax rate from 23% in 2007, to 22% in 2008, 21% in 2009, and 20% from 2010 onwards.
In 2007, the government also committed to increase infrastructure spending. The authorities accepted that this increased spending, plus an initial decline in revenues associated with the tax-reform program, would cause the budget deficit to widen. In 2008, the budget deficit did indeed rise, to 2.2% of GDP, from 0.9% in the previous year, according to the European Commission (EC). The government planned to reduce the budget deficit to around 1% of GDP in 2009 and achieve a structural balance by 2011. However, the global economic slowdown has derailed these goals.
In December 2008, the government introduced a recovery package that will cause the deficit to widen to slightly above 3% of GDP in 2009, according to the EC, which believes that the deficit will narrow marginally to just below 3% of GDP in 2010. The recovery plan included measures worth around 2% of GDP to boost the economy, including subsidies for shorter working hours to avert mass layoffs, and tax breaks for investment in small companies.
The European Central Bank (ECB) has determined monetary policy in Slovenia since the country joined the Eurozone on January 1, 2007. The ECB was slower than other central banks to loosen monetary policy amid the global financial crisis of 2008 and 2009. In March 2009, the ECB cut its key interest rate from 2.0% to 1.5%, the lowest since it started setting euro rates in January 1999. US and Japanese rates were, in effect, already at zero by March 2009.
However, the use of the euro protects Slovenia from the dangers of a currency crisis, while the country’s well-regulated financial system has not been directly affected by the global credit crunch. None of Slovakia’s 19 banks has come under any pressure, and they are unlikely to do so. The financial system has generally relied on traditional, simple instruments that have shielded Slovenia from the US subprime crisis. Furthermore, in early 2009, the central bank called on commercial banks to raise additional capital, and use most of their 2008 profits to bolster their balance sheets.
Economic Performance over 12 Months
The downturn in the global economy and, in particular, in the EU affected Slovenia in the latter stages of 2008. Growth moderated markedly in the third quarter of 2008, and the economy shrank by 0.8% in the final three months of the year, the first quarter of negative growth in more than 15 years. Despite this contraction, economic growth for the whole year stood at 3.5%, according to the country’s statistics office.
In January 2009, the government and the EC forecast that the slowdown in economic activity would accelerate in 2009, driven mainly by declining exports as foreign demand weakens, and by a fall in investment. The EC anticipated growth of 0.6% in 2009, down from 4% in 2008 and 6.8% in 2007.
The EC also foresaw a “very gradual” recovery towards the end of 2009, while in 2010, despite a negative contribution from the external sector, the EC believed that growth would pick up to 2.3%, supported by domestic demand, and an acceleration in gross fixed-capital formation, as railway investment gathers pace.
Unemployment data confirm that the country experienced a sharp slowdown in the latter stages of 2008. The jobless rate rose to 7% in December, from 6.7% in the previous month, while industrial output fell by 17.5% year-on-year, and exports by 15.3%. Darko Kovacic, an analyst at Raiffeisen Bank, told Reuters in February 2009 that unemployment could increase by 50% during the remainder of the year, “as many companies will still have to cut jobs over the next months.”
By March 2009, many firms had already announced or enforced job cuts. The country’s second-largest exporter, the household-appliances maker, Gorenje, planned to lay off around 400–500 workers in 2009, out of a workforce of around 9,000 people in Slovenia. An opinion poll in March 2009 showed that more than 20% of Slovenians feared for their jobs in 2009—many construction, textile, and car firms were under pressure to cut their workforces.
However, the economic slowdown will help to quell inflation, which averaged 5.5% in 2008, up from 3.8% in 2007, and 2.5% in 2006. By January 2009, the annual rate of inflation, measured by the EC’s harmonized index of consumer prices, had fallen to 2.1%. The government anticipates that average inflation will fall to 0.9% in 2009.
Support for Inward Investment and Imports
Slovenia welcomes foreign direct investment that does not have a negative impact on the environment. Slovenia particularly welcomes those investments that create jobs in the high-tech sector and have links to R&D activities, for which special tax incentives are available (see Tax Exemptions). The Slovenian Public Investment Promotion Agency (JAPTI) was established to provide assistance to foreign investors.
Slovenia is part of the EU customs union. Decisions regarding quotas or customs suspensions to be applied to goods imported into Slovakia are currently taken at the European Community level.
Corporate income tax is levied on the taxable profit of private companies at a rate of 21% for 2009 (for 2010 and beyond, the corporate-profit tax rate will fall to 20%), with a reduced rate of not less than 10% applying to corporations established in special economic zones. A special rate of 0% also applies to investment funds, pension funds, and insurance undertakings for pension plans, under certain conditions. The special rate of 0% applies also to venture-capital companies that were set up under the Venture Capital Companies Act, and that prepare a separate tax statement just for that part of their activity. The government also offers a general R&D investment incentive.
For more information on the tax regime in the country, please see the guide to the country’s taxes published on the Ministry of Finance website.
GDP growth: 3.5% (2008, government figures)
GDP per capita: US$30,800 (2008, est.)
CPI: 5.5% (2008, average inflation, government figures)
Key interest rate: 1.5% (March 2009)
Exchange rate versus dollar: euros per US dollar—0.6734 (2008, est.)
Unemployment: 7% (December 2008, government figures)
FDI: US$11.51 billion (2008, est.)
Current-account deficit/surplus −US$3.706 billion (2008, est.)
Population: 2,007,711 (July 2008, est.)
Source: CIA World Factbook except where stated