CFO Survey Slovenia | February 2014 As Long As Government Focuses on Measures That Enable Filling the Impoverished State’S Budget (E

CFO Survey Slovenia | February 2014 As long as government focuses on measures that enable filling the impoverished state’s budget (e. g. new taxations), we can’t expect economic progress. On the contrary, we need stimulating measures that will make Slovene economic environment more optimistic and more supportive, where fear from failure and lack of confidence, as stated by one of the interviewees, will no longer block the development of our economy.

2 Slovenia in 2014 – Lack of optimism

Further contraction of the economy, decrease of employment due to the transition of working population to inactivity, stricter credit standards which reduce the availability of new financing – these are main forecasts of Slovene CFOs for the year 2014. Not really optimistic, especially when still a vast majority (62%) of Slovene participants in this third edition of CFO Survey believe that Slovenia will face another year of recession. And for the third time Slovenian CFOs remain the most pessimistic about expectations for the country’s growth this year among all the countries that participate in the Survey. The vicious circle of economy crisis in Slovenia though continues.

According to Slovene CFOs, all Slovene governments are responsible for the weak economic development of the country in the last couple of years. They estimate that government involves too much in the economy, and what is more, it constantly changes its economic policy what continues to block the country’s development and growth. The most important factors to reach the last, CFOs list development of financial sector, tax reductions and decrease in corruption. This list should be a sign that it’s about time to implement so hardly waited structural reforms, starting with the rescue program of the Slovene banking system.

But only that will not save the Slovene economy. As long as government focuses on measures that enable filling the impoverished state’s budget (e. g. new taxations), we can’t expect economic progress. On the contrary, we need stimulating measures that will make Slovene economic environment more optimistic and more supportive, where Yuri Sidorovich fear from failure and lack of confidence, as stated by one of Managing Partner, Deloitte Slovenia the interviewees, will no longer block the development of our economy.

CFO Survey Slovenia 3 Key findings: • No signs of revival of the economy.

• Decrease of employment due to the transition of working population to inactivity.

• Stricter credit standards reduce the availability of new financing.

• Slovene banking system needs additional restructuring.

• Slovene CFOs believe that the government is responsible for the weak economy development.

4 Economic forecasts for Slovenia

It is not expected that the economic conditions shall Due to further fiscal consolidation and tight improve in Slovenia in the short term. Despite the first conditions on the labor market and in the banking signs of recovery in the euro area, domestic factors system, business will continue to be difficult in 2014. will remain to constrain the recovery of the Slovenian economy. In 2012 the economy contracted by 2.5% Despite the introduced measures for increasing and it is expected to further contract by 2.4% in the state’s revenue, the general government deficit 2013 and 0.8% in 2014, respectively. According to in 2013 has increased. Rising expenditures for the Slovene Institute of Macroeconomic Analysis interest and pensions surpassed the savings related to and Development (“SIMAD”), a slight recovery is the reduction of salaries in the public sector. Similar envisaged for 2015 where the economy is expected trends are expected also for 2014 as the government to grow by 0.4%. will need to collect new funds for rehabilitation of the banking system and additional 3 billion EUR to Current and ongoing recession in Slovenia is repay government bonds with the maturity date mainly driven by domestic factors which will slow in 2014. The government austerity measures are down the economy also in 2014. It is expected expected to increase also in 2014 which will especially that the Slovene economy will be affected by affect new investments and disposable income. the following factors in 2014: Contraction of economic activity contributed •• weak consumer and corporate confidence; to the fall of employment in all sectors. Due to •• high and rising unemployment; austerity programs, the employment decreased also •• declining household spending; in the public sector for the first time in the history of Slovenia. The pension reform in the beginning •• tight government spending; of 2013 significantly contributed to the fall of •• highly indebted local companies; employment, which was largely due to the transition •• ongoing credit crunch and upcoming bank rescue of working population to inactivity. SIMAD expects programs; on average 120.6 thousand registered unemployed persons in 2013. With the continuation of poor •• declining construction sector; economic conditions, employment will further •• slow growth in the euro-zone and most of the CEE decrease in the next two years. The number of market; registered unemployed persons will remain around •• low and declining foreign direct investments as 120 thousand, however, the working-age population well as declining domestic investments. will shrink.

CFO Survey Slovenia 5 Business in Slovenia is also constrained due to banks In terms of CFOs’ expectation for Slovene GDP which continue to reduce the amount of granted growth in 2014, the majority of Slovene CFOs (62%) loans to nonfinancial institutions. In the first seven agree with SIMAD that Slovenia will face another year months of 2013, the volume of loans granted to of recession, while 35% of surveyed CFOs feel more the private sector has decreased by 1.1 billion EUR. optimistic and believe that the Slovene economy The “stress tests”, recommended by the European will manage to grow between 0 and 1.5% in 2014. Council, have established that non-performing loans CFOs also deem that the level of unemployment are estimated at 7.8 billion EUR which represents will increase in the upcoming 12 months. 65% of approximately 17% of all outstanding receivables of surveyed CFOs expect that unemployment shall the Slovene banking system. According to SIMAD, increase somewhat and 24% expect a significant the first positive effect of the bank rescue program increase of unemployment. shall be visible only in 2015.

The recovery of the Slovene economy also very much depends on the economic growth in our most important trading partner countries. Due to the important shares of export and import of goods All Slovene governments are responsible for in the GDP structure, the way out of this crisis will largely be affected by the recovery of Slovenia’s trade the current condition of our economy. It’s time in goods with foreign countries. Luckily, international politicians put aside old grudges and differences organization envisaged slow economy growth in our most important trading partner countries which will and jointly make the necessary steps to boost have a positive effect on the Slovene economy as Slovene economy. well.

6 Graph 1: CFOs’ expectations for Slovene GDP growth Graph 2: How CFOs expect levels of unemployment in 2014 to change in Slovenia over the next 12 months

3% 8% 35% 3% 24%

62%

65%

Recession Increase Significatly Stagnation (0 - 1,5%) Increase Somewhat Moderate Growth (1,5-3%) Neutral Growth (>3%) Decrease Somewhat Decrease Significantly

CFO Survey Slovenia 7 The Survey Findings

Not very optimistic and cautious when it comes to risk

CFO’s outlook on financial prospects of their Graph 3: CFOs’ views on their companies’ financial prospects companies did not change significantly in comparison 100% 3 to the survey carried out in spring 2013. 30% of 15 27 surveyed CFO’s feel fairly or very optimistic about 80% 27 the financial future of their companies. When 33 60% compared to the results from the CFO survey carried 43 42 out in autumn 2012, it is evident that 15% more 40% Very Optimistic

CFOs expressed confidence about the companies they 52 Somewhat Optimistic 20% work for. The share of CFOs that are less optimistic 27 30 Unchanged Less Optimistic about their companies is 27%, which is the highest 0% percentage among the 13 countries where the CFO Late 2013 Early 2013 Late 2012 survey took place. However, if compared to the data from autumn 2012, we can see that the percentage of CFOs that feel less optimistic has reduced by 25 percentage points. More than 40% of surveyed CFO’s feel that financial prospects of their companies have not changed in comparison to 6 months ago. We60% miss consistent, balanced and growth

oriented50% tax policy. New taxes must not only Review of individual answers reveals that confidence about the financial future of their companies was be40% a tool to fill the state’s budget, they must expressed mainly by CFO’s of export oriented be30% considered as a mean to support the whole production companies. Given the economic 20% situation in Slovenia and our important trading society. Therefore, tax legislation must be clear 10% partner countries, the result is not surprising. and carefully implemented. First signs of economic recovery and optimistic 0% Very high High Above normal Normal forecasts in trading partner countries are likely the reason for optimism of the respective CFOs.

100% 90% 80% 8 70% 60% 50% 40% 30% 20% 10% 0% Late 2013 Early 2013 Late 2012

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Late 2013 Early 2013 Late 2012

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Late 2013 Early 2013

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Late 2013 Early 2013 Late 2012

50%

40%

30%

20%

10%

0% Less Unchanged Somewhat Very optimistic optimistic optimistic

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% DGC CFO survey Slovenia CFO survey Slovenia

80% 70% 60% 50% 40% 30% 20% 10% 0% Unattractive Neither attractive Attractive nor unattractive

100%

80%

60%

40%

20%

0% Difﬁcult to obtain Normally available Easily available

50%

40%

30%

20%

10%

0% Decrease Decrease Remain Increase Increase signiﬁcantly somewhat the same somewhat signiﬁcantly

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% DGC CFO survey Slovenia CFO survey Slovenia

70% 60% 50% 40% 30% 20% 10% 0% Strongly Somewhat Priority Not a priority 100%

80%

60%

40%

20%

0% Late 2013 Early 2013 Late 2012

When asked how would CFOs rate the general level Graph 4: CFOs’ opinions on the general level of external financial of external financial and economic uncertainty facing and economic uncertainty facing their businesses their business, most of the CFOs (88%) responded 60% 56 that the level of uncertainty is above normal, high or 50% very high. It seems that the magnitude of uncertainty 40 40% has increased among CFOs in comparison to our 32 33 29 previous CFO’s surveys. Almost 30% of CFOs feel 30% 27 26 23 uncertainty is very high, which is a considerably higher 20% Late 2013 percentage than in our spring 2013 survey (23%) and 12 11 10% 7 Early 2013 autumn 2012 survey (7%). On the other hand, 12% 3 Late 2012 0% of CFOs believe that uncertainty is at a normal level, Very high High Above normal Normal which has increased from 3% in the previous survey.

A greater diversity of opinion between the respondents implies that the financial Graph 5: CFO views on whether this is a good time to take and economic uncertainty depends on greater risk on to company balance sheets various factors. One of the reasons for a high percentage of CFOs which feel that (financial) 100% 100% 90% uncertainty is very high might be the limited 80% availability of loans for Slovene companies. 70% 60% 50% Despite the slight improvement in optimism regarding 40% the financial prospects of surveyed companies 30% and increase of percentage of CFOs that deem 20% the uncertainty is at a normal level, CFOs were again 10% 0% unanimous in giving a resounding “no” to taking Late 2013 Early 2013 Late 2012 greater risk onto their company’s balance sheets. Among CFOs from 13 countries, which participated in the survey, Slovene CFOs were the only ones Yes who unanimously refused taking greater risk. No

100% 90% 80% 70% 60% 50% CFO Survey Slovenia 9 40% 30% 20% 10% 0% Late 2013 Early 2013 Late 2012

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Late 2013 Early 2013 Late 2012

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Late 2013 Early 2013

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Late 2013 Early 2013 Late 2012

50%

40%

30%

20%

10%

0% Less Unchanged Somewhat Very optimistic optimistic optimistic

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% DGC CFO survey Slovenia CFO survey Slovenia

80% 70% 60% 50% 40% 30% 20% 10% 0% Unattractive Neither attractive Attractive nor unattractive

100%

80%

60%

40%

20%

0% Difﬁcult to obtain Normally available Easily available

50%

40%

30%

20%

10%

0% Decrease Decrease Remain Increase Increase signiﬁcantly somewhat the same somewhat signiﬁcantly

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% DGC CFO survey Slovenia CFO survey Slovenia

70% 60% 50% 40% 30% 20% 10% 0% Strongly Somewhat Priority Not a priority Tightening of credit standards reduces the availability of new financing

The Slovene banking system is under a great liquidity Capital adequacy of Slovene banks was among pressure. In the second quarter of 2013 the stock of the lowest in the euro area. Due to the low capital household deposits was down by 500 million EUR adequacy of banks, their access to sources of funding which is mainly related to the financial crisis in Cyprus is also limited, which limits their ability to absorb and higher uncertainty associated with the domestic losses and lending activity. In the first seven months banking system. The outflow of deposits from of 2013, the volume of loans to the private sector households was partially compensated by companies decreased by 1.1 billion EUR (approximately 810 which increased their deposits and partially by million EUR to organizations and 210 million EUR the State which deposited part of the assets acquired to households). According to the Bank of Slovenia, at issue of dollar bonds. The Slovene financial corporate loans declined due to declining demand system is heavily dependent on financing via loans. and the tightening of credit standards, however, The high growth in loans to the non-banking sector Slovene organizations have managed to partly replace in the years before the financial crisis was supported the lack of loans from Slovene banks by borrowing by high growth in Slovene banks’ borrowing in abroad and using other sources of financing. the rest of the world. The outbreak of the crisis was followed by the banks making debt repayments at foreign banks. According to SIMAD, Slovene banks reduced their net borrowings in the rest of the world by 1.4 billion EUR in the first seven months of 2013. Slovene economy continues to spin in vicious Furthermore, in 2014 and 2015, Slovene banks will have to repay liabilities to foreign organizations in circle. The main reasons for a weak development the amount of 1.8 and 4.3 billion EUR, respectively, of our economy are lack of confidence and fear which will increase the liquidity pressure on Slovene banks. from failure.

10 100%

100%80%

60%80%

40%60%

20%40%

20%0% Late 2013 Early 2013 Late 2012 0% Late 2013 Early 2013 Late 2012

60%

60%50%

50%40%

40%30%

30%20%

20%10%

10%0% Very high High Above normal Normal 0% Very high High Above normal Normal

Findings of the CFO survey have confirmed the overall Graph 6: Currently, CFOs believe bank borrowing as a source of funding is: situation of the Slovene banking system, as Slovene 100% 90% 6 4 CFOs continue to view bank loans as an unattractive 100% 80% 10 source of funding which is difficult to obtain. 70%90% 60%80% 50%70% 53 56 41% of surveyed CFOs stated that bank borrowings 53 40%60% are unattractive (compared to 37% in the previous 30%50% 40% survey). Furthermore, 53% of participating 20% Attractive 10%30% CFOs deem bank loans as neither attractive nor 20% 41 41 Neither attractive 0% 37 nor unattractive unattractive, which means that only 6% of CFOs 10% Late 2013 Early 2013 Late 2012 Unattractive that find bank borrowing as an attractive source of 0% Late 2013 Early 2013 Late 2012 funding.

New loans still seem to be difficult to obtain for

Slovene organizations, according to the results of Graph 7: How CFOs rate the overall availability of new credit for companies the CFO survey. However, the results are slightly less pessimistic than in the previous surveys. The majority 100% 13 15 (79%) of CFOs stated that new loans are unavailable 90% 21 (compared to 87% in the previous survey). Only 21% 100%80% 70%90% of participating CFOs deem bank loans as normally 60%80% available which is considerably higher percentage 50%70% 87 85 than in the previous survey, when only 13% of CFOs 40%60% 79 50% viewed the availability of new loans as normal. 30% Easily available 20%40% Normally available The result is not surprising as tight credit standards 10%30% still continue to prevent Slovene organizations to 20%0% Difficult to obtain 10% Late 2013 Early 2013 Late 2012 obtain new loans at Slovene banks. 0% Late 2013 Early 2013 Late 2012

100% 90% 100%80% 70%90% 60%80% 50%70% 40%60% 30%50% CFO Survey Slovenia 11 20%40% 10%30% 20%0% 10% Late 2013 Early 2013 Late 2012 0% Late 2013 Early 2013 Late 2012

100% 90% 100%80% 70%90% 60%80% 50%70% 40%60% 30%50% 20%40% 10%30% 20%0% 10% Late 2013 Early 2013 Late 2012 0% Late 2013 Early 2013 Late 2012

100% 90% 100%80% 70%90% 60%80% 50%70% 40%60% 30%50% 20%40% 10%30% 20%0% 10% Late 2013 Early 2013 0% Late 2013 Early 2013

100% 90% 100%80% 70%90% 60%80% 50%70% 40%60% 30%50% 20%40% 10%30% 20%0% 10% Late 2013 Early 2013 Late 2012 0% Late 2013 Early 2013 Late 2012

50%

40%50%

30%40%

20%30%

10%20%

10%0% Less Unchanged Somewhat Very 0% optimistic optimistic optimistic Less Unchanged Somewhat Very optimistic optimistic optimistic

100% 90% 100%80% 70%90% 60%80% 50%70% 40%60% 30%50% 20%40% 10%30% 20%0% 10% DGC CFO survey Slovenia CFO survey Slovenia 0% DGC CFO survey Slovenia CFO survey Slovenia

80% 70% 80% 60% 70% 50% 60% 40% 50% 30% 40% 20% 30% 10% 20% 0% 10% Unattractive Neither attractive Attractive 0% nor unattractive Unattractive Neither attractive Attractive nor unattractive

100%

100%80%

60%80%

40%60%

20%40%

20%0% Difﬁcult to obtain Normally available Easily available 0% Difﬁcult to obtain Normally available Easily available

50%

40%50%

30%40%

20%30%

10%20%

10%0% Decrease Decrease Remain Increase Increase 0% significantly somewhat the same somewhat significantly Decrease Decrease Remain Increase Increase significantly somewhat the same somewhat significantly

100% 90% 100%80% 70%90% 60%80% 50%70% 40%60% 30%50% 20%40% 10%30% 20%0% 10% DGC CFO survey Slovenia CFO survey Slovenia 0% DGC CFO survey Slovenia CFO survey Slovenia

70%

70%60% 60%50% 50%40% 40%30% 30%20% 20%10% 10%0% Strongly Somewhat Priority Not a priority 0% Strongly Somewhat Priority Not a priority In comparison with results of CFO surveys from other participating countries, new bank loans are deemed Slovene companies are facing value crisis. most difficult to obtain in Slovenia (followed by Romania). As Slovene CFOs face many challenges To tackle it, managements should raise corporate when trying to obtain new loans at Slovene banks, responsibility and focus on employees. more and more Slovene organizations seek new bank borrowings at foreign banks. These results once again confirm that the rescue program of the Slovene banking system is necessary to be executed.

Graph 8: How CFOs rate the overall availability of new credit for companies (Central Europe comparative) (%)

100% 3 4 4 2 9 7 7 14 18 21 21 24 80% 41 55 57 67 63 60% 67 62 79 79 59 59 63 40% 79

20% 39 43 33 30 Easily available 23 24 26 20 12 13 14 Normally available 0% Difficult to obtain Slovenia Romania Hungary Albania Serbia Croatia Latvia Bulgaria Slovakia Lithuania Poland Czech Bosnia Republic and Herzegovina

12 100%

100%80%

100%80%60%

80%60%40%

60%40%20%

40%20%0% Late 2013 Early 2013 Late 2012 20%0% Late 2013 Early 2013 Late 2012 0% Late 2013 Early 2013 Late 2012

60%

50% 60% 40% 50% 60% 30% 40% 50% 20% 30% 40% 10% 20% 30% 0% 10% 20% Very high High Above normal Normal 0% 10% Very high High Above normal Normal 0% Very high High Above normal Normal

100% 90% 100%80% 90%70% 100%80%60% 90%70%50% 80%60%40% 70%50%30% 60%40%20% 50%30%10% 40%20%0% Late 2013 Early 2013 Late 2012 30%10% 20%0% 10% Late 2013 Early 2013 Late 2012 0% Late 2013 Early 2013 Late 2012

100% More than half of the surveyed CFOs (53%) deem Graph90% 9: How CFOs expect the costs of finance for companies in Slovenia to100%80% change over the next 12 months that financing costs of Slovene organizations will 90%70% increase over the next 12 months. Compared to 100%80%60% 9 11 surveys in spring 2013 and autumn 2012, this is 70%90%50% 17 40% a considerable lower percentage when 73% and 60%80% 50%70%30% 44 74% of the respondents agreed with this statement, 40%60%20% 57 63 Increase significantly respectively. 30%50%10% 20%40%0% Increase somewhat Late 2013 Early 2013 Late 2012 10%30% Remain the same 47 Equity raising as a source of funding is attractive to 20%0% 11 23 Decrease somewhat 24% of participating CFOs. A comparison with our 10% Late 2013 Early 2013 Late 2012 3 15 Decrease a significantly previous surveys reveals a clear downtrend as 33% 0% Late 2013 Early 2013 Late 2012 and 56% of participating CFOs agreed with this statement in early 2013 and late 2012, respectively. Graph100% 10: Currently, CFOs believe raising equity as a source of funding is: On the other hand 32% of participants are not 90% fond of equity raising as a source for financing their 100%80% company (compared to 30% and 15% in spring 2013 90%70% 24 80%60% 33 and autumn 2012 surveys, respectively). 100% 90%70%50% 56 80%60%40% 44 With regard to financing the companies’ debt, 70%50%30% 37 60%40%20% Slovene CFOs remain fairly optimistic. More than Attractive 50%30%10% 30 39% of participating CFOs expressed confidence 0% Neither attractive 40%20% 32 Late 2013 Early30 2013 Late 2012 nor unattractive when it comes to ability to service a company’s debt 30%10% 15 Unattractive (compared to 57% and 33% in our previous surveys). 20%0% 10% Late 2013 Early 2013 Late 2012 However, a majority of 52% remains cautious in 0% Late 2013 Early 2013 Late 2012 their expectations, thinking that the ability to service Graph 11: How CFOs expect their ability to service debt to change a company’s debt will not change (compared to 30% over the next three years and 59% in our previous surveys). 100% 90% 33 100%80% 39 90%70% 57 100%80%60% 90%70%50% 60%40% 80% 52 59 70%50%30% 30 Increase 40%20% 60% Remain the same 50%30%10% 13 9 7 Decrease 40%20%0% Late 2013 Early 2013 Late 2012 30%10% 20%0% 10% Late 2013 Early 2013 Late 2012 CFO Survey Slovenia 13 0% Late 2013 Early 2013 Late 2012

100% 90% 100%80% 90%70% 100%80%60% 90%70%50% 80%60%40% 70%50%30% 60%40%20% 50%30%10% 40%20%0% Late 2013 Early 2013 30%10% 20%0% 10% Late 2013 Early 2013 0% Late 2013 Early 2013

50%

50%40%

50%40%30%

40%30%20%

30%20%10%

20%10%0% Less Unchanged Somewhat Very optimistic optimistic optimistic 10%0% Less Unchanged Somewhat Very optimistic optimistic optimistic 0% Less Unchanged Somewhat Very optimistic optimistic optimistic

100% 90% 100%80% 90%70% 100%80%60% 90%70%50% 80%60%40% 70%50%30% 60%40%20% 50%30%10% 40%20%0% DGC CFO survey Slovenia CFO survey Slovenia 30%10% 20%0% 10% DGC CFO survey Slovenia CFO survey Slovenia 0% DGC CFO survey Slovenia CFO survey Slovenia

80% 70% 80% 60% 70% 50% 80% 60% 40% 70% 50% 30% 60% 40% 20% 50% 30% 10% 40% 20% 0% 30% 10% Unattractive Neither attractive Attractive 20% nor unattractive 0% 10% Unattractive Neither attractive Attractive nor unattractive 0% Unattractive Neither attractive Attractive nor unattractive

100%

100%80%

100%80%60%

80%60%40%

60%40%20%

40%20%0% Difficult to obtain Normally available Easily available 20%0% Difficult to obtain Normally available Easily available 0% Difficult to obtain Normally available Easily available

50%

50%40%

50%40%30%

40%30%20%

30%20%10%

20%10%0% Decrease Decrease Remain Increase Increase significantly somewhat the same somewhat significantly 10%0% Decrease Decrease Remain Increase Increase significantly somewhat the same somewhat significantly 0% Decrease Decrease Remain Increase Increase significantly somewhat the same somewhat significantly

70% 60% 70% 50% 60% 70%40% 50% 60%30% 40% 50%20% 30% 40%10% 20% 30%0% 10% Strongly Somewhat Priority Not a priority 20% 0% 10% Strongly Somewhat Priority Not a priority 0% Strongly Somewhat Priority Not a priority The focus for the year ahead

In the upcoming 12 months, Slovene companies This confirms the forecast of SIMAD, which predicts shall focus on revenue growth on new and current a fall in new investments in fixed assets by 4% in markets. Furthermore, CFOs will focus on improving 2014. liquidity of their companies. The least important area of consideration highlighted by the CFOs was new investments.

Graph 12: Business focus for the upcoming year (1-least important, 6-most important)

New investments

Improved liquidity

Cost reduction - Indirect costs

1 Cost Reduction - direct costs 2

Revenue growth (new markets) 3 4 Revenue growth (current markets) 5 6 0% 20% 40% 60% 80% 100%

We need more optimism in Slovenia in general. As long as politicians, economists and also media create nothing but pessimistic environment on daily basis, people really can’t feel optimistic and self-confident.

14 100%

80%

60%

40%

20%

0% Late 2013 Early 2013 Late 2012

60%

50%

40%

30%

20%

10%

0% Very high High Above normal Normal

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Late 2013 Early 2013 Late 2012

Remodeling or restructuring seems to be one of Graph 13: To what extent business remodelling or restructuring the priorities for half of the surveyed companies is likely to be a priority over the next 12 months in the next 12 months. 27% of the surveyed CFOs view remodeling as somewhat of a priority and 24% do not view it as a priority in the next 12 months. 100%24% 90% 80% Participating CFOs expect that the market will further 70% consolidate in the next 12 months. Increase in local 60% 50% 50% M&A activity is expected by 62% of the respondents 40% Strongly (compared to 38% in the previous survey). However, 30% 35% of CFOs believe that the level of M&As will 20% Somewhat Priority 10% remain unchanged. 27% Not a priority 0% Late 2013 Early 2013 Late 2012 Optimism of participating CFOs regarding the M&A activity in Slovenia is probably driven by the commitment of the Slovene Government to privatize a number of State-owned companies. Graph 14: How CFOs expect levels of M&A activity to change in Slovenia In June 2013 the National Assembly expressed over the next 12 months support for the privatization of fifteen State-owned 100% companies. 90% 80% 38 70% 62 60% 50% 40% 55 30% Increase 20% 35 Neutral 10% 3 7 Decrease 0% Late 2013 Early 2013

100% 90% 80% 70% 60% 50% CFO Survey Slovenia 15 40% 30% 20% 10% 0% Late 2013 Early 2013 Late 2012

50%

40%

30%

20%

10%

0% Less Unchanged Somewhat Very optimistic optimistic optimistic

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% DGC CFO survey Slovenia CFO survey Slovenia

80% 70% 60% 50% 40% 30% 20% 10% 0% Unattractive Neither attractive Attractive nor unattractive

100%

80%

60%

40%

20%

0% Difﬁcult to obtain Normally available Easily available

50%

40%

30%

20%

10%

0% Decrease Decrease Remain Increase Increase signiﬁcantly somewhat the same somewhat signiﬁcantly

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% DGC CFO survey Slovenia CFO survey Slovenia

70% 60% 50% 40% 30% 20% 10% 0% Strongly Somewhat Priority Not a priority According to the opinion of participating CFOs, Graph 15: Expectations of which foreign markets will be the most important German speaking markets will be of significant for Slovenian companies in the next 12 months importance to Slovene economy in the upcoming 2% 4% year. Austria and Germany were selected by 41% 2% 19% Former Yugoslav republics 4% of respondents as the most important foreign Austria and Germany Russia and former USSR countries markets for Slovene companies. Countries of former 8% Yugoslavia are considered as the most important by Other Eastern European countries 19% and Russia and former USSR countries by 14% Other Western European countries 6% Asia: China, Japan, India of the respondents. USA and Canada No expectations about export growth When asked what are the most important growth 14% Other factors of the Slovene economy for the upcoming 12 41% months, the opinions of participating CFOs were split, as the development of the financial sector is the most important to 26% of respondents, tax reductions and decrease in corruption are the most important to Graph 16: CFOs’ view of the most important growth factors of the Slovenian economy for the upcoming 12 months 16% of participating CFOs, followed by technology development (14% of participating CFOs). 4%

24% Many CFOs also indicated that the Slovene economy 16% will very much depend on the activities of Slovene government, which should be focused on offering State aid for business support to export-oriented companies, attracting Tax reduction foreign investments and on reduction of informal 16% Corruption decrease economy. Financial sector development Technology development 14% Other

26%

16 CFOs believe that the government is responsible Bad financing possibilities were selected by 23% for the weak economic development in the last of respondents as the most important reason for couple of years. More than one third of participating weak economic development. On the other hand, CFOs (35%) stated that the Slovene economy is participating CFOs believe that Slovene companies mostly constrained by the excessive involvement have sufficient amount of adequately qualified staff of the government in economy and 24% of and enough business self-confidence to support their respondents view constant changes in government business. economic policy as the most important obstacles for the development of the Slovenian economy.

Graph 17: CFOs’ view of the most important obstacles for the Slovenian economic development (1-least important, 6-most important)

Bad ﬁnancing possibilities

Lack of adequately qualiﬁed staff

Lack of business self-conﬁdence 1 Unfavourable tax legislation 2 3 Constant changes in the government economic policy 4 Excessive involvement 5 of the government in economy 6 0% 20% 40% 60% 80% 100%

CFO Survey Slovenia 17 Slovene CFOs are against additional tax burdens. 54% Graph 18: CFOs’ view of fields where new taxation is acceptable of the participating CFOs believe that the Slovene government should not seek new revenue on 14% 24% the basis of tax collection. Introduction of new real Land tax/real estate tax estate tax is perceived as the only acceptable source Tax incentives for start-ups of new revenue from taxes as it was supported by Payroll tax (0%) 24% of the respondents. Corporate income tax 5% I am against the new taxation Other Slovene CFOs, which participated in the survey, 3% are determined to increase the efficiency of their financial function. Reduction of operating costs and 54% improvement of business processes are the most important to 31% and 27% of respondents, respectively. Approximately 10% of the participating CFOs face challenges with debt restructuring, recovery of bad debt and searching new financing Graph 19: CFOs’ current main challenges options for investments.

8% Reduction of operating costs 4% Searching for new financing options for new investments 10% 31% Debt restructuring Upgrading of business processes Bad debt recovery Balance sheet assets evaluation (impairment of assets) 27% Other 10%

11%

18 100%

80%

60%

40%

20%

0% Late 2013 Early 2013 Late 2012

60%

50%

40%

30%

20%

10%

0% Very high High Above normal Normal

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Late 2013 Early 2013 Late 2012

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Availability of financial talent Late 2013 Early 2013

Surveyed CFOs deem that there will be no shortage Graph 20: Whether or not CFOs expect talent shortages in the finance area of talent in the finance area in Slovenia over the next over the next year year. Even though the percentage of CFOs that agree 100% with this statement decreased from 89% in autumn 90% 2012 to 65% in autumn 2013, it still seems that 80% 70% 65 the high level of general unemployment is enabling 60% 86 Slovene companies to find employees with adequate 50% 89 knowledge and talents. 40% 30% 20% 35 No CFOs that foresee a shortage of finance personnel 10% 14 11 Yes during the next 12 months believe that the shortage 0% Late 2013 Early 2013 Late 2012 will occur among the top-level management (54% of CFOs responding to this question) and at the middle level (29% of CFOs responding to this question). Graph 21: Where CFOs expect there to be significant talent shortages in finance over the next year

50% 4% 8%

40%

30%

Graduate level 20% 29% 54% Junior level 10% Middle level Senior level 0% Top level Less Unchanged Somewhat Very optimistic optimistic optimistic 4%

CFO Survey Slovenia 19 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% DGC CFO survey Slovenia CFO survey Slovenia

80% 70% 60% 50% 40% 30% 20% 10% 0% Unattractive Neither attractive Attractive nor unattractive

100%

80%

60%

40%

20%

0% Difﬁcult to obtain Normally available Easily available

50%

40%

30%

20%

10%

0% Decrease Decrease Remain Increase Increase signiﬁcantly somewhat the same somewhat signiﬁcantly

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% DGC CFO survey Slovenia CFO survey Slovenia

70% 60% 50% 40% 30% 20% 10% 0% Strongly Somewhat Priority Not a priority Dynamically growing companies CFO Survey

20 DGC CFO Survey

Slovenia

For the first time since we launched the Deloitte CFO The results of this survey, which was also carried out Survey in Slovenia, we also examine in this edition using face-to-face interviews, mainly show that DGCs the sentiment among CFOs of small and medium- face several challenges that are similar to those facing sized enterprises – the so called Dynamic-Growth the biggest Slovene companies. Companies (DGCs).

Areas shared by DGCs and the biggest Slovene companies

The general level of external financial and economic According to DGC CFOs, business remodelling/ uncertainty is pretty much the same in both restructuring will be a strong priority for their environments. Both surveys show that most CFOs rate companies over the next 12 months (50% of the general level of external financial and economic large-company CFOs and 41% of DGC CFOs). CFOs uncertainty as above normal, high or very high (88% of both company types also make a similar choice of CFOs and 76% of DGC CFOs). Like the CFOs of of important foreign markets: in the year to come, the biggest Slovene companies, DGC CFOs also they will focus on Austria and Germany, the former expect their companies’ ability to service debt over Yugoslav republics, Russia and other former USSR the next three years to remain unchanged (52% of countries. Reducing operating costs currently large-company CFOs and 41% of DGC CFOs) or even represents a major challenge for CFOs in both to increase (39% of large-company CFOs, 29% of environments (31% of large-company CFOs and DGC CFOs). 65% of DGC CFOs).

CFO Survey Slovenia 21 100%

80%

60% 100% 40% 80% 20% 60% 0% 40% Late 2013 Early 2013 Late 2012

20%

0% Late 2013 Early 2013 Late 2012

60%

50%

40%

30%60%

20%50%

10%40%

30%0% Very high High Above normal Normal 20%

10%

0% Very high High Above normal Normal

100% 90% 80% 70% 60% 100%50% 40%90% 30%80% 20%70% 10%60% 50%0% 40% Late 2013 Early 2013 Late 2012 30% 20% 10% 0% Late 2013 Early 2013 Late 2012

100% 90% 80% 70% 60% 100%50% 40%90% 30%80% 20%70% 10%60% 50%0% 40% Late 2013 Early 2013 30% 20% 10% 0% Late 2013 Early 2013

100% 90% 80% 70% 60% 100%50% 40%90% 30%80% 20%70% 10%60% 50%0% 40% Late 2013 Early 2013 Late 2012 30% 20% DGCs versus the largest Slovene10% companies: the main differences 0% Late 2013 Early 2013 Late 2012 According to the DGC CFOs who participated in Graph 22: DGC CFOs’ expectations for Slovene GDP growth in 2014 this survey, their companies will focus over the next 50% 12 months on growing revenues from new markets (29%) and improving liquidity for the Slovene market 40% in general (35%). New investments are the lowest 30% priority for DGCs (65%) and for the biggest Slovene 50% 42 companies (44%). 20% 41 40% 27 29 27 10% 18 12 CFO survey Slovenia DGC CFOs rate unfavourable tax legislation as 30% 3 DGC CFO survey Slovenia an important obstacle to Slovene economic 0% development (29%, compared with only 15% of CFOs 20% Less Unchanged Somewhat Very optimistic optimistic optimistic at Slovenia’s biggest companies). While 35% of CFOs 10% of the biggest Slovene companies believe an excessive Almost a quarter (24%) of surveyed DGC CFOs stated involvement of the government in the economy is 0% that now is Lessa good timeUnchange to taked greaterSomewhat risk on to theirVe ry blocking the development of the Slovene market in optimistic optimistic optimistic companies’ balance sheets, as opposed to 0% for general, 18% of DGC CFOs are of the same opinion. large-company CFOs. This also supports the previous conclusion of being more optimistic than the Slovene In terms of expectations for Slovene GDP growth in market in general, which in all previous surveys has 2014, most DGC CFOs think that GDP will remain responded to this question with a firm “NO”. unchanged in 2014 (DGC CFOs 41%, large-company 100% CFOs 42%); there is also only a slight difference 90% Graph 23: DGC CFOs’ views on whether this is a good time to take greater risk in the percentage of those who are somewhat 80% on70% to company balance sheets optimistic (DGC CFOs 29 %, other CFOs 27 %). 60% But there is an important difference in the levels 100%50% 90% of optimism: 18% of DGC CFOs are very optimistic 40% 30%80% about Slovene GDP growth in 2014, while only 3% of 20%70% 76 CFOs of the biggest Slovene companies agree. They 10%60% 50% 100 are by contrast more pessimistic – the expectations of 0% 40% DGC CFO survey Slovenia CFO survey Slovenia 27% of large-company CFOs for 2014 GDP growth 30% 20% are less optimistic, while only 12% of DGC CFOs share No 10% 24 the same view. Yes 0% DGC CFO survey Slovenia CFO survey Slovenia

80% 70% 60% 50% 40%80% 30%70% 20%60% 10%50% 40%0% 30% Unattractive Neither attractive Attractive nor unattractive 20% 10% 0% Unattractive Neither attractive Attractive nor unattractive

100%

80%

60% 100% 40% 80% 20% 60% 0% 40% Difﬁcult to obtain Normally available Easily available

20%

0% Difﬁcult to obtain Normally available Easily available

50%

40%

30% 50% 20% 40% 10% 30% 0% 20% Decrease Decrease Remain Increase Increase signiﬁcantly somewhat the same somewhat signiﬁcantly 10%

0% Decrease Decrease Remain Increase Increase signiﬁcantly somewhat the same somewhat signiﬁcantly

100% 90% 80% 70% 60% 100%50% 40%90% 30%80% 20%70% 10%60% 50%0% 40% DGC CFO survey Slovenia CFO survey Slovenia 30% 20% 10% 0% DGC CFO survey Slovenia CFO survey Slovenia

70% 60% 50% 40% 70% 30% 60% 20% 50% 10% 40% 0% 30% Strongly Somewhat Priority Not a priority 20% 10% 0% Strongly Somewhat Priority Not a priority 100%

80%

60%

40% 100% 20% 80% 0% Late 2013 Early 2013 Late 2012 60%

40%

20%

0% Late 2013 Early 2013 Late 2012 60%

50%

40%

30%

20% 60% 10% 50% 0% 40% Very high High Above normal Normal 30%

20%

10%

0% Very high High Above normal Normal 100% 90% 80% 70% 60% 50% 40% 100%30% 20%90% 10%80% 70%0% Late 2013 Early 2013 Late 2012 60% 50% 40% 30% 20% 10% 0% Late 2013 Early 2013 Late 2012

100% 90% 80% 70% 60% 50% 40% 100%30% 20%90% 10%80% 70%0% Late 2013 Early 2013 Late 2012 60% 50% 40% 30% 20% 10% 0% Late 2013 Early 2013 Late 2012 100% 90% 80% 70% 60% 50% 40% 100%30% 20%90% 10%80% 70%0% Late 2013 Early 2013 Late 2012 60% 50% 40% 30% 20% 10% 100%0% Late 2013 Early 2013 Late 2012 90% 80% 70% 60% 50% 40% 100%30% 20%90% 10%80% 70%0% Late 2013 Early 2013 Late 2012 60% 50% 40% 30% 20% 10% 0% 100% Late 2013 Early 2013 Late 2012 90% 80% 70% 60% 50% 40% 100%30% 20%90% 10%80% 70%0% Late 2013 Early 2013 Late 2012 60% 50% 40% 30% 20% 10% 0% Late 2013 Early 2013 Late 2012 100% 90% 80% 70% 60% 50% 40% 100%30% 20%90% 10%80% 70%0% Late 2013 Early 2013 60% 50% 40% 30% 20% 10% 0% 100% Late 2013 Early 2013 90% 80% 70% 60% 50% 40% 100%30% 20%90% 10%80% 70%0% Late 2013 Early 2013 Late 2012 60% 50% 40% 30% 20% 10% 0% Late 2013 Early 2013 Late 2012 50%

40%

30%

20% 50% 10% 40% 0% Less Unchanged Somewhat Very 30% optimistic optimistic optimistic

20%

10%

0% Less Unchanged Somewhat Very optimistic optimistic optimistic

100% 90% 80% 70% 60% 50% 40% 100%30% 20%90% 10%80% 70%0% DGC CFO survey Slovenia CFO survey Slovenia 60% 50% 40% 30% 20% 10% 0% DGC CFO survey Slovenia CFO survey Slovenia

80% 70% 60% 50% Bank borrowing as a source of funding seems to be Graph 24: Currently, CFOs believe bank borrowing as a source of funding is: 40% much more unattractive to DGC CFOs (65%) than for 30% the biggest Slovene companies (41%). Nevertheless, 20%80% it is still attractive to 18% of DGC respondents, which 10%70% is three times more than the response for CFOs of 60%0% the biggest Slovene companies (6%). 50% Unattractive Neither attractive Attractive nor unattractive 40% 65 Slovene DGCs face even more challenges than other 30% 53 41 companies when trying to obtain new loans at 20% CFO survey Slovenia Slovene banks, and these results once again confirm 10% 18 18 6 DGC CFO survey Slovenia that Slovene banking system needs additional 0% Unattractive Neither attractive Attractive restructuring. The results show that 94% of the DGC nor unattractive CFOs believe that it is difficult to obtain new credit; although the number from the survey of the biggest Slovene companies is also high, it is considerably lower at around 79 %. Graph 25: How CFOs rate the overall availability of new credit for companies

100%

80%

60%

40%

100% 94 20% 79 CFO survey Slovenia 80% 6 21 0 DGC CFO survey Slovenia 0% Difﬁcult to obtain Normally available Easily available 60%

40%

20%

0% Difﬁcult to obtain Normally available Easily available

50%

40%

30% CFO Survey Slovenia 23 20% 50% 10% 40% 0% Decrease Decrease Remain Increase Increase 30% signiﬁcantly somewhat the same somewhat signiﬁcantly

20%

10%

0% Decrease Decrease Remain Increase Increase signiﬁcantly somewhat the same somewhat signiﬁcantly

100% 90% 80% 70% 60% 50% 40% 100%30% 20%90% 10%80% 70%0% DGC CFO survey Slovenia CFO survey Slovenia 60% 50% 40% 30% 20% 10% 0% DGC CFO survey Slovenia CFO survey Slovenia

70% 60% 50% 40% 30%

20%70% 10%60% 50%0% Strongly Somewhat Priority Not a priority 40% 30% 20% 10% 0% Strongly Somewhat Priority Not a priority 100%

80%

60% 100% 40% 80% 20% 60% 0% 40% Late 2013 Early 2013 Late 2012

20%

0% Late 2013 Early 2013 Late 2012

60%

50%

40%

30%60%

20%50%

10%40%

30%0% Very high High Above normal Normal 20%

10%

0% Very high High Above normal Normal

100% 90% 80% 70% 60% 100%50% 40%90% 30%80% 20%70% 10%60% 50%0% 40% Late 2013 Early 2013 Late 2012 30% 20% 10% 0% Late 2013 Early 2013 Late 2012

100% 90% 80% 70% 60% 100%50% 40%90% 30%80% 20%70% 10%60% 50%0% 40% Late 2013 Early 2013 30% 20% 10% 0% Late 2013 Early 2013

100% 90% 80% 70% 60% 100%50% 40%90% 30%80% 20%70% 10%60% 50%0% 40% Late 2013 Early 2013 Late 2012 30% 20% 10% 0% Late 2013 Early 2013 Late 2012

50%

40%

30% 50% 20% 40% 10% 30% 0% 20% Less Unchanged Somewhat Very optimistic optimistic optimistic 10%

0% Less Unchanged Somewhat Very optimistic optimistic optimistic

100% 90% 80% 70% 60% 100%50% 40%90% 30%80% 20%70% 10%60% 50%0% 40% DGC CFO survey Slovenia CFO survey Slovenia 30% 20% 10% 0% DGC CFO survey Slovenia CFO survey Slovenia

80% 70% 60% 50% 80%40% 70%30% 60%20% 50%10% 40%0% 30% Unattractive Neither attractive Attractive nor unattractive 20% 10% 0% Unattractive Neither attractive Attractive nor unattractive

100%

80%

60% 100% 40% 80% 20% 60% 0% 40% Difﬁcult to obtain Normally available Easily available

20%

0% Difﬁcult to obtain Normally available Easily available

50%

In this area too, the answers of DGC CFOs once Graph40% 26: How CFOs expect the costs of finance for companies in Slovenia again reflect more optimism than those of their to change over the next 12 months 30% colleagues from the biggest Slovene companies. 18% 50% of the DGC CFOs believe that there will be a decrease 20% in financing costs over the next 12 months, compared 40% 10% to 0% of large-company CFOs. Still, most DGC CFOs 30% (70%) think that financing costs for their companies 0% 47 44 20% will remain the same or increase slightly (other CFOs: Decrease Decrease Remain35 Incr35ease Increase significantly somewhat the same somewhat significantly 91%), while 12% of DGC CFOs believe that they will 10% CFO survey Slovenia increase significantly (versus 9% of large-company 12 12 9 6 0 0 DGC CFO survey Slovenia CFOs). 0% Decrease Decrease Remain Increase Increase significantly somewhat the same somewhat significantly CFOs in both surveys expect no shortage of talent in the finance area in Slovenia over the next year. Graph 27: Whether or not CFOs expect talent shortages in the finance area The percentage of DGC CFOs (88%) who believe this over the next year is however much higher than that of the Slovenian market in general (65%). It seems that the high level 100% of general unemployment in Slovenia is enabling 90% 80% Slovene companies to find employees with adequate 70% 65 knowledge and talents. 60% 88 100%50% 90%40% 80%30% 70%20% 35 No 60%10% 12 Yes 50%0% 40% DGC CFO survey Slovenia CFO survey Slovenia 30% 20% 10% 0% DGC CFO survey Slovenia CFO survey Slovenia

70% 60% 50%

70%40% 60%30% 50%20% 40%10% 30%0% Strongly Somewhat Priority Not a priority 20% 10% 0% Strongly Somewhat Priority Not a priority Central European comparative overview

CFO Survey Slovenia 25 “May you live in interesting times...”

Introduction

The famous old Chinese curse “May you live in We don’t attempt to provide a definitive answer in interesting times” has a powerful grip on the econo- this report. Rather, building on past editions, we mies of Central Europe (CE) as the region’s CFOs strive try to show how short-term plans and expectations to steer their companies to ultimate success through are evolving to give the region’s largest companies the obstacles of uncertainty, volatility and rapid global a context for their decision-making. In this way, economic change. we hope to contribute to their success and so help the region exert the greater gravitational pull to But in interesting times, winning financial strategies attract business influence to CE. depend more than ever on timely and relevant information. That’s why we’re so pleased to publish this The good news is that optimism for company pros- report including the CE CFO Confidence Index, which pects has become more widespread than pessimism summarises the perspectives of around 600 CFOs over the six months since the last survey. On the down from 13 countries across Central Europe. While we all side, the majority of CE CFOs believe the time has not have daily access to abundant (and often conflicting) yet come to take more risk on to company balance forecasts from analysts, academic economists, journal- sheets. The key business priority for CFOs might sound ists and politicians we believe it’s just as valuable to simple: to increase revenues. But, in the interesting understand what practicing CFOs have to say. times we are experiencing in Central Europe, simple does not translate into easy-to-achieve. The shift of business impetus from the developed to the developing world has been seen as the principal driver of global change over the last decade. That said, the current re-industrialisation of the US and the deceleration in developing countries suggests the picture is not as clear-cut as believed. So the big question for business leaders in Central Europe is: “Can the region grow into one of the new centres of economic influence?”

26 Key findings

• The CE CFO Confidence Index shows signs of optimism among nearly 600 CFOs from companies across 13 countries, which are experiencing volatility and external financial uncertainty • Despite signs of optimism, the majority of CFOs in Central Europe believe that the time has not yet come to take more risk on to company balance sheets • CFOs in CE hold divergent views on their priorities for the next 12 months • Many CFOs plan to reduce gearing levels, associated with a corresponding expectation of higher financing costs • While talent shortages are not of concern to most participating CFOs, there are opportunities for experienced financial professionals around the region • The top priority for next year, shared by many CFOs in Central Europe, is simply to grow their revenues

CFO Survey Slovenia 27 About the fifth CE CFO Survey About the author

The report compares the expectations of CFOs from This part of the report was prepared by Dr Michał 13 Central European economies (Albania and Kosovo, Zdziarski, Research Director, Warsaw University Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Executive MBA, exclusively for Deloitte Central Europe. Republic, Hungary, Latvia, Lithuania, Poland, Dr Zdziarski’s research interests include strategy, Romania, Serbia, Slovakia and Slovenia). It is based finance, leadership and international business. on the answers of 580 CFOs from a broad range of industries who responded to our survey in October and November 2013. The survey captures shifts in CFOs’ opinions on factors including risks, GDP growth and financing priorities. It has become a benchmark for agile decision-making that takes into account the financial attitudes of major corporations across Central Europe.

28 Signs of optimism

Graph 1: CE CFO Confidence Index

10 8

5 0 0 0

-5

-10 -9

-15 -14 -20 1st Survey 2nd Survey 3rd Survey 4th Survey 5th Survey

We have developed the CE CFO Confidence Index1 The 22-point increase in the CE CFO Confidence to track the evolution of CFO sentiments regarding Index between the third and fifth editions signals their companies’ financial prospects across many the growing optimism of the region’s finance profes- sectors and geographies. We have taken into account sionals. The level of confidence now is the highest of accumulated opinions from five major economies in all editions of the survey we’ve undertaken since its the region: Poland, the Czech Republic, Romania, launch in June 2011, into a region that was already Hungary and Slovakia, which jointly represent close affected by the global slow down. Therefore, we to 80% of CE’s aggregated GDP. We have weighted propose to conservatively interpret the current levels the influence of CFOs’ sentiments from different of CFO confidence as a sign of cautious optimism. countries by the relative size of their economies, to best represent the overall expectations for changing regional dynamics.

1 The CE CFO Confidence Index is calculated based on net optimism – the difference between the percentage of CFOs who are optimistic about the financial prospects for their company compared with six months ago and those who are pessimistic, weighted by the proportion who believe that conditions remain unchanged. We calculate the index based on results from five major economies of the Central European region, which between them have a 78% share of the total GDP of all analysed countries. Net optimism is then weighted by product of individual country (GDP) to produce the index for the overall region. The results from the first Deloitte CE CFO Confidence Index are taken as base data.

CFO Survey Slovenia 29 Staying on the safe side

Graph 2: CFO views on whether this a good time to take greater risk on to company balance sheets

100% 7 12 15 21 21 21 24 28 30 30 39 80% 57

60% 100 93 88 85 79 79 79 40% 76 72 70 70 61 43 20% Yes No 0% Slovenia Serbia Latvia Albania Slovakia Bulgaria Croatia Hungary Bosnia Romania Czech Poland Lithuania and Republic Herzegovina

The majority of CFOs in all countries except Lithuania and there is a corresponding difference in the size believe that now is not the time to take greater of the business operations of our respondents. In risks on to company balance sheets. The diversity of the two following countries, fewer CFOs are willing opinion on risk-taking across the region is notable: in to increase risk levels – Hungary at 24%, and Slovakia Slovenia, no CFOs at all believe that their company at 21%. should increase its risk exposure; 57% of Lithuanian CFOs, meanwhile, are willing to leverage their growth Results across Central Europe are far from the six-year potential. It is also worth noting the relatively high high in optimism expressed by UK CFOs. With 54% of proportion of CFOs who appear ready to take more them bullish about taking greater risks, Ian Stewart, risk in the three largest economies of the region: Chief Economist at Deloitte, expects UK corporations Poland (39%), the Czech Republic (30%) and Romania to significantly increase their capital expenditure over (30%). These countries’ combined share of the total the next 12 months. GDP of the Central European region is over 60%,

2 The Deloitte CFO Survey UK. 3rd Q results.

30 Graph 3: Percentage of CFOs choosing now is a good time to take greater risk on to company’s balance sheets

40% 35%

30%

25%

20% Poland 15% Czech Republic 10% Hungary 5% Slovakia 0% Romania 1st CFO Survey 2nd CFO Survey 3rd CFO Survey 4th CFO Survey 5th CFO Survey

Comparing the risk-aversion findings across all five The overall trend from the five largest countries is editions of the Deloitte CE CFO Survey, we can see towards an increased proportion of CFOs who are that the proportion of CFOs in Poland, Hungary and willing to take more risks. Maybe the time to increase Slovakia that believe now is a good time to take risks has not yet arrived, but we are getting closer to greater risk on to the balance sheet has increased by a more endemic mood of expansionary investment. more then 10% since the first survey in June 2011. In interesting times like the present, it is necessary to In Romania the proportion has returned to the 30% make a decision: should we take greater risk now, level that we also saw in the first survey. This recovery hoping to maximise the benefit of grabbing invest- follows a steep decrease in the second edition, to only ment opportunities ahead of the curve? Or should we 10% of Romanian respondents. The Czech Republic instead take a conservative approach and minimise is the only country where the proportion of CFOs the chance of making losses if the trend goes into willing to take greater risks has decreased; it has fallen reverse? by close to 5% over last two and a half years, while remaining on the relatively high level of 30%.

CFO Survey Slovenia 31 Regional view – divergent needs, different priorities

Graph 4: Company business focus over the next 12 months. Top two priorities

100%

80% 43 45 44 43 51 52 46 48 51 50 51 59 56

60%

40% Cost reduction - indirect costs 57 55 56 57 Cost Reduction - direct costs 49 54 52 49 50 49 48 44 20% 41 Improved liquidity Revenue growth (current markets)

0% Revenue growth (new markets) Croatia Lithuania Poland Romania Czech Hungary Bulgaria Albania Serbia Slovenia Latvia Slovakia Bosnia Republic and Herzegovina

Comparing the top priorities for CFOs over the next In the next group of countries, all located in the south 12 months by country, we see three distinct groups, of the region, improving liquidity is one of the two which we have called: top priorities. While seeking revenue in current • Growth-seeking markets is the primary challenge in Bulgaria, Albania and Serbia, this might be hard to achieve – CFOs • stability-seeking expect stagnation in all these markets. Even more • cost advantage-seeking challenging might be growing revenues from new markets, which is the second priority for CFOs in CFOs’ top priorities in growth-seeking countries are Slovenia. Their expectation of recession in their home almost equally divided between two revenue-growth market leaves them with no other alternative. alternatives: growth from current markets or from new ones. The growth-seeking group of countries The group of countries seeking cost advantage is is the most numerous and includes the largest the least homogeneous, as indirect cost reduction is economies in the region: Poland, the Czech Republic, accompanied by three disparate priorities: revenue Romania and Hungary as well as Croatia and growth from existing markets in Latvia; direct cost Lithuania. In these countries factors like austerity, cost reduction in Bosnia and Herzegovina; and revenue control and improving liquidity are out, and expansion growth from new markets in Slovakia. priorities are clearly in.

32 It’s all about growth

Graph 5: CFOs’ expectations for their countries’ GDP growth in 2014

Lithuania

Slovenia Latvia

Croatia Poland

Recession Bosnia and Albania Herzegovina Stagnation (0 - 1.5%) 0.0% Moderate Growth (1.5-3%) 10.0% 20.0% Growth (>3%)

30.0% Serbia Slovakia 40.0% 50.0%

60.0% Bulgaria Romania 70.0%

80.0% Hungary Czech Republic

In general, CFOs report that where growth is currently The dominant expectation for the region is stagnation weak or absent, the situation is not expected to (between 0 and 1.5%), chosen most frequently by CFOs reverse in any dramatic way. Some signs of improve- in nine countries. Recession is clearly the consensus view ment are expected by CFOs operating in four for Slovenian economic prospects in 2014. countries – Lithuania, Latvia, Poland and Albania – where the dominant best estimate is for moderate Overall, therefore, the region’s waters of economic annual growth of between 1.5 to 3% of GDP. In these prosperity remain unsettled. It will be critical to learn four countries alone, relatively small groups of CFOs in the next few months what would be more transfer- expect growth to exceed 3% in 2014. able among countries in the region – the moderate economic growth expected in Poland, Latvia and Lithuania, or the recession that Slovenia is going through.

CFO Survey Slovenia 33 The prospects for employement

GDP growth is again the key factor when we look at seekers and current employees. In Slovenia, which expected changes in unemployment. The expected remains in recession, the largest proportion of CFOs moderate growth in Lithuania, Latvia and Poland expect a significant increase in unemployment levels, corresponds with anticipated decreases in the levels and any expectations of a significant increase in of unemployment in these three countries. In all other employment will need to wait for GDP to grow faster countries, CFOs expect fewer opportunities for job than 3%.

Graph 6: How CFOs expect levels of unemployment to change in their countries over the next 12 months

100% 3 3 2 5 4 4 5 4 11 9 15 23 23 31 29 80% 43 38 20 44 39 46

37 72 60% 61

65 54 52 40% 73 25 39 44 69 37 41 Increase significatly 46 20% Increase somewhat 14 21 3 Neutral 25 18 15 15 15 15 16 Decrease somewhat 9 9 7 2 0% Decrease significantly Croatia Slovenia Serbia Bulgaria Romania Czech Bosnia Slovakia Albania Hungary Poland Latvia Lithuania Republic and Herzegovina

34 Financial prospects compared to six months ago

CFOs are much more optimistic about their own this is perhaps thanks to growth from new markets companies’ prospects in the next six months than and exports that might compensate for the weak- for the GDP growth outlook of the countries in ness of the domestic market. In several markets, which they are located. In all countries, more CFOs there is a net difference of over 40% between ‘very/ have become more optimistic about their company somewhat optimistic’ CFOs and their less optimistic prospects in the next six months than have become peers. These countries include Poland, Romania and less optimistic. Even in troubled Slovenia, expecta- Serbia, as well as Bosnia and Herzegovina. CFOs have tions of continuing recession do not translate into clearly learned to operate their companies in stagnant, pessimistic views on companies’ financial prospects; troubled economies.

Graph 7: CFOs’ views on their companies’ financial prospects compared with six months ago

3 2 3 100% 3 7 8 8 10 18 18 27 38 33 33 80% 43 35 55 41 54 46 27 32 47 60%

41 50 40% 41 50 32 51 39 49 32 35 33 37 20% Very optimistic 27 Somewhat optimistic 21 18 18 15 14 Unchanged 12 11 10 10 8 6 6 0% Less optimistic Slovenia Lithuania Slovakia Bulgaria Hungary Croatia Albania Serbia Poland Bosnia Romania Czech Latvia and Republic Herzegovina

100%

80%

CFO Survey Slovenia 35

60%

40%

20%

0% Slovenia Lithuania Slovakia Bulgaria Hungary Croatia Albania Serbia Poland Bosnia RomaniaCzech RepublicLatvia Financial prospects – the long-term view

Most CFOs predict no change in their ability to service in companies’ financial performance. While there their debt, while almost the same proportion expect are notable exceptions of companies implementing a moderate improvement over the next three years. a winning strategy in a difficult environment, no Radical changes in companies’ financial performance company is isolated from its business context. For were indicated only rarely, suggesting that current the majority of CFOs, therefore, the long-term long-term views on companies’ financial prospects prospects of their companies are grounded in are in fact closer to the expected changes in GDP the dynamics of the external environment. than they are to anticipated short-term improvements

Graph 8: How CFOs expect their ability to service debt to change over the next three years

100% 3 3 4 5 6 4 7 11 10 12 14 14 21 29 33 80% 32 26 27 40 45 26 32 45

51 60% 49

41 71 40% 47 55 53 63 52 50 47 45 45 Increase a lot 32 30 20% Increase a little 19 Remain the same 5 3 14 Decrease a little 3 12 10 6 3 5 6 2 7 7 7 7 0% 4 Decrease a lot Czech Serbia Bosnia Slovakia Slovenia Croatia Hungary Lithuania Latvia Bulgaria Romania Poland Albania Republic and Herzegovina

36 External financial uncertainty – learning to cope with the “New Normal”

The majority of CFOs in the region describe Many companies react to the situation by with- the general level of external financial uncertainty as holding investment funds and focusing on quick above normal, high or very high. This majority is as wins. While this strategy is typical of how to deal high as 88% in Slovenia and 70% in Poland. This with cyclical downward shifts in the economy, there suggests that they do indeed operate in interesting is less clarity about how to manage financial risks in times, when higher uncertainty becomes part of an environment where high levels of external financial the “new normal” environment. uncertainty are normal for the long term.

Graph 9: CFOs’ opinions on the general level of external financial and economic uncertainty facing their businesses

100% 3 2 7 5 12 11 18 15 19 14 20 24 29 35 80% 31 31 46 25 41 45 33 44 40 60% 47 33 44 30 31 34 40% 28 39 28 18 30 27 26 20% 43 Very high 33 35 33 30 High 25 28 26 20 18 14 18 Above normal 12 0% Normal Slovenia Bosnia Serbia Croatia Latvia Romania Bulgaria Hungary Czech Poland Lithuania Slovakia Albania and Republic Herzegovina

CFO Survey Slovenia 37 Gearing and costs of finance

Most CFOs remain cautious on the subject of gearing. a good time to take greater risks on to the balance In seven markets, the clear majority anticipate no sheet. Efforts to reduce gearing will be more common change, and in all countries except Poland the largest among CFOs based in the southern part of Central proportion of CFOs choose this option. The fact Europe: in the troubled economy of Slovenia, as well that Poland and Lithuania have the largest propor- as in Croatia, Bosnia and Herzegovina, Serbia, Albania tion of CFOs anticipating that gearing will increase and Hungary, plans to reduce gearing are quite corresponds with these two countries also having common. Overall, reducing gearing is the second the highest proportion of CFOs who say that now is most popular strategy after “no change”.

Graph 10: How CFOs anticipate their levels of gearing to change over the next 12 months

100% 9 9 7 16 19 18 18 17 25 25 24 80% 37 33

50 60% 45 70 67 53 56 44 63 47 63 31 37 62 40%

20% 41 32 36 31 28 29 Raise 30 26 24 20 21 23 14 No change 0% Reduce Poland Lithuania Albania Croatia Bosnia Slovenia Serbia Hungary Bulgaria Latvia Czech Slovakia Romania and Republic Herzegovina

38 Central European CFOs feel that the costs of finance somehat over the next 12 months. Expectations are set to remain the same or to increase somewhat. of a significant increase are marginal – the 9% There are four exceptions, Romania, Albania, Hungary of Slovenian CFOs who expect such a change is and Serbia, where between 39% and 21% of CFOs the largest group among the entire sample. believe that interest rates are likely to decrease

Graph 11: How CFOs expect the costs of finance for companies in their countries to change over the next 12 months

100% 3 3 2 3 5 5 5 4 9 7 21 24 34 35 80% 40 44 39 43 38 51 44 57 60

60% 37 26 54

40% 36 57 45 44 31 53 49 Increase significantly 47 34 38 20% 36 33 Increase somewhat 21 7 Remain the same 15 10 21 Decrease somewhat 3 3 2 3 2 3 3 5 2 0% 4 Decrease significantly Slovakia Czech Serbia Bosnia Slovenia Bulgaria Poland Albania Hungary Croatia Lithuania Latvia Romania Republic and Herzegovina

CFO Survey Slovenia 39 Availability of new credit

Most CFOs in our survey see new credit as “normally While 6% more Polish CFOs than last time find credit available”. The story is different in Slovenia and easily available, 5% also find it more difficult to Romania, where 79%, respectively 60%, of CFOs have obtain. Such results suggest that the region’s largest difficulties in accessing credit. Compared to last year, economy is set for an increase in those companies credit availability has improved notably in Hungary, using M&A activity to restructure and seek new and it is less of an issue even to 8% of Slovenian CFOs efficiencies. than it was then.

Graph 12: How CFOs rate the overall availability of new credit for companies

100% 3 4 4 2 7 9 7 14 21 18 24 21

80% 41 55 57 67 63 60% 67 62 79 79 59 59 63 40% 79

20% 39 43 33 30 Easily available 26 24 23 20 14 12 13 Normally available 0% Difficult to obtain Czech Slovakia Bosnia Hungary Albania Lithuania Bulgaria Poland Latvia Serbia Croatia Romania Slovenia Republic and Herzegovina

40 Funding alternatives

There is quite a diversity in the perceived attractiveness The opposite holds true for CFOs from Serbia, Bosnia of bank borrowing versus equity finance among CE and Herzegovina, Slovenia, Croatia and Romania – countries. In Poland, the Czech Republic and Slovakia, countries where availability of new credit is often CFOs regard equity raising as a less attractive option more restricted. In the remaining three countries, for funding their plans than bank borrowing. there is a less clear-cut orientation towards bank credit rather than equity raising.

Graph 13: Currently, CFOs believe bank borrowing as a source of funding is:

100% 6 7 13 17 17 16 21 26 34 80% 40 38 42 45

56 60% 63 56 32 48 67 68 72 40% 46 44 53 56

20% 41 34 31 30 Attractive 27 26 16 16 12 11 Neither attractive nor unattractive 7 7 6 0% Unattractive Slovenia Latvia Bosnia Serbia Albania Romania Croatia Hungary Poland Czech Bulgaria Lithuania Slovakia and Republic Herzegovina

CFO Survey Slovenia 41 Graph 14: Currently, CFOs believe raising equity as a source of funding is:

100% 9 9 12 17 15 17 22 24 26 37 80% 43 41 48 45

60% 29 45 58 45 58 44 57 46

26 40% 39 48 40

46 20% 45 38 38 32 33 32 33 30 28 Attractive 18 15 12 Neither attractive nor unattractive 0% Unattractive Slovenia Latvia Bosnia Serbia Albania Romania Croatia Hungary Poland Czech Bulgaria Lithuania Slovakia and Republic Herzegovina

42 Mergers, restructuring and remodelling

CFOs will lead a great deal of restructuring/remodel- increase in M&A activities in most markets is another ling and M&A over the next year. Restructuring/ means of seeking efficiency savings in times where remodelling will be strong priority for more than the simple goal of revenue growth can be difficult to 50% of CFOs in all countries except Lithuania, where achieve organically. Slovenia and Poland, currently expected growth is not necessitating major internal at very different stages of the economic growth efficiency initiatives. This level of restructuring/remod- cycle, will see much activity in both mergers and elling is impressive, as much has already been done in restructuring. most CE markets in the last few years. The expected

Graph 15: How CFOs expect levels of M&A activity to change in their countries over the next 12 months

3 2 100% 4 4 4 8 8 7 7 15 12 21

80% 41 44 33 42 46 51 39 47 57 69 60% 47 70

40% 75 48 54 36 44 35 54 53 40 20% 35 33 Increase significatly 25 Increase somewhat Neutral 3 11 3 11 2 10 3 5 5 27 2 5 0% Decrease somewhat Slovenia Poland Hungary Romania Croatia Bulgaria Latvia Serbia Bosnia Lithuania Czech Albania Slovakia and Republic Herzegovina

CFO Survey Slovenia 43 Graph 16: To what extent business remodelling or restructuring is likely to be a priority over the next 12 months

100% 7 12 19 18 21 21 30 27 27 24 80% 35 26 52 50 38 41 32 60% 47 41 44 48 52 67 36 40% 27 33 67

49 47 20% 41 32 29 29 29 Strongly 23 25 24 15 15 Somewhat priority 0% Not a priority Hungary Slovenia Serbia Poland Bosnia Albania Croatia Bulgaria Slovakia Czech Romania Latvia Lithuania and Republic Herzegovina

44 Talent shortages and prospects for finance professionals

The majority of CFOs in the region do not expect any Slovakia, Lithuania and Latvia where middle and talent shortages in financial roles. There is a consider- senior-level finance executives are more in demand able variation in views, however, with some promising than in any other country in Central Europe. prospects for experienced finance professions in

Graph 17: Whether or not CFOs expect talent shortages in the finance area over the next year

100%

15 30 26 26 24 38 38 37 35 80% 47 45 43 50

60%

40% 85 70 76 62 62 63 65 74 53 55 57 74 50 20%

Yes 0% No Slovakia Lithuania Latvia Serbia Bosnia Bulgaria Poland Slovenia Albania Croatia Hungary Czech Romania and Republic Herzegovina

CFO Survey Slovenia 45 Graph 18: Expected talent shortages in finance over the next 12 months - top 3 countries

60%

51 50%

40% 38 36

31 29 30% 28 25 21 20% 16 Top level Senior level 10% 7 7 6 Middle level 3 4 Junior level Graduate level 0% Slovakia Lithuania Latvia

46 Contacts

Yuri Sidorovich Zala Praprotnik Managing Partner Coordinator, Marketing [email protected] [email protected]

Katarina Kadunc Urban Zaveršek Senior Manager, Audit Senior Consultant, Tax [email protected]

Milka Janičijević Audit Supervisor [email protected]

CFO Survey Slovenia 47 Methodology The 3rd CE CFO survey took place in October & November 2013. A total of 580 CFOs across 13 countries completed our survey. The survey is divided into two parts, first - local analysis based on responses from Slovenia and the second part is based on all the responses across the region. Not all survey questions are reported in each annual survey. If you were interested to see the full range of questions, please contact [email protected].

We would like to thank all participating CFOs for their efforts in completing our survey. We hope the report makes an interesting read, clearly highlighting the challenges facing CFOs, and providing an important benchmark to understand how your organization rates among peers.

This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, any of its member firms or any of the foregoing’s affiliates (collectively the “Deloitte Network”) are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.

This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

“Deloitte” is the brand under which tens of thousands of dedicated professionals in independent firms throughout the world collaborate to provide audit, consulting, financial advisory, risk management, and tax services to selected clients. These firms are members of Deloitte Touche Tohmatsu Limited (DTTL), a UK private company limited by guarantee. Each member firm provides services in a particular geographic area and is subject to the laws and professional regulations of the particular country or countries in which it operates. DTTL does not itself provide services to clients. DTTL and DTTL member firm are separate and distinct legal entities, which cannot obligate the other entities. DTTL and each DTTL member firm are only liable for their own acts or omissions, and not those of each other. Each of the member firms operates under the names “Deloitte”, “Deloitte & Touche”, “Deloitte Touche Tohmatsu”, or other related names. Each DTTL member firm is structured differently in accordance with national laws, regulations, customary practice, and other factors, and may secure the provision of professional services in their territories through subsidiaries, affiliates, and/or other entities.

Deloitte Central Europe is a regional organization of entities organized under the umbrella of Deloitte Central Europe Holdings Limited, the member firm in Central Europe of Deloitte Touche Tohmatsu Limited. Services are provided by the subsidiaries and affiliates of Deloitte Central Europe Holdings Limited, which are separate and independent legal entities. The subsidiaries and affiliates of Deloitte Central Europe Holdings Limited are among the region’s leading professional services firms, providing services through more than 3,900 people in 34 offices in 17 countries.

Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte’s approximately 200,000 professionals are committed to becoming the standard of excellence.