Investors will be closely watching Slovenia this month, as the new government attempts to restore waning market confidence via a new budget and a long-awaited return to the Eurobond markets.
Slovenia, normally a small but regular issuer, had by mid-April been absent from the international bond markets for more than a year after a referendum last June.
That referendum put paid to plans to reform the pensions system, and ultimately brought down the former government. Elections in December were then followed by two months of political stasis before centre-right Slovenian Democratic Party leader Janez Jansa succeeded in forming a government – by which time Slovenia had been stripped of its double-A rating by all three main agencies due to its deteriorating debt and deficit metrics.
The message from the new team at the Slovenian finance ministry, however, is that the country will do what it takes to prevent a repeat of last year’s 6.4% deficit and regain its status as one of CEE’s safer havens.
Negative surprise
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| Dejan Krusec, state secretary at the ministry of finance |
"We were all negatively surprised when we saw the final number for the 2011 budget deficit – that’s why this government has made a strong commitment to work towards a balanced budget via a wide-ranging reform of public sector spending," says Dejan Krusec, state secretary at the ministry of finance. The new budget, designed to bring the deficit down to close to 3% this year and to zero by 2015, was expected to be passed by parliament – despite strong opposition from local trades unions – on May 5. For Krusec, this will be key to soothing market anxieties about the cohesion and effectiveness of Slovenia’s ruling five-party coalition.
"The passing of the rebalanced budget by parliament will be a big and important step, which shows that the government is united when facing the problems at home," he says.
Passing the budget, however, requires only a simple majority in parliament. More of a challenge is the proposed introduction of a golden fiscal rule that would embed limits for both the overall and structural deficit into the constitution. The latter will require opposition help to achieve the necessary two-thirds majority.
Nonetheless, Krusec is adamant this type of long-term fiscal consolidation – as opposed to the quick tax fixes adopted by the Hungarian government – is the only way to restore investor confidence.
"We don’t want to follow some countries in undertaking temporary measures that only affect the budget for one year," he says. "We are aiming at a permanent adjustment of public financing."
The response has been encouraging. Slovenia met investors at the end of March to assess appetite for a proposed five-year Eurobond issue and, says Krusec, received very positive feedback. "Investors made it clear they think it’s high time Slovenia sent a strong signal to the market that it’s doing the right things after all the reforms that didn’t go through in the previous mandate."
Fortunately, when it comes to funding, Slovenia can afford to wait. Two-thirds of this year’s €1.5 billion refinancing requirements were prefunded in 2011 and the extensive participation of the banking sector in the European Central Bank’s refinancing operations means there is untapped potential in the domestic bond market.
Adding difficulty
The looming recapitalization of the country’s state-owned banks is an added difficulty. Under the European Banking Authority stress tests, Slovenia has to find more than €400 million – 1.1% of GDP – to restore the tier 1 ratio of market leader Nova Ljubljanska Banka (NLB) by June 30.
Krusec is confident this can be achieved via external investment – probably from multilaterals, such as the European Bank for Reconstruction and Development – but some external analysts are unconvinced.
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| Slovenia’s budget deficit for 2011 |
And as Mai Doan, CEE economist at Bank of America Merrill Lynch, points out, the consequences of failure would be severe. "If the government can’t secure private funding to recapitalize NLB then it’s going to be a burden on the budget and will make it very hard for them to meet the 3% deficit target," she says. Pension reform, including extending the retirement age, might also yet again prove a stumbling block. Under Slovenian law, the issue is off-limits for politicians until a year after the referendum. But by June it will be back on the table – and the inclusion in the ruling coalition of the Pensioners’ Party is unlikely to make implementing much-needed reforms any easier.
Krusec does not, however, expect concerns over bank capitalization or pension changes to dampen investor appetite for Slovenian debt, given the country’s still impressive debt metrics – at 47%, its debt-to-GDP ratio is among the lowest in the European Union – and relative scarcity as an issuer.
"Slovenia still enjoys an investment-grade rating, which would in normal market conditions offer uninterrupted access to the market at reasonable prices, and is undertaking the measures necessary to stabilize the economy and arrive at a viable fiscal position," he says.
