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OECD Maintains Forecast of 2.1% GDP Contraction in 2013

Ljubljana, 09 April (STA) - The Organisation for Economic Cooperation and Development (OECD) has maintained the forecast of a 2.1% contraction of Slovenia's economy this year and a 1.1% drop next year on the back of a severe banking crisis, roughly in line with other domestic and foreign forecasts.

The organisation's Economic Survey for Slovenia, released on Tuesday, says Slovenia has been hit hard by a "boom-bust cycle, compounded by reform backlogs and the euro area sovereign debt crisis."

Growth is being hampered by public and private sector deleveraging, growing unemployment and stalling export performance. Although important reforms have been adopted, "additional and far-reaching reforms are needed as soon as possible".

The report focuses on what the OECD describes as "a severe banking crisis, driven by excessive risk taking, weak corporate governance of state-owned banks and insufficiently effective supervision tools."

The creation of the Bank Asset Management Company to ring-fence impaired assets is welcome, but lack of transparency and potential political interference pose risks. "The main results of new stress tests should be disclosed, followed by the recapitalization and privatization of state-owned banks."

The OECD acknowledges that the authorities have adopted an ambitious fiscal consolidation path, "but the fiscal position is not yet sustainable" owing to the surging deficit accumulated during the downturn.

Moreover, it has so far relied too heavily on temporary steps. "Fiscal consolidation should focus on permanent measures while letting automatic stabilisers operate," it says.

The organisation has lauded reforms, saying the recent pension reform "is a welcome step forward", but it notes that bold additional reforms are needed to reign in ageing costs and stabilise public debt.

Restructuring welfare spending would help achieve fiscal sustainability. While an increase in social spending is appropriate to cushion the impact of the deep recession, there is room to restructure the welfare state without undermining the quality of public services.

Despite recent progress in means testing of cash transfers, the eligibility criteria could be further tightened, according to the report. High effective tax rates are partly driven by generous social transfers, which "hampers the transition of inactive and unemployed persons to the labour market."

As for the labour market, the organisation says it is "not sufficiently flexible although an improvement is expected" following the adoption of a recent reform.

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