Summary: KEY ISSUES Context: Slovenia is recovering from a profound recession, which culminated in a banking crisis in 2013. Following the recapitalization by the state of the major banks, growth has returned, supported by strong exports and EU funded public investment. Nevertheless, output is below pre-crisis levels, and unemployment remains high. Large deleveraging needs of the private and public sectors weigh on medium-term growth. Challenges: The balance sheets of banks, corporations, and the state remain vulnerable and are deeply interlinked. Without continued reforms to address these, more losses could materialize, risking renewed financial stress. Policy priorities: Slovenia needs to reignite the reform momentum to reduce vulnerabilities and boost potential growth. Priorities include the following: • Address the still high non-performing loans, including through more transfers to the bank asset management company (BAMC), strengthen bank governance, and fully privatize all state-owned banks; • Restructure the corporate sector by making full use of existing tools, such as the BAMC, whose independence should be safeguarded, and the new debt- restructuring legal framework; further reduce the role of the state in the economy; • Consolidate the public finances through structural measures and reforms, including of the pension system, to put public debt on a sustained downward path; and • Implement structural reforms to support corporate restructuring and youth employment and facilitate domestic and foreign investment.

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