Slovenia yesterday unveiled a package of measures including tax hikes, a restructuring of its banks and a programme of privatizations in a bid to avoid the need for an international bailout.
Announcing the plan, Prime Minister Alenka Bratusek said the moves would halve the country’s soaring budget deficit over the coming year.
The move was widely expected amid speculation that Slovenia would become the next country to seek a bailout from the EU in the wake of the financial crisis in Cyprus.
Bratusek unveiled a hike in VAT from 20% to 22% from July and a property tax to kick in from next year. A total of 15 publicly-owned businesses will be sold off, including Nova KBM, the second biggest bank, Adria Airways, the national airline, and Telekom Slovenia.
Meanwhile the government will create a “bad bank” to enable the ailing banking sector to offload its toxic debts. The European Commission will now consider the plan.
Market reaction to the plan – details of which had been communicated before in various investor road shows and were leaked in the media – was muted. “It’s in line with what we expected,” Abbas Ameli-Renani, emerging markets analyst at RBS, said. “It says all the right things.”
Earlier this month, Slovenia raised $3.5 billion in 10-year and 5-year dollar-denominated bonds at yields of 6% and 4.95% respectively, an amount that Ameli-Renani said covered the country’s financing needs until next year. “The idea of an international bailout is far-fetched now,” he said. But the country’s market success was dubbed by the RBS analyst “a double-edged sword” because it might actually delay the revamping of Slovenia’s economy. “Given that now they came to the market they might be less pressed to implement reforms,” he said.
James Howat, European economist at Capital Economics said it was an “encouraging step in the right direction” but left a number of questions unanswered.
The problem for Slovenia was not its fiscal position but the scale of the problems in its banking sector, he said. “We are waiting for details of the bad bank and the haircuts [for investors],” Howat told Emerging Markets.
Slovenia has said it plans to inject E900 million into the banking sector. “The big issue is how much money they need to recapitalize the banks,” he said.
“The government has pumped in E900 million but that figure is on the low side of many people’s estimates. Slovenia is getting its act together but that does not mean it is out of the woods.”
Bratusek said she expected the budget deficit to rise to 7.8% of GDP this year, but was forecast to fall to 3.3% next year.
In an interview before yesterday’s bailout EBRD chief economist Erik Berglof told Emerging Markets that Slovenia needed to carry out major structural reforms.
“Slovenia has come to the market recently and has managed to raise money so there is no immediate danger but it is clear Slovenia needs to address the situation in the banking sector and that implies dealing with the portfolios of loans to the corporate sector.
“It is not that there are not things to do but rather that the likelihood that there will be an immediate crisis is hopefully small.”
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