Press release - Meeting of the Governing Board of the Bank of Slovenia on 7 July 2015

537th Meeting of the Governing Board of the Bank of Slovenia

1) The Governing Board of the Bank of Slovenia was briefed on the July 2015 Economic and Financial Developments, and on the report on the performance of the banks in the current year, developments on the capital market, and interest rates.

Economic and Financial Developments, July 2015
Economic growth in Slovenia strengthened again in the first quarter, significantly outpacing overall growth in the euro area. In line with the increased confidence, the situation is improving in an increasing number of segments of the private sector, which is gradually raising turnover also on the domestic market. This relates in particular to transactions within the corporate sector, as domestic final consumption remains relatively weak, and growth is limited to consumer durables, mostly from imports. The recovery in domestic consumption, which is being constrained by the situation on the labour market and restrictive fiscal policy, remains sharply behind the overall recovery in the euro area. Slovenia’s above-average growth is primarily being driven by faster growth in export-oriented industrial production, which is based on a relatively low number of sectors.
The relatively high economic growth is being reflected in positive developments on the labour market. Employment rose further in the first quarter, but the jobs created were primarily temporary and uncertain, and the use of staffing agencies is in particular expected to increase in the future. Firms are mainly forecasting increased employment of manual labourers, which remains likely to lead to merely minimal wage growth, which already significantly lags behind growth in economic activity. Unemployment is falling, but is becoming more structural: the number of people who have been unemployed for more than three years has now passed 50,000. 
Economic growth and employment are improving the conditions for fiscal consolidation. Growth in general government revenues is outpacing growth in expenditure, which is making it easier to meet the government’s fiscal target for this year of reducing the deficit below 3% of GDP. The target is feasible, although precise monitoring and prompt action in the event of negative deviations will be required. 
The improved competitiveness of the economy has continued to be reflected in a large current account surplus. Last year’s very large surplus in merchandise trade narrowed slightly as a result of lower export growth, which alongside the slowdown in car exports was also attributable to the contraction in the Ukrainian and Russian markets. However, exports of services have strengthened sharply this year. The main increase was in exports of travel services, as a result of an improvement in the ratio of the number of overnight stays to the number of arrivals by foreign visitors. The deficit in primary income narrowed at the same time, as a result of smaller outflows of dividends and improved terms for government refinancing. 
Deflation deepened in the second quarter, and is the product of low global commodity prices and the constraints on the domestic market. Prices as measured by the HICP were down 0.8% in year-on-year terms. By contrast, average inflation in the euro area has already re-entered positive territory. The gap is largely attributable to domestic demand, which is recovering significantly more slowly in Slovenia. 
 

Performance of the banks in the current year, developments on the capital market, and interest rates

The contraction in the banking system’s total assets continued in 2015. The pace of the contraction in loans to non-financial corporations began to slow, particularly at the large domestic banks, but also at the small domestic banks, as a result of growth in lending at the savings banks. While the banks have maintained high credit standards on corporate loans, this year’s sharp falls in lending rates have brought improved access to loans and better competition with euro area banks. The spread over average interest rates across the euro area declined to below 1 percentage point, down from 3.5 percentage points in 2010 and 2 percentage points in 2013. 
The banks’ non-performing claims have been declining since the second half of last year, particularly since October, even excluding the impact of the transfers to the BAMC on portfolio quality. This was attributable to positive trends in the corporate sector, which last year doubled its net profits, which increased firms’ debt servicing capacity. The proportion of the banks’ classified claims more than 90 days in arrears stood at 11.6% in April. The stock of non-performing claims also declined in the corporate segment, although the ongoing contraction in the portfolio meant that the proportion of classified claims against the sector that they account for increased by 0.3 percentage points to 18%. This year’s largest decline in the proportion of non-performing claims has been recorded by non-residents, which nevertheless remains the highest-risk part of the banks’ portfolio. 
Continuing debt repayments on the wholesale markets saw the banks’ funding structure approach that of ten years ago, before the banks began borrowing extensively on foreign markets. Wholesale funding accounted for just 13.5% of bank funding in April, compared with 35% at the end of 2008. Following the repayment of the residual debt to the Eurosystem from the 3-year LTROs, and the low participation in the third TLTRO in March of this year, the proportion of bank funding accounted for by the Eurosystem had declined to just 2.3% by April. Growth in household deposits is slowing, although the year-on-year rate remained favourable in April at 4.1%. Some deposits have been redirected into investment funds, which have been recording increased net inflows from households since last March. Investor conservatism means that it is unlikely that savings will be directed more into higher-risk investments.
The banks generated a pre-tax profit of EUR 123 million over the first four months of the year, primarily as a result of a decline in impairment and provisioning costs. The solid profit saw them realise favourable performance indicators.

2) The Governing Board of the Bank of Slovenia was briefed on the implementation of monetary policy (April to June 2015). The Bank of Slovenia continued its purchases of Slovenian government bonds as part of the securities purchases programme. The purchases at the Bank of Slovenia are proceeding in line with its corresponding share of the ECB’s capital key. Slovenian government bond yields have risen slightly in recent weeks, following the path of other comparable euro area government bond yields, primarily as a result of the uncertain situation in Greece. Slovenian banks are facing excess liquidity, and reduced their partcipation in Eurosystem credit operations during the aforementioned period. Consequently they did not participate in the fourth TLTRO.

3) The Governing Board of the Bank of Slovenia discussed current supervisory matters.