Press release after the Meeting of the Governing Board of the Bank of Slovenia on 24 february 2015
Economic and financial developments, and banking operations
1) The Governing Board of the Bank of Slovenia discussed current supervisory matters.
2) The Governing Board of the Bank of Slovenia adopted a decision on additional capital required for Gorenjska banka. The bank will be informed on the aforementioned decision by the end of the month. The opinion of the European Central Bank is expected in the interim period.
3) The Governing Board of the Bank of Slovenia was briefed on the publication Economic and Financial Developments, February 2015.
Euro area economic growth was up slightly at the end of 2014, but remains weak, with confidence in the economy below the level recorded during the first half of the year. In addition, the sharp fall in oil prices has pushed the euro area into a period of moderate deflation. The ECB responded in January by announcing a comprehensive quantitative easing, which triggered a further fall in the value of the euro and a decline in required yields on the bonds of euro area countries. Expected economic growth on the majority of primary markets for Slovenian exports remains low. However, outlooks remain more favourable relative to the conditions seen in 2014, while corporate export expectations also remain positive.
Domestic economic developments were affected in the final quarter of last year by rapid growth in exports and weaker domestic consumption. Growth in output in the manufacturing sector, supported by improved cost and technological competitiveness, remained solid, while export demand strengthened within and outside the EU. Growth in public investment slowed further, which was reflected in a decline in construction activity, the latter being almost entirely dependent on public projects in the absence of private investment. Current activity was also down in private sector services, which was seen in weaker domestic consumption in the final quarter of last year. As a consequence, the current account surplus over the preceding 12 months stood at 5.8% of GDP. This was primarily the result of a rising surplus in merchandise trade, while the deficit in primary income continues to widen due to the significant burden from the payment of interest on the public debt.
Despite improvement on the labour market, high unemployment remains one of the central macroeconomic problems, while new job security also continues to decline. The number of registered unemployed rose by nearly 5,000 in January relative to December, to exceed 124,000. That increase is part of seasonal trends, and is more than 4% less than a year earlier. However, unemployment remains distinctly structural, while the high unemployment rate hinders the recovery in private consumption and complicates fiscal consolidation. December saw the continuation of year-on-year growth in the workforce in employment, which continues to derive primarily from the employment of agency workers and, in the context of the diminishing effects of labour market reform, temporary employment. In the context of zero inflation, the real wage bill was up again in December. However, the recovery in purchasing power measured as such has not yet been reflected in the corresponding growth in consumption, primarily due to uncertainty on the labour market.
Falling oil prices were the sole reason for moderate deflation in January. Prices measured by the HICP were down by an average of 0.7% in year-on-year terms, lower energy prices having contributed 1.2 percentage points to that decline. At the same time, growth in the narrowest core inflation indicator remained unchanged at 0.8%, which indicates the continuation of weak but positive growth in prices that are not directly dependent on developments on global commodity markets. This, in addition to the depreciation of the euro, reduces the risk of deflationary movements in a broader range of prices.
The country’s fiscal position is improving. Despite a sharp increase in investment, growth in general government revenues exceeded growth in expenditure, according to the cash flow methodology, by 3 percentage points over the first 11 months of last year. According to European Commission estimates based on the ESA 2010 methodology, the deficit remained high in 2014 at 5.4% of GDP, but primarily due to numerous one-off expenditures and rising interest payments. Excluding the aforementioned expenditures, the primary deficit was just 0.5% of GDP. This year’s deficit is projected to be 2.9% of GDP, solely as the result of interest payments, while the primary balance is actually expected to record a minor surplus. Financing conditions for the government are also continuing to improve on the financial markets.
4) The Governing Board of the Bank of Slovenia discussed and approved the report on the 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 December. A significant factor in the contraction were the effects of the transfer of non-performing claims from Banka Celje to the BAMC, which also resulted in an increase in the stock of investments in securities and equity. The banking system’s total assets contracted by EUR 1.6 billion in 2014, while year-on-year growth was negative in the amount of 3.9%. The contraction in the scope of banking system’s operations is slowing. There was a notable increase in the stock of liabilities to foreign banks in December for the first time since 2011. The stock of liabilities to the ECB was also up due to the banks’ participation in targeted longer-term refinancing operations (TLTRO). All segments of the non-banking sector, with the exception of non-residents, recorded positive year-on-year growth in deposits at the end of 2014, while quarter-on-quarter growth in household deposits has become very stable. Mutual funds recorded a positive net annual inflow in 2014 for the first time since the outbreak of the crisis.
The year-on-year contraction in loans to the non-banking sector improved by 10 percentage points due to base effects to stand at -11.4% in December, or at -7.8% excluding the effects of bank recovery measures. The number of banks recording positive annual growth in loans prior to impairments and the number of banks slowing the contraction in loans to the non-banking sector is rising. The positive development of events is seen in 19% growth in the annual stock of newly approved long-term corporate loans and declining interest rates on loans, which in turn the banks are seeing in higher credit demand.
Credit risk is still significant. The proportion of claims more than 90 days in arrears remains high and stood at 11.9% at the end of 2014. That proportion is particularly high in the segments of non-residents and non-financial corporations where it stands at 20.6% and 17.7% respectively.
Income risk is becoming crucial to the banks, as their ability to generate income is diminished in the context of a contraction in operations during a period of low interest rates. Despite significantly lower impairment costs than in previous years, the latter remain at a level where the banking system is unable to achieve positive returns. The banks improved their interest margin in 2014, to 2.2%, as well as their cost-efficiency. Nevertheless, the banking system recorded a pre-tax loss in the amount of EUR 67.5 million at the end of the year.