Press release after the Bank of Slovenia Governing Board meeting on 4 September 2012
1) The Governing Board of the Bank of Slovenia discussed current economic and financial developments, and approved the release of the July-August 2012 Report on Economic and Financial Developments and the June 2012 Report on Slovenia's External Relations.
The economic situation in Slovenia deteriorated during the second quarter, and has remained unfavourable in recent months. According to estimates from the SORS, GDP declined by 1.0% in the second quarter. In addition to low domestic demand, conditions have tightened in the euro area, where forecasts of economic growth in 2013 deteriorated further. Such conditions in the international environment do not facilitate an economic recovery based on export demand, which is already being seen as a deterioration in the situation in the manufacturing sector. Exports were down slightly in year-on-year terms for the first time since 2009, while a sharper drop in exports was mitigated by relatively solid economic growth in Germany and Austria, and a focus on markets outside the EU. The contraction in household consumption is a result of uncertainty on the labour market, and a decrease in consumer purchasing power and an expected decline in disposable income. Corporates are reducing their investments and inventories in the context of low demand, excess production capacities and limited access to financing. The decline in employment has accelerated, in part due to the deteriorating situation in the majority of export-oriented sectors.
Fiscal conditions have deteriorated to the point where the credible balancing of public finances can no longer be delayed. The required return on long-term Slovenian government bonds rose sharply in July and August. Ratings agencies downgraded Slovenia and certain banks in August, with a warning of the possibility of a further downgrading in the future. Following the rejection of reform measures last year, the government and social partners must ensure a return of confidence and the long-term sustainability of public finances through a coordinated approach to the necessary reforms. Additional short-term measures will also be required for the planned balancing of public finances. It would be advisable, at least temporarily, to use measures on the revenue side of the budget to a greater degree and, to a lesser degree, measures that generally have more significant adverse short-term effects on economic activity, such as a decline in intermediate government spending and investment. Reducing the deficit must also be based on the continued adjustment of public sector wages and social transfers, where the situation permits. On the other hand, significant lay-offs in the public sector in the current economic climate could have adverse effects on the functioning of the public sector and on unemployment, with minor net effects in terms of balancing the budget.
Inflation reached 3.1% in August, 0.5 percentage points higher than in the euro area. The rise in inflation in recent months is the result of an increase in excise and other duties, and a year-on-year rise in euro prices of oil and seasonal food. Nevertheless, low core inflation continues to indicate low inflationary pressures on goods and services subject to a higher degree of market competition. Persistently weak demand and the need for cost adjustments in the economy will continue to curb price growth in the future.
2) The Governing Board of the Bank of Slovenia discussed banking operations and developments on the capital market during the first six months of 2012. The banking system's total assets declined by EUR 310 million to EUR 48.8 billion, the level recorded in December 2011. The adjustment of balance sheets is likely to continue on both the asset and liability side. On the liability side, the banks have reduced their scope of funding via securities and subordinated debt, due to the early repurchase of subordinated equity instruments. There was no outflow in June due to the net repayment of loans to foreign banks. However, additional net repayments can be expected if the banks are unable to roll over this source of funding. The banks' ability to raise new loans will depend more on country risk than the credit rating of an individual bank. Stable sources from non-financial corporations were practically unchanged, while household deposits were down slightly, confirmation of developments in the real sector, given the uncertainty regarding employment and declining gross wages. On the asset side, the banks primarily reduced their investments in securities and short-term deposits at foreign banks. The continued contraction in loans to the non-banking sector, which stood at 5.2% in year-on-year terms, is a result of uncertainty regarding sources of financing, and in particular due to pessimistic economic outlooks and high financial leverage in the real sector. Credit risk diminished slightly in June, when judged solely by the number of clients settling their liabilities to banks more than 90 days in arrears as a proportion of classified claims. However, the proportions of D- and E-rated non-performing claims have stagnated, while impairment and provisioning costs were relatively high. The banking sector's gross income was up more than one tenth during the first half of this year, relative to the same period last year, due to a one-off rise in net non-interest income. In the context of a 43% increase in impairment and provisioning costs compared with the first half of last year, Slovenian banks ended the first half of this year with a pre-tax profit of EUR 17 million. Due to the sustained decline in net interest income, the banks' operating results can be expected to deteriorate again during the second half of the year.