Slovenia Economic Openness Analysis

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Slovenia Economic Openness Analysis

Key View: Slovenia offers a geographically ideal market for trade, with easy access to both the EU common market, as well as regional developing markets. The country has modern infrastructure, allowing access to main EU transportation corridors, a major port on the Adriatic Sea with access to the Mediterranean. Domestic demand will lead the recovery as the lifting of Covid-19 restrictions supports a rebound in household spending and investment activity. That said, several reforms are needed, such as greater privatisation, improved openness to foreign investment, investor-friendly changes to taxes and labour flexibility to support greater economic competitiveness. Overall, Slovenia scores 67.9 out of 100 for the Economic Openness pillar in our Trade and Investment Risk index, ranking it fourth out of the 12 states in the South East Europe region and 36th globally.

Relatively Competitive Regionally

South East Europe - Economic Openness

Note: 100 = Lowest risk; 0 = highest risk. Source: Fitch Solutions Trade and Investment Risk Index

Latest Economic Openness Analysis

Growth will moderate further in 2022 on waning base effects, but will likely remain robust due to stronger private consumption, while the external sector will benefit from easing supply chain disruptions. However, further Covid-19 waves amid a low vaccination rate pose a downside risk, while political uncertainty clouds the outlook.
Economic prospects appeared to worsen somewhat in Q321. Despite looser restrictions, private consumption growth was negatively impacted by rising Covid-19 cases since September amid the country’s flagging vaccination rate, with retail growth and consumer confidence averaging lower than in Q221. Meanwhile, industrial production growth eased amid supply bottlenecks in 2021, with the autos industry also impacted by semiconductor shortages. That said, rising foreign visitor arrivals in the quarter marked a bright spot for the external sector. Turning to Q4, prospects appear bleaker, with consumer confidence and broader economic sentiment both worsening in October, and a rocketing Covid-19 caseload forcing slightly tighter restrictions in November. Any further rise in cases could lead to tougher measures ahead. In politics, parliamentary elections were recently called for April 2022.

Trade Openness

Slovenia performs well in terms of its receptiveness to trade, largely owing to the country's close proximity to its main trading partners. Its EU membership translates into the country having virtually no tariff barriers, increasing the competitiveness of exports. In addition, Slovenia's export-oriented manufacturing sector is fairly diversified in terms of not being strictly reliant on one type of exported product and will benefit from a brightening economic outlook in the eurozone. That said, we caution that the rising wave of global trade protectionism could have negative implications on the trade and investment attractiveness of export-oriented economies, such as that of Slovenia. Overall, Slovenia has a very high score of 82.6 out of 100 for Trade Openness, ranking it in first position out of the 12 states in the South East Europe region and 13th globally.

Structure Of The Economy

Overview: Slovenia has a strong and broad economic base and its large component of the international activity is both a source of risk and reward as it subjects the economy to global fluctuations. With its population of just around 2mn people, the health of the global economy has significant implications for Slovenia's trade and investment performance. This is so as the small domestic population present challenges for consumer-facing businesses due to the relatively small potential consumer market. In particular, Slovenia's EU membership since 2004 is beneficial to the country as it gives businesses access to a potential wider consumer market in Western Europe, which has been very supportive of the country's export-oriented manufacturing sector.

Industry: Industry accounts for 28.9% of GDP in 2019. Slovenia has a sizeable automotive manufacturing component industry, despite producing very few full assembly vehicles. Other key industries include metal products, furniture, paper, shoes, sporting goods, electronic equipment and textiles.

Services: Services account for 56.6% of GDP in 2019. The service sector has grown steadily over the past decade, with information and communications technology, financial, commercial and retail business services being among the most prominent. The tourism sector is undergoing a period of strong development and continues to grow. According to national statistics, the tourism sector accounted close to 13% of Slovenia's GDP, 8% of total exports and 37% of total services exports.

Agriculture: Agriculture accounts for 2.0% of GDP in 2019. lovenia is among the top countries that are richly endowed with forest resources in Europe, with over 60% of its territory estimated to be under forests cover. As such, the wood processing industry has always been one of the most important primary sector activities. The industry is estimated to employ about some 11,000 people and has created investment opportunities to over 1,000 companies engaged in a variety of primary sector related-activities such as timber and similar activities.

Highly Dependant On Services Sector

Slovenia - GDP By Sector, 2019 (% Share of GDP)

Source: World Bank, Fitch Solutions

Covid-19 Impact And Near-Term Business Outlook: The impact of Covid-19 resulted in a significant decline to Slovenia's economic growth. Going forward, domestic demand is likely to lead the recovery as the lifting of Covid-19 restrictions supports a rebound in household spending and investment activity.

Trends In Trade

Slovenia is a highly open economy, leaving the country exposed to external shifts, particularly in the eurozone. Similar to the export basket of Central Europe, Slovenia has a high level of exports related to the automotive industry and the surrounding supply chain, which feeds into the wider German manufacturing machine. This is advantageous as it allows Slovenia to gain greater exposure to global trade dynamics, lowering its dependence on trade partners within its immediate geographic vicinity. However, in the current climate, it also leaves the country exposed to regional and global shocks. After slumping in 2020, import growth is likely to gradually recover over the medium term in line with the rebound in domestic demand and rising commodity prices. This will chip away at net export's contribution to real GDP growth, though it should remain positive over the coming years.

Imports And Exports

Imports & Exports (2016-2021)

e/f = Fitch Solutions estimate/forecast. Source: Bank of Slovenia, Fitch Solutions

Composition Of Trade

Slovenia has one of the most complex economies in the world and the country's exports, mainly dominated by high value manufactured products, are relatively diversified. Some of the country's top export products are vehicles and vehicle parts, electrical machinery and equipment, including computers, pharmaceuticals, mineral fuels including oil and refined products, iron and steel, among others. The country's exports are highly diversified with top 10 product exports accounting for approximately 69% of the overall value of its global shipments in 2019. In terms of broad product categories, machinery and complex manufactured products exports were the largest accounting for 41% of total product exports in 2020. This was followed by manufactured consumer goods, chemical, industrial and fuel, metals and metal products, and food and agricultural exports.

Manufacturing Dominates The Export Mix

Slovenia - Goods Exports & Imports, 2020 (USDbn)

Source: ITC-Trade Map, Fitch Solutions

A large portion of Slovenia's imports also comes from the EU countries. According to data from Slovenia's Statistical Office, approximately 80% of total imports of goods were generated on the markets of EU Member States in 2020. Slovenia's largest import partner in 2020 was Germany, which accounted for 14% of total imports. This is followed by Switzerland (12.7%), Italy (10.8%), Austria (7.5%) and China (7.3%). The share of imports from these countries into Slovenia has remained relatively stable over the past decade, with Slovenia benefiting in terms of minimal trade barriers as most of these countries are members of the EU, aside from China. We expect the trade picture to remain relatively stable over the coming decade as Slovenia's industrialising and manufacturing based economy has better supply-chain linkages in terms of trade complementary of these countries.

Highly Exposed To Potential Regional Disruptions

Slovenia- Top Five Import Partners & Products, USDbn, 2016-2020

Source: ITC-Trade Map, Fitch Solutions

Slovenia's EU and Schengen memberships allow for high levels of freedom of movement between member states, given that the EU is a customs union and has a common external tariff, and that the Schengen agreement abolishes all forms of border checks between member states.These have significantly reduced the country's tariff and non-tariff barriers to trade, especially for international trade between Slovenia and its EU peers (which accounts for the vast majority of the country's exports and imports).On the back of this, in terms of documentation required for exporting to and importing from Slovenia (for EU member states who are its main trading partners), there are only very minimal forms to fill out. Compliance procedures for both exporting and importing therefore only take one hour.Slovenia is, therefore, one of the least time-consuming emerging European states to trade with from a document preparation perspective, along with other EU member states in the South East Europe region such as Romania and Croatia. Overall, this will highly benefit businesses trading with the country.

Membership To EU Customs Union Has Come With Multiple Trade-Related Advantages

Major Customs Unions Worldwide

Source: Fitch Solutions. Template image: D-maps.com

Slovenia's top five exporting partners are mainly eurozone-based: Germany, Italy, Croatia, Austria, and Switzerland. This means that Slovenia has benefited in the past few years from the surge in demand experienced by the region, as well as the low transport costs due to geographical proximity, and minimal trade barriers owing to the fact that the country's main trading partners are members of the EU. That said, the high dependency on the eurozone does make Slovenia vulnerable to any changes in demand within the region. We highlight this as a risk to Slovenia's external trade outlook going forward, in the form of the regional headwinds such as the slowdown in many of the EU's major economies, the fallout from Brexit as well as high debt levels in Southern Europe.

High Integration With Western Europe A Source Of Both Risks And Benefits

Slovenia- Top Five Export Partners & Products, USDbn, 2016-2020

Source: ITC-Trade Map, Fitch Solutions

Trade Agreements

The domestic market in Slovenia is constrained by the country's small population with just around 2.0mn people. As such, the country's economy is highly driven by trade and easy access to an international market, with potentially larger consumer base, has been critical in boosting its trade competitiveness. In addition to being a member of the EU, which allows for duty-free trade among member states, Slovenia has been a member of the World Trade Organisation (WTO) since July 1995 and a member of GATT since 30 October 1994. Additionally, Slovenia has many trade-related agreements with various countries, which demonstrates the country's commitment to free trade.

Slovenia - Free Trade Agreements
Country/Bloc	Status	Positive Effect On Businesses
EU Common Customs Tariff	Active	High: Since the completion of the internal market, goods can circulate freely between member states. As Slovenia's main trade partners are in the EU, the absence of customs charges with member countries greatly enhances its trade volumes.
European Economic Area (EU-European Free Trade Association - Iceland, Liechtenstein, Norway and Switzerland)	Active	Moderate: Switzerland is Slovenia's 16th largest trading partner, and therefore the ability for goods to circulate freely between Switzerland and Slovenia has aided trade flows between the two countries.
EU-Serbia	Active	High:Serbia is Slovenia's seventh highest exporting partner, and therefore this FTA has assisted in the flow of trade between the two countries.
EU-South Korea	Active	High: South Korea is Slovenia's seventh largest importing partner, especially for cars. The agreement eliminates duties for industrial and agricultural goods in a progressive, step-by-step approach. The majority of import duties were removed when the FTA entered into force on July 1 2011. On July 1 2016, all remaining import duties were eliminated on all products except for a limited number of agricultural products.
Source: Fitch Solutions

Trade Barriers

As part of integration into the EU and the euro area, Slovenia became the first of 10 countries that joined the EU in 2004 to adopt the euro in 2007, the bloc's single currency introduced in 2002. This has been beneficial in terms of eliminating foreign currency exchange risks for businesses engaging in cross-border trade within the EU. In addition, the euro has been relatively stable over the decades benefiting from strong monetary regulation by the bloc's central bank and has been core in facilitating trade growth among member states.

As an EU member state, Slovenia’s regulatory system is based on two principles: the supremacy of EU laws and the principle of direct effect. In areas subject to EU responsibility, EU laws override any conflicting member state laws. Direct effect enables Slovenians and other EU citizens to use EU laws in national courts against the government or private parties.

Slovenia - Tariff And Non- Tariff Barriers
Measure Type	Trade Partners Affected	Business Impact
Import tariffs	Non-EU member states	Moderate: Slovenia is a member of the European Union Common Customs Tariff, which applies to the import of goods across the external borders of the EU. The tariff is common to all EU members, but the rates of duty differ from one kind of import to another depending, on what they are and where they come from. The rates depend on the economic sensitivity of products. Tariff rates in Slovenia are low, at an average of 1.5%, ensuring lower costs for exporters and importers - particularly if a trade is taking place within the EU customs union. Average import tariffs for goods outside of the EU are highest for agricultural products and processed food; while the highest applied tariff for non-agricultural goods is for clothing, at 11.5%, with duties falling as low as 2.4% for electrical machinery and 2.0% for petroleum. These low tariffs facilitate trade even with countries outside of the EU.
Import requirements and documentation	All	Low: As an EU member state, Slovenia applies the Integrated Tariff of the Community, which is designed to show various rules applying to specific products imports and exports into and from the EU. The EU adopted the Union Customs Code (UCC) on October 9, 2013, aimed at modernising customs and serving as the new regulatory framework for customs rules and procedures across the EU. The UCC aims to streamline legislation pertaining to customs by simplifying customs rules and procedures, fully computerise customs procedures, offer regulatory certainty and uniformity, which will further reduce trade barriers within the block.
Source: Global Trade Alert, Fitch Solutions

Investment Openness

In addition to helping develop a liberal trade regime, Slovenia's transition to a free-market economy and accession to the EU have resulted in a generally welcoming environment for FDI, with no restrictions on foreign investment, with foreign companies afforded equal treatment to their domestic counterparts under the law. That said, though the government also offers some incentives for investment in certain industries and underdeveloped regions, and has recently attempted to coordinate a more focused strategy for FDI, foreign investors continue to face a number of barriers. Chief among these include a heavy presence of state-owned enterprises (SOEs) in many sectors, a small domestic market, a high tax burden, and limited investment incentives. Consequently, the country does not offer the most attractive business climate in the region and is ranked eighth out of 12 South East Europe states for Investment Openness, with a score of 53.2 out of 100. This score places it towards the lower end of the region, above North Macedonia.

Investment Trends

While Slovenia provides a highly stable political environment for investors, given the country is a well-established liberal democracy with a history of peaceful transitions of power, it remains an underperformer in terms of inward FDI compared to its regional peers. In absolute value terms, inward FDI is only USD16.8mn, the fifth lowest in the South East Europe region. Relative to GDP, Slovenia performs even worse with FDI totalling only 33.8% of GDP, the second lowest in the region, only above that of Turkey (22.4% of GDP).

Slovenia is a country with a small population of around 2.0mn people which, despite being a high-income country, suggests that the small size of the domestic market could be a key constraint for FDI, especially for consumer-facing businesses. Such businesses are more likely to set-up locations elsewhere in the region where larger population sizes provide potentially robust demand for consumer businesses. That said, even with its small population Cyprus's FDI to GDP is more than 50 times (1,825% of GDP) larger than that of Slovenia even with its population being only large as half as that of Slovenia. This suggests that population size alone could not be a key deterrent to FDI in Slovenia.

State Presence Crowds Out Private Investment

South East Europe - Inward FDI Stock (2019)

Source: National Statistics, Fitch Solutions

While private enterprises and public enterprises compete on the same terms and conditions with respect to access to markets, credit, and other business operations in Slovenia, some sectors which are considered to be of strategic national interest such as energy, transport, banking, and insurance are more likely to be dominated by state-owned companies. The government also has a significant presence in other economic sectors such as retail, entertainment, construction, tourism, and manufacturing businesses which are either wholly state-owned or in which the state maintains a controlling interest by being the larger shareholder. In our view, the strong presence of the state in the economy, which leaves little room for private sector participation is a key factor inhibiting FDI inflows in Slovenia than the country's relatively small consumer base.

Slovenia - FDI Stock By Country
Source: Investment Map, Fitch Solutions
Major Investing Countries	% Of Total, 2018
Austria	24.0
Luxembourg	13.7
Switzerland	10.8
Germany	9.0
Italy	7.9

Austria and Luxembourg remain Slovenia's main investing partners, accounting for 24.0% and 13.7% of total investment in 2018. Slovenia remains an attractive destination for Austrian investors, mainly due to its geographical position, in particular the maritime port of Koper, skilled workforce, access to south-east European markets and safety. Austrian companies in Slovenia note the quality, level of education and motivation of the Slovenian workforce, ease of access to public contracts and the tax system in the broadest sense. In Value terms, finance remains the largest sector, accounting for 33.0% of total investment inflow in 2018. This is followed by business activities (22.6% of total inward investment) and food, beverages and tobacco (15.2%).

FDI Flows Have Improved In Recent Years

Slovenia - Inward FDI Stock (2010-2019)

Source: UNCTAD, Fitch Solutions

Investment Incentives

From an overall FDI openness perspective, Slovenia generally has a welcoming attitude to foreign investment based on the harmonisation of regulations with EU norms, which has resulted in equal treatment for both domestic and foreign sources of investment by law. There are no restrictions on currency conversions, which are available at market rates, and companies are free to remit profits and undertake capital transfers. In recent years, the government has responded to criticism of its lack of coordination with regard to FDI inflows by creating a new body - the Slovenian Public Agency for the Promotion of Entrepreneurship, Innovation, Development, Investment and Tourism - which is intended to promote a more coherent strategy for attracting and managing foreign investment. Through its website, Invest Slovenia, the agency offers advice and assistance in order to ease the process of setting up operations and to boost the country's competitiveness.

Invest Slovenia highlights a number of key areas in which foreign investment is encouraged: automotives; chemicals and pharmaceuticals; electronics; ICT; logistics; machinery and metalworking; and wood processing. Traditionally, the banking sector, manufacturing activities and retail industry have been the major recipients of FDI inflows to Slovenia, so this new strategy represents some effort towards diversification as the government aims to improve the development of certain industries. As well as improving the national strategy for FDI, the government has initiated reforms aimed at improving foreign participation in the economy. This has progressed in the aftermath of the financial crisis, as the government has been more open to privatisation and actively reducing its presence in the economy. Banks, insurance, and energy companies are in the process of being privatised, removing one of the major barriers to foreign participation in these sectors, which remain dominated by SOEs.

Slovenia - Free Trade Zones And Investment Incentives
Free Trade Zone/ Incentive Programme	Main Incentives Available
Free Economic Zones (FEZs): Koper and Maribor	FEZs may be established by one or more domestic legal persons. The founders must provide the resources necessary for the establishment and commencement of operation, as well as suitable technical, organisational, ecological and other conditions for the performance of business activities. The following activities may be performed within free economic zones: production and services; wholesale trade; banking and other financial services; and insurance and reinsurance regarding the above mentioned activities. After obtaining an appropriate tax authority decision, users of FEZs are entitled to the following benefits: (i) VAT exemption for imports of equipment, production materials and services necessary for export production or performance of other permitted activities; (ii) a reduction in corporate tax rates from the normal 21% to 10%; (iii) a tax allowance amounting to 50% of invested resources on investments in tangible assets in the FEZ; and (iv) a reduction in the taxable base amounting to 50% of the salaries of apprentices and other workers formerly unemployed for at least 6 months.
Free Customs Zone (FCZ): Port of Koper	Under the Customs Act, subjects operating in FCZs are not liable for payment of customs duties, nor are they subject to other trade policy measures until goods are released into free circulation. Duties and rights of users include the following: (i) Separate books must be kept for activities undertaken in FCZs; (ii) Users may undertake business activities in a FCZ on the basis of contracts with the founders of FCZs; (iii) Users are free to import goods (customs goods, domestic goods for export) into FCZs; (iv) Goods imported into FCZs may remain for an indefinite period, except agricultural produce, for which a time limit is set by the government; (v) Entry to and exit from FCZs is to be controlled; (vi) Founders and users must allow customs or other responsible authorities to execute customs or other supervision; and (vii) For the purposes of customs control, users must keep records of all goods imported into, exported from, or consumed or altered in FCZs. The Customs Act also allows the establishment of open FCZs that will allow for more flexible organisation and customs authorities' supervision.In such FCZs, users may undertake the following activities: (i) Production and service activities, including handicrafts, defined in the founding act or contract, and banking and other financial business transactions, property and personal insurance and reinsurance connected with the activities undertaken; (ii) Wholesale transactions; and (iii) Retail sales, but only for other users of the zone or for use within the FCZ.
Source: Government websites, Fitch Solutions

Investment Barriers

Foreign investment in Slovenia has traditionally been hampered by the lack of a clear promotion strategy, due to ambivalent attitudes towards FDI, and the heavy presence of SOEs in many areas of the economy. Although the former issue is being alleviated somewhat by the introduction of the SPIRIT Slovenia agency and a clearer incentive programme, the latter remains a barrier to private sector involvement despite the recent divestiture of some SOEs. Unlike most of its post-Communist peers, Slovenia did not undergo a major privatisation programme following its independence from Yugoslavia. Although this aided its swift and largely peaceful transition to a stable liberal democracy, the heavy presence of the state in the economy is now proving an obstacle to development, particularly in strategic sectors such as energy, banking, transport and telecommunications. The privatisation process will be gradual, and the prevalence of SOEs will, therefore, continue to prove a barrier to FDI over the medium term. In addition, foreign investors from outside the EU or OECD are not permitted to purchase property unless establishing a legally resident company, which hinders the potential for long-term investment from wider sources.

The American Chamber of Commerce have cited additional factors that adversely affect the local investment climate, including the lack of a high-level FDI promotion strategy, a sizable judicial backlog, difficulties in obtaining building permits, labor market rigidity, and disproportionately high social contributions and personal income taxes coupled with excessive administrative tax burdens. Businesses have also reported a lack of transparency in public procurement, unnecessarily complex and time-consuming bureaucracy, frequent changes in regulation, relatively high real estate prices, and confusion over lead responsibility or jurisdiction regarding foreign investment among government agencies.

However, a factor which does count in Slovenia's favour is that it is one of three Emerging European countries which has been able to as of yet adopt the euro as its currency. This means that Slovenian exporters and capital markets benefit from reduced transaction costs. As a eurozone member, Slovenia is not ordinarily permitted to enact capital controls. Capital controls are in principle prohibited under EU law, which guarantees the free flow of capital, except for certain exceptions on public policy or security grounds; however, the European Court of Justice has tended to interpret these rules conservatively. Transfer and convertibility risk is therefore exceptionally low in Slovenia, as with all European Monetary Union members.

Slovenia - Barriers To FDI
FDI Barrier	Sector Affected	Business Impact
State-owned enterprises	Strategic sectors such as energy, banking, transport, and telecommunications.	High: Through a widespread public ownership, the Slovene government is strongly involved in business operations which crowds out investment opportunities for private sector participation in the domestic economy. It is alleged that about half of the Slovenian economy and 44% of the banking sector is under the control of the government. While private enterprises and public enterprises compete on the same terms and conditions with respect to access to markets, credit, and other business operations in Slovenia, some sectors which are considered to be of strategic national interest such as energy, transport, banking, and insurance are more likely to be dominated by state-owned companies. The government also has a significant presence in other economic sectors such as retail, entertainment, construction, tourism, and manufacturing businesses which are either wholly state-owned or in which the state maintains a controlling interest by being the larger shareholder. There are limits on banking and investment services, private pensions, insurance services, asset management services, and settlement, clearing, custodial, and depository services provided in Slovenia by companies headquartered in non-EU countries. Companies from non-EU countries can operate freely only through an affiliate with a license granted by an appropriate Slovenian or EU institution.
Small population size	Consumer & retail	Moderate: Slovenia is a country with a small population of around 2mn people which, despite being a high-income country, suggests that the small size of the domestic market could be a key constraint for FDI, especially for consumer-facing businesses. Such businesses are more likely to set-up locations elsewhere in the region where larger population sizes provide potentially robust demand for consumer businesses. That said, Slovenia's membership to the EU gives businesses access to over half a billion potential consumers, which could take up the extra demand needed to complement the smaller domestic market.
Source: Fitch Solutions

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings.