How is Slovenia coping with the turbulent economic situation?

How is Slovenia coping with the turbulent economic situation?

Author: Lidija Zupančič

Just as the negative impacts of the pandemic were coming to an end and the market was slowly picking up, the adverse effect of the Russia/Ukraine crisis began to impact the Slovenian market. In order to mitigate the situation, Slovenia has adopted several measures alongside implementing those of the EU. However, the current economic situation in Slovenia remains uncertain and unstable, which makes it hard realistically to predict how it might unfold in the coming months.

  1. Current situation on the Slovenian market

Less restrictive measures for preventing the spread of the coronavirus and the effective adaptation to the “new normal” of business activities were the key elements for successfully mitigating the negative impact of the pandemic. As a result, the Slovenian GDP growth recorded in 2021 was 8.1%.

According to the Bank of Slovenia, Slovenian GDP growth is projected at 5.8% in 2022. However, the relatively high growth projections for this year can be largely attributed to the high economic activity in the second half of last year. The Bank of Slovenia also made forecasts in case the war in Ukraine should continue into 2023 and sanctions were to escalate, i.e., if a complete ban on imports of Russian energy products was to be implemented into the EU. In this scenario, Slovenian economic growth would be projected at only 4.3% in 2022.

  • Disruptions in supply chains

The situation on the global markets, in particular the delays in supply chains, impacted both the Slovenian automotive and construction industries. Most notably, they have caused delays in the supply of cars and car parts, accompanied by a rise in prices.

It is possible that supply chains will move closer to European markets, and thus Slovenian companies will have access to new opportunities. In such a case, they are likely to need additional resources to expand their capacity, which could increase financing in this area.

  • Inflation

Like most European countries, Slovenia is struggling with high inflation. The inflation forecast for 2022 is expected to be 9.0% on average. According to the Statistical Office of the Republic of Slovenia, by the end of June 2022, consumer prices already rose by 10.4% over the year, prices of goods by 13.1% on average, and prices of services by 5.3%.

Until the end of June 2022, higher prices of electricity, gas and other fuels were the main contributors to the overall annual price increase, followed by higher prices of petroleum products and an increase in food prices.

High inflation will lead to tighter financing conditions. Indeed, in response to the high inflation rates, the European Central Bank (ECB) has announced measures that will tighten the monetary policy, which includes raising interest rates.

Slovenia has also seen an almost unprecedented rise in real estate prices. The growth in real estate prices continued to sharply rise in 2021, surpassing the previous record highs set in 2008. Nevertheless, banks report an above-average increase in housing loans over the last few months.

  • Banking sector

The Russia/Ukraine crisis is also impacting the banking sector. At the end of February, the Slovenian subsidiary of Sberbank was estimated to be failing or likely to fail due to an extraordinary decline of its liquidity. To avoid disrupting the Slovenian economy, Sberbank’s Slovenian subsidiary was – as a measure imposed by the authorities – taken over by the largest banking group in Slovenia, NLB. Thus, as of 2 March 2022, all customers of Sberbank’s Slovenian subsidiary were able to use banking services normally; and the nervousness concerning the potential failure of Sberbank’s subsidiary subsided almost instantly. The deposit guarantee scheme was not triggered and, considering the complexity of the matter, the transaction was carried out extremely rapidly, which is in most part attributable to the exceptional collaboration between the EU and national banking regulators.

Another development is, as elsewhere in the world, the growth of interest rates, both fixed and floating. There are certain indications that the banks are considering ceasing offering fixed interest rate loans (although currently they are still available), and generally further growth of interest rates is expected. As the financing conditions are tightening, the number of loan applications could decrease in the future.

There are, however, also certain Slovenian specifics requiring significant resources from Slovenian banks.

First, Slovenian banks are making every effort to ensure that the recently adopted CHF loans law does not enter into force in its current state. This law retroactively shifts the majority of CHF loan related risks onto the banks and imposes extremely strict sanctions in case of failure fully to comply with the relatively onerous obligations imposed on banks (including an easily triggered loss of banking licence). In March, the entering into force of the respective law was on the initiative of the banks, having been suspended by the Slovenian Constitutional Court until the final ruling on its constitutionality has been made.

The other pressing topic for Slovenian banks is the defence to several collective legal actions in relation to the use of zero-floor EURIBOR (either in absence of contractual clauses or based on contractual clauses which are claimed to be unfair). The respective dispute proceedings commenced in May 2022.

  • Sanctions

In response to Russia’s actions destabilising the situation in Ukraine, the EU has adopted various restrictive measures (sanctions), such as prohibiting or limiting trade with Russia, as well as targeting certain Russian citizens and legal entities in Russia. Slovenia has largely followed the EU sanctions and, where necessary, implemented them into Slovenian legislation.

As certain sanctions are rather ambiguous, the legal analyses of practical issues can be very interesting. By way of example, one of the earliest sanctions included a prohibition of the sale of luxury goods to natural persons in Russia or for use in Russia. In one of our cases, the question was raised whether this sanction also applies to natural persons who have Russian citizenship (or in some cases even double citizenship – Russian and from an EU country) but reside in the EU and have not ordered luxury goods to be delivered to Russia. At the time of the matter, the restrictive measures had been recently adopted and considering the lack of practice and guidance on interpretation thereof, we advised that the competent authorities may interpret the applicable rules broadly and hence, there is a risk of sanctions also in such cases.

  • M&A financing projects and forecasts

The current situation on the market as described above, does not however seem to have any material negative impact on M&A financing projects. We have recently worked on certain M&A transactions of a larger scale, and there are also many acquisitions of SMEs. The banks are supportive.

Moreover, the whole impact of the pandemic, as well as the Russia/Ukraine crisis – contrary to general expectations – did not cause many bankruptcy cases.

Many are predicting that a recession will start at the end of the year, however M&A activity does not yet support such predictions.

  1. Challenges for the new government

Parliamentary elections were held this spring and a new left-to-centre government was formed in June 2022. Although instilled with a different political focus, we expect that the new government will also be occupied predominantly with the mitigation of the effects of the Russia/Ukraine war and the predicted recession, as well as the desperately needed reform of the health sector, a prospective tax reform (envisaged to enter into force in 2024) and the digitalisation of the society.

The measures used or announced to be used soon include, among others, certain regulations concerning petroleum product prices, certain aids to Slovenian farmers (including subsidies for fuel and fertilisers) and the purchase of all the wheat grown in Slovenia.

In an effort to tackle high inflation rates, a new measure is being discussed. This measure would include introducing a tax on the ownership of real property as well as create a basket of fifteen products the prices of which will be monitored and may (to an extent) be controlled. For the time being, the aim of this measure is to make prices of comparable products more transparent and thereby inform the consumers where they can purchase such products at the lowest price.

Albeit with autumn approaching, the most pressing concern for the Slovenian economy appears to be ensuring the receipt of the needed quantities of natural gas. According to the recent statements of the Slovenian Chamber of Commerce and Industry, Slovenia does not have its own gas storage capacities, and there is a 90% dependency of the industry on Russian gas.

Moreover, in the following months, adopting fiscal measures to help the most vulnerable populations and exposed parts of the economy will most likely be one of the highest priorities of the new government.

As the uncertainty encompassing the whole situation is extremely high, it makes future developments very difficult to predict. It seems that many of the measures were adopted in haste and consequently not all (financial) impacts were closely considered. For instance, the petroleum companies have filed claims against Slovenia to be compensated for the loss of profit due to the regulation of petroleum prices, however until now it is not clear if they will be compensated. If the petroleum companies will have to bear these losses, this will most likely be reflected in the (non)fulfilment of obligations towards their financial creditors. At the same time, the price of their stock could also be negatively affected.

  1. Conclusion

As in other European countries, the situation in Slovenia depends largely on the developments in the geopolitical situation at the European level.

It is possible that the financing of local companies will increase due to supply chains moving closer to the European markets. However, on the other hand, due to high inflation, the financing conditions are tightening, which could result in banks granting fewer loans.

It is inevitable that the newly adopted measures of the Slovenian government will affect the financial market, however as the current situation is so unstable, some time will need to pass before they crystallise and later also materialize.

Looking ahead, like most other countries, Slovenia’s macroeconomic forecast is affected by the consequences of the Russian military aggression in Ukraine, and growth continues to be threatened by continued disruptions in supply chains as well as possible new outbreaks of coronavirus infections. It is expected that, to a certain extent, the Slovenian economy will remain unstable, although the legal services market may not necessarily feel this.

The article was originally published in the CEE Finance and Capital Markets Workshop brochure prepared by Freshfields Bruckhaus Deringer (available here: