Press release after the Bank of Slovenia Board meeting on 4 December 2012
1) The Governing Board of the Bank of Slovenia discussed current supervisory matters.
2) On 4 December 2012 the Bank of Slovenia was awarded a judgement from the Supreme Court in favour of its suit against a ruling by the Securities Market Agency imposing a fine on the Bank of Slovenia. The court confirmed to the Bank of Slovenia that the exchange of data between the SMA and the Bank of Slovenia should be undertaken via the mutual cooperation process as regulated by the Banking Act.
3) The Governing Board of the Bank of Slovenia discussed current economic and financial developments, and approved the release of the Report on Economic and Financial Developments for November 2012 and the Report on International economic relations (External Statistics) for September 2012.
Economic activity in Slovenia declined further in the third quarter, although the decline was smaller than in the second quarter. The outlook for the final quarter is also unfavourable, which is in line with Bank of Slovenia’s autumn projections of a decline of around 2% in economic activity this year.
The decline in economic activity is increasingly the result of a rapid decline in all components of domestic demand. As uncertainty on the labour market has increased and real disposable income has fallen, the decline in household consumption has accelerated in the last two quarters. Disposable income is being reduced by fiscal consolidation measures, which are also being reflected in lower government consumption and investment and in reduced value-added in public services. The adverse economic climate, excess capacity in the corporate sector and financing problems are causing a rapid decline in investment and inventories. The decline in investment in machinery and equipment is a growing factor in the overall decline in investment. The continuation of such developments could bring a long-lasting deterioration in economic potential.
For the moment the export sector is still showing relatively favourable results, in spite of the unfavorable situation on certain key export markets. The contribution made to GDP growth by net trade exchange with the rest of the world is extremely high, imports having fallen significantly more sharply than exports as domestic demand declined in the third quarter. Despite the adverse situation, there was no significant decline in industrial production, which is primarily determined by export demand. Industrial production in Slovenia has actually outpaced the euro area overall this year. A high trade surplus can be expected to contribute to a current account surplus over the next two years.
Further fiscal consolidation is necessary, despite the adverse macroeconomic situation. Establishing fiscal balance in the years ahead is vital to reducing uncertainty in the economic environment and to ensuring no disruption in access to financing on the international financial markets. However, when the measures are being designed, it is necessary to also consider their short-term impact on economic activity. For the credibility of fiscal consolidation it is also important to ensure long-term sustainability, most notably through the introduction of pension reform.
Lower energy prices saw inflation fall to 2.8% in November, but it remains above the euro area average. The temporary rise in inflation is also a reflection of the introduction of fiscal consolidation measures. As domestic demand contracts, core inflation remains low and below the euro area average. The inflation risks are increasingly related to administered prices and measures to stabilise public finances.
Here the Governing Board of the Bank of Slovenia assesses that allowing local authorities to make decisions about prices of municipal services and utilities prices without appropriate regulation represents a serious risk to price stability and inflationary expectations. Despite the current low core inflation, the Governing Board is therefore concerned over the envisaged transfer of decision-making about prices of municipal services and utilities prices to local authorities without the preliminary introduction of institutional regulatory mechanisms to ensure that price rises by local providers are justified. As an input cost for many firms, rises in prices of municipal services could also directly contribute to a deterioration in the competitiveness of the economy.
The past model of financing the economy predominantly using foreign debt via bank lending now demands appropriate restructuring of the economy and deleveraging.
The key policy focus for reviving the economy is proper development policy and an encouraging business environment for sectors with high value-added.