Due to the outbreak of the COVID-19 pandemic, Slovenia’s GDP was forecast to contract by 7.6% in 2020. Intervention measures have provided conditions to preserve the potential of the economy. Given the projected slower recovery of the Slovenian economy in 2021, it will be crucial to strengthen investment activity in the coming years, to which funds from the new EU Recovery Instrument will be able to make an additional contribution.
Author: Gregor Umek, representative of the Slovenian National Contact Point for OECD, Ministry of Economic Development and Technolog
Relatively low investments in recent years have been, in addition to structural gaps, one of the main reasons for Slovenia’s modest productivity growth after 2008. The key to increasing the competitiveness and productivity of the country’s economy is the creation of products and services with higher added value. This can be achieved through measures to support innovation, basic and applied research, promote the digital transformation of the economy and the internationalization of companies, support the transition to a sustainable and circular economy, as well as foster an effective and supportive environment for companies. To ensure a stimulating and predictable business environment, the implementation of structural reforms is particularly important. Above all, this requires political stability and consistency in the implementation of reform measures. In its December Forecast of Macroeconomic Developments, the Bank of Slovenia predicts a 7.6% decline of Slovenian GDP for 2020 as well as slow economic recovery in 2021. According to the bank’s estimates, the intervention measures and the EU Recovery Instrument funds will offset the 2020 decline in economic activity by slightly less than 4% and maintain the GDP level higher by 1.3% at the end of 2021–2023 compared to a scenario without these measures. It is also interesting to compare the impact of intervention measures on one hand and the resources of the EU Recovery Instrument on the other. The cumulative effective multiplier of intervention measures in the period 2020–2023 is expected to be around 1.3%, while in the case of the EU Recovery Instrument it is even higher, estimated at around 1.9% for the period 2021–2023. The bank attributes the latter difference to the fact that the EU Recovery Instrument is intended to strengthen both public and private investment, so that their effect on the economy will be more lasting compared to intervention measures that affect the economy mainly through private consumption.
Weaker investments due to slow recovery in domestic demand and after-crisis timidity
Investment activity is also strongly related to productivity. The Development Report 2020 by the Institute of Macroeconomic Analysis and Development of the Republic of Slovenia (IMAD) states that Slovenia still lags far behind the EU average in terms of productivity. In 2018, the level of productivity in Slovenia amounted to 82% of the EU average, without improvement from 2008 when it had reached 83%. Average annual productivity growth in the period 1996–2008 was 3.5%, slowing down to 0.5% over 2009–2018 and then settling to 1.2% in the period 2014–2019. IMAD emphasises that, in addition to structural reasons, relatively low investment is the main culprit behind modest productivity growth after 2008. IMAD attribute weak investment activity in the initial years after the financial crisis to a slow recovery of domestic demand, and to more risk aversion in corporate investment due to crisisdamaged balance sheets and dampened expectations for the future. It should be noted that companies cited bureaucratic obstacles, in particular lengthy procedures for obtaining various permits, as the main reason for lower investment activity. According to IMAD, this factor could have an even greater negative impact on the companies’ investment activity in coming years, given the everfaster dynamics of the introduction of new products and services.
Structural reforms and the reduction of administrative burden of the economy are particularly important. In the framework of the Recommendations for individual Member States in 2020, the European Commission highlighted Slovenia’s following substantive areas which needed to be addressed through reforms or structural changes:
In the field of the labour market, it is necessary to regulate flexible forms of work, including teleworking, to maintain and promote employment, especially the first employment for young people, and to regulate housing issues.
With regard to the reform of social protection and long-term care, it is necessary to regulate the system of long-term care, and to carry out health care reform.
In the area of the financial and fiscal system, access to alternative sources of financing, including equity financing, should be improved.
The key area that needs to be regulated is the reduction of administrative barriers in business environment.
Weaker investments due to slow recovery in domestic demand and after-crisis timidity
All these areas are also addressed in the draft National Recovery and Resilience Plan. These are the five pillars of development, followed by investments that will support reforms and structural changes. The development pillars are as follows: sustainable and green transition, Digital Slovenia, supportive environment for companies, knowledge-based society and tourism and culture. The sustainable and green transition pillar in particular aims to support investments in renewable energy and energy efficiency, sustainable renovation of buildings, adaptation to climate change, circular economy, sustainable mobility, and connectivity. The Digital Slovenia pillar is intended for investments in the digital transformation of companies, government, and local communities. To achieve a knowledge-based society, a range of investments will be supported – those with an aim to strengthen development and innovation, as well as knowledge and competences (especially digital ones, required by the new professions of the future and investment in research). To provide a stimulating and predictable environment for companies, it will be important to encourage investment in companies and strengthen the supportive environment for companies. For this purpose, it will be necessary to further strengthen the development and optimisation of the ecosystem, to support the creation and development of companies and promote entrepreneurship and innovation (SPOT points, subjects of innovative environment – SIO, economic business zones), cofinance process improvements and introduction of digital business models in companies, encourage start-ups and companies in the transition to the next phase of growth. In addition to the above-mentioned incentives, the internationalisation of companies is particularly important for increasing the productivity of the economy through the creation of high valueadded products and services in global value chains. To support the internationalisation, it is necessary to continue with measures to finance partnerships in foreign markets, promote and strengthen brands of products and services in foreign markets, trade fairs, market research and digitalisation of international business and support new measures, such as international development cooperation, feasibility studies and pilot demonstration projects and their investment components.
Great investment potential in multibillion financial stimulus
The National Recovery and Resilience Plan will provide extensive financial support for reforms/structural change and investment, with the aim of mitigating the economic and social impact of the coronavirus pandemic and making the economy, the public sector, and society as a whole more sustainable, resilient, and better prepared for the challenges posed by green and digital transitions. Under the national plan, Slovenia will have at its disposal approximately EUR 1.6 billion as grants and EUR 3.6 billion as loans. This financial stimulus brings great potential for investment and reform, which can significantly contribute to alleviate the challenges mentioned above, and to increase the competitiveness and productivity of the Slovenian economy. Of course, it is essential that these reforms and investments are implemented, leading to the results expected at the milestones as set out in the draft national plan. Political stability, reform commitment, and continuity of current and future governments, are essential for this.