SLOVENIA: Now or never?

In Portoroz, a tidy, balmy resort town on Slovenia’s short Adriatic coast, the first week of September marks the end of the peak summer season. Yet in the local tourist office, staff remain hard at work.

“The hotels here are full right now because of EuroBasket. All the basketball teams playing in [nearby] Koper are staying here, so we expect a very good month,” Lea Suligoj, office spokesperson, tells Emerging Markets.

Guest-nights for the first eight months of the year, at almost 809,000, mean Portoroz is hardly a threat to Copacabana. But boosted by an influx of Russians, numbers are 2% up on last year. Coming in September, the basketball tournament is merely the icing on the cake.

Alas, for Alenka Bratusek, the prime minister of this former Yugoslav republic, and its population of two million, the Portoroz hospitality sector is more the exception to the economic rule in the country.

True, economic contraction in the second quarter eased to just 0.3% quarter-on-quarter, slower than the 0.5% it shrank in the first three months of the year. But Bratusek, who forged what at first seemed an unlikely centre-left government coalition earlier this year, was forced to raise value added tax by 2 percentage points from July 1 in an effort to support budget revenues – a move that is expected to further dampen already weak domestic consumption.

As a result, the economy is expected to continue to contract by 2.4% this year and by 0.2% in 2014. Growth is only on the distant 2015 horizon.

REAL PROBLEM

Slovenia’s real problem is the banking sector: more specifically, the state-owned banks, which are laden with potentially catastrophic levels of non-performing loans (NPLs) – estimated at some 7.5 billion euros, or roughly one-fifth of gross domestic product.

The origins of this are straightforward enough. “The country’s elites routinely circulated from government to state-owned enterprise to state-owned banks. Investment decisions were often made with political, rather than business interests, in mind,” Otilia Dhand, vice-president of Teneo Intelligence, a US political risk consultancy, says.

In 2008, the credit crunch exposed this model as a house of cards. Solving the mess, however, is another matter. The size of the problem has unnerved the markets, most particularly at the time of the Cyprus banking crisis, when many saw Slovenia as next in line for a bailout led by the International Monetary Fund (IMF).

The immediate threat was averted when the government in May unveiled a comprehensive plan to tackle the issue: it would put non-performing loans into a bad bank, sell stakes in the cleaned-up banks, and privatize 15 state-owned companies – a move that would both help finance the deal and reduce the temptations for cronyism at the same time.

But the transfer of bad loans to the Bank Assets Management Company (BAMC – Slovenia’s bad bank), originally scheduled to begin in June, was delayed after the European Commission and European Central Bank requested asset quality reviews and stress tests be undertaken.

The three largest banks – Nova Ljubljanska Banka (NLB), Nova Kreditna Banka Maribor (NKBM) and Abanka – with a combined 50% share of the market, are the crux of the problem, says Dhand. With some 30% of their corporate loan portfolios gone sour, approximately 3.3 billion euros in nominal value NPLs are to be transferred to BAMC.

The reviews on these banks mean the first non-performing asset transfers should start this month. “It’s a priority. Non-performing assets in NLB have already been separated into an ‘internal bad bank’ and are waiting for transfer,” Dhand says.

At the same time, all three banks will need capital injections of public money, now likely to exceed earlier government estimates of 900 million euros, she says.

Along with rising costs, the delays raised concerns that the government – afraid of the political fallout from the reforms – was dragging its feet over the whole process.

“After some brave, initial steps in implementing reforms in the early summer, most prominently the commitment on privatizations, the zeal for further action seems to have waned in the past two months,” Luka Oreskovic, researcher at Harvard University specializing in south-eastern Europe (SEE), tells Emerging Markets. Others insist plans are moving ahead, although perhaps a little under the radar.

“I would give Bratusek and team more credit: they are making good progress with transfer of NPLs, and plans for privatization are moving ahead,” one western diplomat who does not want to be named tells Emerging Markets – before adding “although Telekom Slovenia will be the acid test.”

On September 2, Prime Minister Bratusek said a timetable for the privatization of the 15 state-owned companies – which include Slovenia Telekom and Aerodrom Ljubljana, the country’s principal airport – would be finalized by the end of the month. A few days later the government began the controlled liquidation of two small, privately-owned banks – in effect, the first concrete moves to resolve the banking crisis.

Like Portoroz hotels, Slovenia has its bright spots: exports, for example, rose 2% in the second quarter. But the sheer enormity of the banking problems overshadows all else.

Time is of the essence, says Saso Stanovik, chief economist at Alta Invest, a Ljubljana brokerage. As he puts it: “If they don’t resolve the problems soon, even the current gloomy growth scenario may prove optimistic.”