Press release from the Bank of Slovenia Governing Board meeting on 6 November 2012
1) The Governing Board of the Bank of Slovenia discussed current supervisory matters.
2) 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 October 2012 and the Report on Slovenia’s International economic relations (External Statistics) for August 2012.
In the last year Slovenian exporters have mostly succeeded in compensating for the weak demand from the euro area with increased sales on other markets. Activity in manufacturing industry therefore remains relatively favourable, but new orders are declining. Domestic demand remains weak, while the situation in construction is still unfavourable, and volume turnover in trade and other services is continuing to gradually decline. Confidence in most segments of the private sector is still declining, and consumer confidence remains low.
The adverse economic trends are worsening the situation on the labour market, although the unemployment rate remains almost unchanged at 8.4%. The workforce in employment is falling, primarily because of jobseekers giving up the search for work. Year-on-year growth in the workforce in employment in the public sector is slowing, and in certain segments the workforce in employment is already falling. The proportion of unemployed with higher qualifications is also increasing. Labour costs are falling in the private sector as a result of the adverse situation, and in the public sector as a result of the need for fiscal consolidation. Another factor in the decline in consumer purchasing power in recent months have been rising prices.
Year-on-year inflation in October was down 0.5 percentage points on September at 3.2%. Inflation is still largely under the influence of fiscal measures, in particular excise duties, administrative charges, municipal services and reduced subsidies for school meals. These measures account for over a third of headline inflation. The additional fiscal measures required to reduce the deficit in accordance with the commitments under the Stability Programme and envisaged in the draft budgets for the next two years could lead to a further temporary rise in inflation. Core inflation remains low, and has been below the euro area average for the last three years. This is a reflection of the adverse macroeconomic situation, which is limiting the chances of inflation rising for a longer period.
3) The Governing Board of the Bank of Slovenia discussed the annual survey of demand for loans by non-financial corporations.
The Bank of Slovenia uses the survey to determine once each year how bank lending activity is being affected by factors on the side of demand for bank loans by non-financial corporations and the basic reasons for the partial rejection of credit demand by banks.
The results of the survey confirm the Bank of Slovenia’s previous findings of a relatively sharp contraction in corporate credit demand for bank loans. This contracted by 27% in 2011 and by a further 15% in the first half of 2012, which was a reflection of the decline in economic growth and the corporate deleveraging process. There were particularly adverse developments in demand for loans for investment, which recorded the largest year-on-year contraction. Demand for loan restructuring and loan repayment extensions is however increasing. There remains an imbalance in corporate financing between debt and equity, to the detriment of equity financing. This problem cannot be resolved solely by addressing and cleaning up the banks’ bad loans, and there can be no expectation of this automatically increasing credit growth.
The level of excess demand for loans (the percentage of unapproved loans) increased slightly in the first half of the year to 31%, but has remained at a similar level since 2010. The banks under majority foreign ownership were relatively more successful in adjusting to the change in demand for loans, their better performance than the other two bank groups allowing them to reduce their level of excess demand. Analysis of the survey results reveals two processes: a shift in demand for loans from the two groups of banks under majority domestic ownership to the banks under majority foreign ownership, which reject the largest number of applicants for reason of poor client creditworthiness, and the rejection of loan terms by applicants. The latter is the result of the uncompetitive interest rates for loans offered by Slovenian banks, which were higher than average rates at banks in the euro area.
The Governing Board of the Bank of Slovenia assesses that the identified reasons for rejecting loans are how the banks are responding to the deterioration in the non-financial corporations sector. It is vital that the agony of corporates without any commercial prospects or any chance of successfully restructuring their business is ended as quickly as possible, to the benefit of all stakeholders, through effective legal proceedings. The banks should focus their attention on two other groups of corporates. The first are corporates that have financial problems and low credit ratings during the recession. The banks should intensively identify, in conjunction with other stakeholders, and among themselves in cases of joint clients, which of these have good market prospects, and should draw up timely financial reprogramming. Effective legislation must allow for the transfer of ownership to new owners. The second group comprises corporates that are rejecting the bank loans offered in Slovenia. For these the banks should better tailor their loan terms to the individual applicant, and expand the range of loan terms offered in their business strategies to take account of each client’s risk assessment.
The survey has been published on the Bank of Slovenia website.
4) The Governing Board of the Bank of Slovenia discussed the draft of Direct Investment 2011, which has been published on the Bank of Slovenia website. The final version with an English translation will be published on the Bank of Slovenia website in December 2012.