Wednesday, December 03, 2008


As a candidate country, Slovenia has been under a detailed observation by the OECD, particulary in areas regarding macroeconomic outlook such as the stability of public finance, fiscal prudence and growth prospects in the short, medium and the long run. Recently, OECD published a preliminary edition of Slovenia's economic outlook in 2009 (link). As expected by estimates and short-term projections, output growth in 2009 will narrowly decline from this year's 4,8 percent to 2,1 percent. A detailed decomposition of growth contributions can be seen here.

Aside from curious structural analysis of the Slovene economy, this year has been accompanied by a turn in the election with center-left government being in charge of forming new coalition. Expectedly, the set of economic policies by the Ministry of Finance is fashioned in the light of this year's financial crisis and a lot of media attention has been devoted to the recovery from the financial crisis.

This year's financial crisis has affected the Slovene stock market. The annual return from SBITOP, Slovene blue-chip index, is -63,12 percent. The rate of return from SBI20, Slovene main stock market, hit -64,36 percent. The collapse of Lehman Brothers where the banking sector has put portfolio investment and mostly the stock market slump in the U.S, Asia and Europe has affected the Slovene economy respectively. Nonetheless, rachitic and inherent problems of the Slovene stock market are not a result of an integration with world capital markets but a harsh consequence of the prevailing insider trading and relative underdeveloped of Slovenia's capital market. The political opposition to the privatization of NKBM, Slovenia's second largest bank, resulted in a rapid decline in the rate of return of NKBM. From January to December, the share of NBKM yielded -73,48 percent respectively. While the correlation between annual yield trends for each enlisted share is very high for the entire SBI20 and SBITOP, the main structural weakness of the Slovene stock market is that stock prices have been heavily overrated as measured by the P/E ratio (link), reflecting the asymmetry of insider information with respect to the evaluation of share prices.

Macroeconomic outlook in 2009 is less favorable due to external shocks that would curb output activity and consequently restrain investment as well. The slowing of investment activity in construction sector, which contributed 1,7 percentage points to output growth in 2007, may curb output growth from medium-term trend line. While decreasing commodity prices boosted deflationary pressures in Q3, inflationary outlook, given ECB's accomodative monetary policy, will crucially depend on the nature of fiscal policy. A decrease in government spending or at least a neutral stance of fiscal policy is essential to the containment of inflationary pressures. Nonetheless, it is crucial to neutralize wage pressures that could boost the inflationary pressures and hinder macroeconomic stability.

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