Having gained independence in 1991 without suffering the drawn out agonies of the Yugoslav war, Slovenia has been quick to build on the liberalisation of the economy.

One of the front-runners for membership of the EU, this tiny Alpine nation of just 2m people has seen sound economic growth encouraged by stable government. Indeed, the quest to join the European club has dictated much of the government's economic policy.

Latest data published by the Statistical Office indicates a 3.8% GDP increase in 1997, higher than anticipated, and a continuation of the upward trend in the first quarter of 1998 with GDP growth accelerating to 6.5%.

Hermine Vidovic at the Vienna Institute for International Economic Studies puts the improvement down to strong domestic demand. Particularly encouraging has been the performance of manufacturing industry," said Vidovic. "After almost stagnating during 1997, output rose 5.6% during the first four months of this year. However, it is too early to say whether this represents a genuine reversal in the trend, as the production levels in the first months of last year were unusually low."

The government's inflation target set at 8% on the PI, however, seems to be a stiff one. The first five months of 1998 have seen consumer prices rise by 9%. Despite the need to phase out state-controlled prices, increases in transport and fuel costs fuelled inflation earlier in the year. The government has also planned an intervention programme to maintain agricultural prices. A taxation review is underway, with plans to introduce VAT in July 1999. "Although the government is optimistic this will help its fight against inflation, other analysts believe that the proposed two band system set at 19% and 8% could add anything between five and 12% to the inflation figure," argues Vidovic.

Meanwhile the Bank of Slovenia has set the annual growth rate of M3, the intermediate target of monetary policy for 1998, at between 18 - 26%. In 1997 M3 rose by 22.9%. This is based on assumptions of 3.5 - 4% GDP growth, a government deficit of 1% of GDP, an average wage growth 1% lower than productivity, an increase in consumer prices of less than 8% and, significantly, an assumption of "no considerable increase of financial inflows from abroad due to domestic factors".

This points to continued strict control of domestic interest rates. A point picked up by Berndt Klett at Deutsche Bank in Frankfurt. "In the past Slovenia has had a balanced budget, or even a small surplus. Even though a small deficit is predicted for this year, Central Bank sources indicate that there is no need for foreign investment to finance this. Consequently the fixed interest market is very small, and of little interest to foreign investors as the government does not need to create new instruments to finance debt."

Gregor Kostelic of CAIB (London) agrees with this view. "There are some old bonds, but there is not much interest in them. The government does, however have plans for a new T-Bills market, aimed at building a real yield curve into the economy. Because of restrictive regulations such investments are mainly of interest only to domestic investors, but liberalisation promised for later this year could change that," he adds.

The equity market, meanwhile, has been on an upward curve since the slump of March last year. Klett believes the key to this has been the liberalisation strategy of the central bank since that low. "The central bank had been worried about the conflict of battling inflation, and trying to develop the stock exchange. Originally they felt that the inflow of foreign capital helped to fuel inflation, and so strict regulations and restrictions on how foreigninvestors could dispose of their holdings tended to limit their involvement on the stock exchange. Now, however, these controls are being relaxed, and we should see the index continue to grow at a healthy rate," he says.

Kostelic agrees that the lifting of restrictions and penalties on foreign investors will help the market, but points out that in the past, especially in August and September, they have protected the index by ensuring that investors could not simply dump stock. "The problems in Moscow have had a serious impact on most eastern European exchanges, but Slovenia has been protected by the restrictions on how foreign investors can dispose of stock acquired after February 1997. Of course foreign investment is important, but as domestic rates fall and are kept low, there will be more domestic interest in the stock exchange," he maintains.

Following the voucher privatisation process, the Ljubljana exchange is broadly representative of the economy as a whole. Recently the law on Completion of Ownership Transformation was approved by the Slovenian parliament, providing the ground rules for the final privatisation process. it is anticipated that two of Slovenia's biggest banks will be the first to the market place. Nova Ljubljanska Banka (NLB) and Nova Kreditna Banka Maribor. Foreigners will be allowed to participate in the sale, but domestic institutions are to remain majority owners. The privatisation of NLB would also pave the way for the merger with SKB Banka, announced earlier this year.

Kostelic also anticipates other major privatisation to boost the stock exchange. "As well as other banks, I would anticipate we will see the state telecoms company privatised. Also, the deregulation of the transport sector will mean that the government may well sell off some of its 51% stake in the Port. This, together with the pharmaceutical sector, which is already heavily traded by foreign investors, could prove a boost to the index," he said.

Whilst its neighbours in the former Yugoslavia struggle to come to grips with the realities of post-Cold War Europe, Slovenia is showing that sound economic management linked to stable government can overcome deeply-rooted structural weaknesses successfully. Kevin Hall"