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Slovenia’s Economy to Shrink 2% as Exports Ease in Europe

Slovenia’s economy will contract more than previously estimated this year as exports to Europe slow and consumption falters, the government’s economic institute said.

Gross domestic product will shrink 2 percent, compared with a 0.9 percent contraction forecast in March, the institute said in a statement today. GDP is expected to fall 1.4 percent next year, according to the institute, whose forecasts are used by the government to prepare the budget.

“Slovenia is seeing modest demand for its exports in Europe, while households and the government are spending and will spend much less,” Bostjan Vasle, the institute’s director, told reporters today in the capital, Ljubljana. “If the situation in Europe worsens, then there’s a downside risk to our forecast.”

Slovenia’s economic outlook is worsening as demand for its exports wanes and domestic consumption drops following austerity measures by the government in Ljubljana and others in Europe. Exacerbating the outlook are ailing banks in Slovenia, which rely on funding from the European Central Bank, continue to lower lending and need fresh capital.

Bank Recapitalization

The government has increased the estimate for its bank recapitalization to 5 billion euros ($6.5 billion), Finance Minister Janez Sustersic said yesterday. Slovenia will guarantee as much as 4 billion euros to transfer bad loans to an agency, while lenders including Nova Ljubljanska Banka d.d. and Nova Kreditna Banka Maribor d.d. are set to receive a direct-capital injection of as much as 1 billion euros, according to Sustersic.

Banks in the former Yugoslav nation are at the center of investors’ concern that the country may be the next in line to ask for an international bailout. Slovenia’s borrowing costs have eased since August, when they surpassed the 7 percent threshold, a mark that forced Ireland and Portugal to seek financial assistance from its euro peers.

Slovenia still aims to cut the budget deficit to 3.5 percent of GDP by year-end from 6.4 percent at the end of 2011, Sustersic said. By the end of next year, the target is to lower the gap below 3 percent, the EU’s limit, he said.

The country could see modest growth in 2014 after fiscal tightening ends and banks are recapitalized, Vasle said. GDP in 2011 advanced an annual 0.6 percent, compared with a previously estimated contraction of 0.2 percent, he added.

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