Press release - Economic and Financial Developments, April 2016

The Governing Board of the Bank of Slovenia was briefed on the April 2016 report on Economic and Financial Developments and the Monthly information on bank performance in February 2016.

1. Economic and Financial Developments, April 2016

According to the latest forecasts by international institutions and the Bank of Slovenia, the situation in the international environment this year will only be slightly better than last year, when global economic growth recorded its lowest rate since 2009. The forecasts for global growth are being reduced, while at the same time overall growth in Slovenia’s trading partners is also expected to be relatively low. In both cases the rate is nevertheless expected to be slightly higher than last year. However there are numerous risks in the international environment, from a further slowdown in growth in emerging countries to increased geopolitical tensions.
Although confidence in the Slovenian economy declined slightly in the early part of this year, the available data indicates a continuation of solid economic growth, at least for the moment, with a positive contribution from industry and numerous service sectors. This has maintained the out-performance of average euro area growth, which is also being supported by favourable changes in sources of growth in 2015. Household consumption strengthened compared with 2014 as a result of growth in employment and the positive impact of falling energy prices on purchasing power.
Growth in investment declined significantly last year, albeit only as a result of weaker government investment in construction at the end of the European financial framework. At the same time there was most likely a reversal in the corporate sector, where investment in production capacity strengthened last year, alongside investment in transport equipment. This was likely attributable in part to better access to financing, which according to a Bank of Slovenia survey is no longer one of the major limiting factors in performance. 
Developments on the labour market remain positive. After a rise of 1.4% in 2015, corporate surveys suggest employment has continued to grow in the first half of this year. The number of registered unemployed is continuing to fall, although long-term unemployment is not falling, and is becoming an increasingly significant structural issue. Nominal growth in gross wages slowed to 0.7% last year, as a result of increased employment of low-income workers and wage adjustments to deflation. After several years of private-sector wage growth outpacing wage growth in the public sector, there was a reversal, which was attributable to the relaxation of restrictions on promotions in the public sector. The average wage in the private sector was unchanged in year-on-year terms in January of this year, while the average wage in the public sector was up 4%. Higher overall growth in wages could have a positive impact on this year’s growth in private consumption. 
The current account surplus over the preceding 12 months remains high. It approached 8% of GDP in January of this year as the merchandise trade surplus widened. This was largely attributable to a decline in merchandise imports, as export growth slowed, albeit temporarily, in light of the rapid growth in February. The gap between the nominal rates of growth in merchandise imports and exports narrowed last year, and would have narrowed even more had it not been for the negative impact of the fall in oil prices on the value of imports. Growth in exports of services remains high, in numerous segments, which is strengthening the surplus of trade in services. 
New falls in oil prices in the early part of the year were the main reason for the persistence of deflation. The headline deflation rate stood at 0.9% in the first quarter, while all the core inflation indicators also remained low. External cost pressures remain absent, and factors from the domestic environment are not yet exerting upward pressure on prices. Purchasing power and household purchases are increasing slowly, although without any impact on inflation for the moment.
The general government deficit stood at 2.2% of GDP last year according to ESA 2010 methodology, significantly less than the forecast in the Stability Programme of April 2015. EU rules stipulate that Slovenia has to improve its structural position by 0.6% of GDP this year, which will probably require greater fiscal effort than that envisaged in current budgets in the government sector. This could have an adverse impact on growth in domestic demand, which this year will already feel the impact of a sharp reduction in government investment owing to the changeover to funding from the new European financial framework.

2. Monthly information on bank performance in February 2016.

The Slovenian banking system’s total assets declined by EUR 177 million in February, most notably as a result of the absorption of Probanka and Faktor banka by the BAMC (resulting in a decline of EUR 412 million). 
The trend of slowdown in the contraction in total assets nevertheless continued, with ongoing debt repayments on the wholesale markets on the liability side and a slowdown in the contraction in lending activity on the asset side. The pressure to repay residual debt to the financial markets is diminishing: in February this debt accounted for just under 12% of bank funding, with smaller amounts and a more favourable maturity schedule than in the previous year. Funding via deposits by the non-banking sector is increasing at a stable 2.2% in year-on-year terms. Household deposits increased by EUR 217 million over the first two months of the year, which was partly seasonal in nature, but was also a continuation of the stable growth from the previous period. Sight deposits in particular are increasing, as a reflection of the sharp fall in interest rates. In conditions of the shortening of average funding maturity in the direction of an increasing proportion of sight deposits and the lengthening of average loan maturity, the maturity gap between bank assets and liabilities is widening, which is increasing the importance of an adequate level of secondary liquidity at the banks.

Differing dynamics in corporate loans are evident at the various bank groups. A sharp decline in corporate lending is being recorded by the banks under majority foreign ownership that have announced their intent to withdraw from the Slovenian market. The other foreign banks and the large domestic banks are notable for the sharpest improvement in corporate lending dynamics, which nevertheless remain negative, while growth in loans is high at the savings banks. Corporate demand for loans is still increasing, although corporate surveys indicate that access to financing is not a limiting factor in performance to the degree that it was in previous years.

The quality of the banks’ credit portfolio is improving. The proportion of claims more than 90 days in arrears had declined to 8.7% by December of last year and to 8.5% by February of this year, down 3.4 percentage points on the end of 2014. The trend of improvement in the quality of bank investments is also evident under the broader EBA definition, which alongside its broader capture of bank investments also includes forborne exposures under non-performing exposures for some time after debtors have begun making regular debt repayments. The portfolio quality indicator under the EBA definition declined from 14.1% in June of last year (the first available figure) to 11.3% in December.

The banks generated a pre-tax profit of EUR 79 million over the first two months of the year, up 40% on the same period last year. As net interest income has continued to decline, the improvement in the operating result was mainly attributable to the release of impairments and provisions.

The total capital ratio of the Slovenian banking system reached 20.9% at the end of 2015, and 18.6% on a consolidated basis, above the euro area average. The banks improved capital adequacy in the final quarter by means of an increase in capital via positive earnings, and a renewed reduction in capital requirements owing to a further contraction in lending activity.