Press release: Bank of Slovenia projections of economic developments revised upwards

Two new Bank of Slovenia publications, which were discussed by the Governing Board of the Bank of Slovenia at its meeting of 13 October 2015, were presented at today’s press conference.

1. Economic and Financial Developments with Projections, October 2015

Slovenia has continued to outperform the euro area in terms of economic growth this year, by a larger margin than forecast. GDP growth stood at 2.7% over the first half of the year, to which the export sector made the largest contribution. This year the export sector is again demonstrating its flexibility in the context of volatile foreign demand, having compensated for the decline in exports to Russia by increasing merchandise exports to non-traditional markets Tourism is also a major factor in export growth. The current account surplus has remained around 7% of GDP.

Household final consumption is gradually strengthening in the wake of relatively fast employment growth and a rise in consumer confidence, which is encouraging growth in numerous private-sector services. The sole exception among the major sectors is construction, where activity has declined sharply this year in line with the decline in investment in buildings and infrastructure. However, a gradual improvement in the structure of aggregate investment is already taking place, private-sector investment in machinery and equipment having strengthened slightly in the first half of the year. At the same time the provisional figures suggest that economic growth remained solid in the third quarter of this year.

On this basis, and having regard for the revisions to the national accounts for 2014, the Bank of Slovenia has revised its projections of economic developments upwards. GDP is forecast to increase by more than 2.5% this year, with growth averaging in excess of 2% over the next two years.
The slowdown in growth will primarily be attributable to the dynamics in government investment. With the stronger recovery in private consumption, the structure of economic growth is becoming better balanced. This is creating the conditions for solid growth in activity despite a decline in government investment, while at the same time growth in general government revenues is easing the fiscal consolidation process. This will continue to hold down growth in total final consumption. With the anticipated solid growth in exports, supported by improved cost competitiveness in the export sector, and with stronger performance on the domestic market, private-sector investment in machinery and equipment will gradually increase, which will contribute to the renewal of the technological capacity of the economy. The financing for this investment will primarily come from corporate financial surpluses, while domestic bank financing will not yet be a decisive factor. Inflation will rise only gradually over the projection period, and will not exceed 1.5%.

The risks to the realisation of these projections are considerably balanced. The largest uncertainty in the domestic environment is the amount of government investment, but the international environment entails the greater risk. The latter relates to the situations in Russia, China, Brazil and Turkey. The Volkswagen scandal could also have an adverse impact on export growth, as could any closure of borders because of the refugee crisis. By contrast, the ECB’s quantitative easing programme could have strongly positive effects. The latter could also have a stronger impact on inflation, where the uncertainties are related to oil price developments and, in the domestic environment, to wage growth.
Despite significant progress, numerous obstacles are still preventing economic growth from becoming more robust. The corporate restructuring process has not yet been completed, and it is necessary to move the focus of activity to SMEs, which should trigger additional investment potential. The principal condition for more significant domestic and foreign private-sector investment is confidence in more sustained economic growth and in the domestic business environment. In the creation of a competitive business environment the role of the government is key, as with zero tolerance to payment indiscipline and corruption, a responsive public administration, and an efficient legal system it can ensure that the domestic business environment is stable and predictable.
 

2. Performance of the banks in the current year, developments on the capital market, and interest rates, October 2015

Debt repayments by the banking system to banks in the rest of the world continued in August. As a result of an SID banka bond issue, the total stock of bank funding on the wholesale markets increased during the month, which led to an increase in the banking system’s total assets. The proportion of bank funding accounted for by deposits by the non-banking sector is continuing to increase, and reached 66.8% in August, up 5.7 percentage points on the end of 2014. After increasing for several months, household deposits declined in August, although no migration to alternative forms of investment can be discerned.

The contraction in lending is continuing to slow, particularly at the large domestic banks and the savings banks. Annual surveys of corporate demand indicate that non-financial corporations’ demand for bank loans has increased this year at half of the banks and savings banks. On the supply side, the terms of new corporate loans are significantly more favourable than a year ago as a result of sharp reductions in interest rates, although credit standards with regard to other loan terms are being maintained at previous levels. By contrast, credit standards on housing loans have eased slightly over the last two quarters. The increase in transactions in used housing and the rapid growth in new loans at banks are indicative of a recovery in the real estate market, with favourable expectations with regard to future growth in this segment of lending at banks.

The quality of the credit portfolio is improving. The proportion of claims more than 90 days in arrears stood at 11.1% in August, while the stock stood at EUR 4 billion, down 10% on the end of 2014. The largest declines in non-performing claims were recorded by those against non-residents and non-financial corporations, although within the latter the quality of the portfolio of claims against SMEs is significantly worse. The banks have increased their write-offs of bad debts this year: write-offs amounted to EUR 0.5 billion over the first eight months of the year.
The banks generated a pre-tax profit of EUR 210.8 million over the first eight months of the year, up just over a half on the same period last year. The key factor in the improved performance was a decline in impairment and provisioning costs.