Transcript Slide 1

Fiscal challenges in
Slovenia
IMAD, Ljubljana, 19 June 2012
Mitja Košmrl, DG ECFIN
Outline
1. Recent public finance developments including
the May 2012 austerity package
2. Structural challenges for public finances
3. Links between financial sector and public
finances
4. Costs and benefits of fiscal consolidation
Slow fiscal consolidation until 2008 and
then the crisis hit
• Gradually improved budgetary position in run-up to EU entry
• Indications of pro-cyclical fiscal policy over 2006-2008
• Widening general government deficit to 6.1% of GDP in 2009
15
Nominal GDP growth and primary expenditure
growth (%)
Headline and structural budget balance (% of GDP)
0
-1
10
EU entry
-2
-3
5
-4
0
-5
-5
-6
-7
-10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Nominal GDP growth
Source: Commission services
Primary expenditure growth without one-offs
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Structural budgetary balance
Headline budgetary balance
2011 brought sharp rise in spreads and
sovereign downgrades
•
•
•
Missed deficit targets over 2010/11 with an average annual
structural effort of only ¼% of GDP
Damaged credibility on financial markets
Sovereign ratings upgraded up to 2006, then stable, but successive
downgrades followed since autumn 2011
Source: S&P, Moody's and Fitch
Is the May 2012 austerity package the
turning point?
10-year Bond spreads
600
500
400
300
200
100
Slovenia
Source: Bloomberg and Commission services
Italy
Spain
Slovak Republic
1.6.2012
1.5.2012
1.4.2012
1.3.2012
1.2.2012
1.1.2012
1.12.2011
1.11.2011
1.10.2011
1.9.2011
1.8.2011
1.7.2011
1.6.2011
1.5.2011
1.4.2011
1.3.2011
1.2.2011
1.1.2011
1.12.2010
1.11.2010
1.10.2010
1.9.2010
1.8.2010
1.7.2010
1.6.2010
1.5.2010
1.4.2010
1.3.2010
0
1.2.2010
•
•
Ambitious 2012 deficit target with an estimated structural fiscal effort
of 2¼% of GDP, which is among the highest in euro area
First-ever planned cut in primary current expenditure
Final decision is taken on the package, hopefully also paving the way
for successful negotiations of the social agreement 2012-2016
1.1.2010
•
Many challenges remain
• Risks to government revenue and expenditure projections in
2012 and beyond
• Additional measures are likely to be needed for 2013 to
ensure the correction of the excessive deficit
• Many consolidation measures have expiry dates so they will
need to be replaced with permanent ones
• Public finance challenges of a more structural nature:
1. Long-term sustainability
2. Medium-term budgetary framework
3. Risks from the financial sector
Structural challenge # 1: Long-term
sustainability of public finances
• Long-term cost of ageing is one of the highest in the EU
(increase by 2060: SI 10.3% vs. EU 4.1% of GDP)
• Based on current policies and projections the medium-term
objective (MTO) of balanced structural position is not
sufficiently demanding
Age-related expenditure
(AWG risk scenario - 2010-2060 change)
14
12
10
8
6
4
2
0
-2
EA
UK
SE
FI
SK
SI
RO
PT
PL
AT
NL
MT
HU
LU
LT
LV
CY
IT
FR
EU27
Source: Commission services, EPC
ES
EL
IE
EE
DE
DK
CZ
BG
BE
-4
Recommendations to Slovenia under
the European semester
• Commission asks that pension reform should:
• equalise the statutory retirement age for men and
women
• raise the statutory retirement age in line with
increasing life expectancy
• reduce early retirement possibilities, and
• review the indexation system for pensions
Structural challenge # 2: Medium-term
budgetary framework (MTBF)
• MTBF and expenditure rule are insufficiently binding and
insufficiently focused on achieving sound medium-term
budgetary position and securing long-term sustainability of
public finances
• The Fiscal Council does not yet weigh on fiscal strategy
development
• Uncertainty about the plans to adopt a constitutional debt
rule
• Recommendation to Slovenia under the European semester
to strengthen the MTBF
Structural challenge # 3: Risks from the
financial sector
• 2011: recapitalisations of NLB (impact on deficit: 0.7% of
GDP) and NKBM
• Second recapitalisation of NLB due by end-June
• Uncertainty about budgetary impact of this and possible
further recapitalisations for state-owned banks (the state as
majority owner carries the burden of responsibility)
• Possible need for further financial sector support also
mentioned by rating agencies as reason for recent
downgrades of sovereign ratings
Interlinkages between sovereign and
banks (I)
• In general, rising sovereign-risk premia, being to an extent
a result of problems in the banking system, may spill back
to the banking system through various channels:
• falling mark-to-market values of government bonds
generate losses on the asset side
• lower values of government bonds impact negatively on
banks' liquidity positions
• banks' funding costs increase due to a worsened access
to funding on the liability side, and
• greater sovereign risks erode the potential for official
support
Interlinkages between sovereign and
banks (II)
Source: Public Finance Report 2009
How to reduce fiscal costs?
• Costs for the government depend ultimately on the
seriousness of the situation in banks and on how accurately
and quickly bank losses are assessed and acted upon
• Direct fiscal costs are lower and recovery rates are higher
when the bank resolution strategy is (Public Finance Report
2009):
• implemented swiftly and transparently
• underpinned by broad political support
• supported by strong public institutions and legal
frameworks
• consistent in terms of fair and uniform treatment of
market participants, and
• accompanied by a clear exit strategy
Recent sovereign CDS spreads
• Strong correlation among sovereign and banks CDS
spreads
Credit Default Swaps (5 year)
Slovenia
Czech Republic
Source: Bloomberg and Commission services
Hungary
Poland
1.5.2012
1.3.2012
1.1.2012
1.11.2011
1.9.2011
1.7.2011
1.5.2011
1.3.2011
1.1.2011
1.11.2010
1.9.2010
1.7.2010
1.5.2010
1.3.2010
1.1.2010
800
700
600
500
400
300
200
100
0
Slovak Republic
Recommendations to Slovenia under
the European semester
• Take the required steps to build sufficient capital buffers in
the banking sector and strongly promote the cleaning of
balance sheets so that appropriate lending to productive
activities can resume. Obtain fully-fledged third party
verification of systemically important banks' stress loanloss estimates
• Improve the business environment through:
• establishing a framework for state-owned enterprises
guaranteeing arms-length management and high standards of
corporate governance, and
• improving bankruptcy procedures, in particular in terms of
timeliness and efficiency
Short- and long-term impact of fiscal
consolidation on the economy
• Consolidation is likely to have negative employment and
GDP effects in short run. Multiplier is around 0.3-0.4 for
standardised 1% of GDP consolidation package
• In the medium to long run funding costs for the private
sector will be lower if sovereign risk is addressed, it leading
to positive effects on investment, GDP and employment
• These effects are strengthened by lower government
interest payments, creating space for future tax reductions
and more growth friendly expenditure
Quality of the consolidation effort matters
•
•
In general, the consolidation effort should be based on permanent
measures and embedded in a credible medium- to long-term
framework;
GDP losses can be minimised and long-run gains maximised with
an appropriate policy mix.
Source: Commission services
Hvala.