Slovenia Business Forecast Report Q3 2009

While Slovenia is not facing the same sort of macroeconomic crisis risks as several of its Central and Eastern European counterparts, we nonetheless expect the impact of the global financial crisis on the economy to be profound. Indeed, aggregate demand is expected to contract significantly as foreign credit into the economy dries up and export demand falls. This will not only weigh on private consumption but also gross fixed capital formation as well. As a result, we do not believe that Slovenia will be able to avoid a very deep recession in 2009, and alongside our global forecasts, do not expect a marked full-year recovery until 2011. To be sure, we stress that the adoption of the euro in 2007 will provide a layer of stability to the economy and we have factored this into Slovenia's overall macroeconomic risk profile. An external debt refinancing crisis is unlikely in the country and we expect the sovereign to maintain its ability to guarantee key private sector borrowing through support to the banking sector, through the crisis.

With the Slovenian economy expected to fall deeper into recession in 2009, we maintain our view that the government's core policy focus will remain the economy. While a comprehensive fiscal stimulus package is unlikely, we maintain that the budget programme this year will be expansionary.

For the most part, we expect economic policy measures to continue to be ad hoc and targeted to mitigate specific effects of the global financial crisis. State refinancing guarantees for the banking sector are likely to continue through the latter half of the year and other proactive measures such as subsidies to prop up employment and consumption are also expected to be implemented.

We have revised down our 2009 economic growth forecast for Slovenia and now expect a contraction of 5.0%. Not only does this factor in a recent downward revision to our eurozone growth forecast to -4.2%, but also the continued deterioration of domestic demand and credit conditions through Q109. While Slovenia's adoption of the euro will provide a degree of protection from refinancing risks in the private sector, we caution that the economy will nonetheless be hit hard by the general deleveraging process globally.

The Slovenian government announced plans on April 16 to double the level of income tax for the highest wage earners in state-owned companies. The measure will levy a 90% tax on any portion of net salaries that exceed EUR12,500 per month for an employee of any directly or indirectly state-owned firm. The tax will also apply to employees of firms that have received state guarantees for loans. While the move will apply to a small minority of individuals, it will apply to several of the country's largest corporations including telecommunications firm Telekom, most energy firms and the country's largest banks. Elevated income taxes will negatively affect the attractiveness of Slovenia to foreign investors, especially as a destination for high value added industries. While we believe these taxes will be repealed eventually, should they be prolonged into 2010 we would expect a marked impact on capital inflows into the country.