Slovenia PM’s Resignation Throws Recovery Into Doubt

Emerging Markets, EBRD editions, May 15 2014

The resignation of Slovenia’s prime minister, Alenka Bratusek, has pushed the Balkan Eurozone state into a period of political uncertainty just as reform measures appeared to be making progress.

Bratusek lost a leadership vote within her party at the end of April and formally resigned last week, calling for a snap election as she departed. Analysts expect they may happen in July, but worry about the impact on reform.

“The most immediate economic fallout of early elections may be limited, with the government funded until 2015 and the most urgent reform steps already taken,” said Peter Sidorov, economist at Deutsche Bank, citing bank restructuring as a key example. But he said early elections would pause further reform. “Future progress on corporate restructuring, privatisation and fiscal consolidation may be in doubt,” he said.

Hrvoje Stojic, director of economic research at Hypo Alde Adria, a regional bank based in Austria and Croatia, hoped for quick resolution. “Beyond a period of lame duck administration, we would be concerned if there is a prolonged reform stalemate and incomplete bank clean-up, which would adjourn private capex recovery and undermine GDP prospects,” he said.

Slovenia has been a relatively strong regional performer this year. In April it issued Eu2 billion in bonds, raising a Eu9.5 billion order book, just a year after being billed “the next Cyprus” due to a banking crisis that many thought would require a bailout and even a Eurozone exit. All told it has raised the equivalent of over Eu4.5 billion this year. Although the economy is expected to grow by less than 1% this year and probably next, and although debt to GDP at around 80% is high, Slovenia did not need to go to the IMF or the EU to fix its banking system and has completed all the international fundraising it needs for this year and well into 2015.

Today [WEDNESDAY] the EBRD announced its own verdict on Slovenian revival. It said: “If sustained, the recapitalization and restructuring of banking and corporate sectors, which commenced following the asset quality review and stress tests in December, will prove a turning point for Slovenian reforms and growth.” It said reforms had “boosted the confidence of the market and led to a fall in the country risk premium and the costs of sovereign financing.” But it noted that the economy contracted by 1.1% overall in 2013 due to depressed domestic demand, and said it was “critical to persevere with the necessary reforms that have been underway during the past year.”

However, the EBRD’s broadly positive comments made no mention of Slovenia’s political situation, which may be uncertain beyond the election; Sidorov said it was “far from certain” that the elections would “result in a strong and reform-friendly coalition.”  And Sidorov said that even with the progress that has been made, other challenges remain. “NPLs at the country’s banks are still elevated, and undertaking privatisation and restructuring of the over-indebted and heavily state-controlled corporate sector is a priority,” he said.