Slovenia’s Listing Lake Lurches

Slovenian shares extended a 10 percent loss as banks NLB and NKBM prepared rights issues to meet European regulatory requirements, as government support for recapitalization may be subject to a referendum at labor union insistence amid rumors a larger EU rescue request is imminent. Recession has set in and will continue next year according to official and private projections, and a further sovereign downgrade may come from contingent liabilities from the state bad banks which have pushed debt/GDP over 60 percent. The units have resisted privatization since the breakup of Yugoslavia with a popular mistrust of FDI reflected in politics and the debate over joining the euro. The recent presidential race resulted in a second-round faceoff between the incumbent and a former prime minister who both advocated minimal liberalization. With “A” rating normal annual refinancing needs of 4-5 percent of GDP could be met should the external bond market stay open as during an October $2.25 billion 10-year tap. However the structural reform agenda is stuck with a range of state-owned enterprises and the pension system representing “negative feedback loops” in the words of the IMF. Non-performing loans are at 15 percent and a central resolution agency has been created to tackle the load but is not yet operational. A 2010 minimum wage hike has eroded competitiveness and generous tax incentives may limit revenues. The Fund’s Article IV report questions rigid worker protection which disadvantage young and female professionals. It recommends that blocking shares and majority control be relinquished to outside investors in the business and financial sectors alongside an effort to improve local prudential supervision and EU coordination.

Serbia’s equity performance has been equally dismal, with a new coalition coming to power headed by a former ally of the Milosevic regime advocating greater economic intervention as he abruptly sacked the previous central bank governor. GDP has fallen 1.5 percent as credit growth finally settles at a single-digit pace with NPLs over one-fifth the total on an industry loan-deposit ratio above 125 percent. Three-quarters of credit is in foreign currency and the timetable for renegotiating a Fund standby arrangement is uncertain. Inflation and the current account deficit are both in double digits as the dinar continues to depreciate against the euro. Sub-regional favorite pupil Former Yugoslav Republic of Macedonia, which qualified for a contingent pre-qualified line for good policy records, has likewise been down 10 percent on its local index. With relative fiscal prudence at a deficit of 3 percent of GDP, officials have managed to borrow externally with a $75 million recent loan from Deutsche Bank, as they plan to extend the domestic yield curve at the same time. It has worked to foster a reputation for sound outward-looking management in contrast with neighbors Greece and Slovenia as their entwined histories fray.