Boston, MA -- (SBWIRE) -- 07/29/2013 -- Political instability will remain elevated as the four-party government coalition attempts to push through harsh austerity measures that will likely prompt parliamentary tensions and social unrest.

The short-term economic outlook has deteriorated sharply due to the deep banking sector crisis, forthcoming fiscal tightening, and soaring unemployment.

Though the new government has been able to stave off the immediate threat of a bailout, this still remains a real possibility for 2014 if it is unable to implement its ambitious fiscal plan.

Major Forecast Changes

We have revised down our real GDP growth forecasts for 2014 and 2015 to -0.2% and 1.0%, from 1.0% and 2.6% respectively, due to the impact of new austerity measures and the costly impact of banking restructure.

We have raised our target for the budget deficit to 7.8% of GDP in 2013, almost double the outturn in 2012, largely on account of the cost of recapitalising ailing banks.

We have revised upwards our current account forecast for 2013 and 2014, to 2.5% and 2.2% of GDP respectively, based on our view that import growth will be stagnant while the recession continues.

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Risks To Outlook

Politics remains a key risk to the national reform programme, with the details of how to slash the budget deficit during a downturn likely to highlight differences between coalition partners. Any sign that the reform programme is at risk of delay or suspension will have an immediate and punishing impact on market sentiment towards Slovenia, pushing the country closer to a bailout.

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