Press release after the Meeting of the Governing Board of the Bank of Slovenia on 25 November 2014

Economic and financial developments, bank performance and direct investment

1.) The Governing Board of the Bank of Slovenia discussed current supervisory matters.
2.) The Governing Board of the Bank of Slovenia discussed and approved the November 2014 Economic and Financial Developments report.
The gradual recovery in the euro area continued in the third quarter: economic growth increased to 0.2%, despite the stagnation in the German economy. Confidence in the euro area improved in October, while export competitiveness has also continued to increase as a result of a fall in the euro. In November Consensus reduced its economic growth forecast for 2015, which is weakening the outlook for growth in Slovenia’s exports. 
According to monthly indicators growth in value-added in Slovenia in the third quarter again outpaced the euro area average, which was attributable to an increasing number of sectors. The increase in industrial production remained solid, as exports continued to record rapid growth, which has maintained the current account surplus at around 5.5% of GDP. The gradual increase in consumer purchasing power is being reflected in growth in turnover in the retail sector, and partly in the majority of other private-sector services primarily dependent on the domestic market. Given that public funding for construction investment increased again in the third quarter, the simultaneous decline in the amount of construction put in place was most likely temporary, and caused by bad weather. The decline in the value of new orders in construction already suggests a future slowdown in the sector, with growth conditioned solely by public investment. The outlook for the end of the year is favourable for the moment, confidence having increased slightly in October in all segments of the private sector.
The situation on the labour market is continuing to improve in line with the economic recovery, albeit mostly as a result of employment via agencies. In October the number of registered unemployed recorded its sharpest year-on-year fall since March 2012. September’s year-on-year increase in the workforce in employment was also the highest of the last six years. The increase in employment is being accompanied by moderate wage growth, which is improving the outlook for a further recovery in private consumption.
Low inflation is also a factor in the gradual recovery of consumer purchasing power. The rate as measured by the HICP stood at just 0.1% in October. The core inflation indicators also fell to a similar level, a reflection of the absence of price pressures in a wide spectrum of prices. The low inflation is the product of falling commodity prices on global markets and of fierce competition on the domestic market. There is not yet any sign of price pressures coming from private consumption. 
The increase in economic activity and growth in employment are contributing to an improvement in the public finances. Growth in general government revenues over the first eight months of the year significantly outpaced growth in expenditure according to the cash flow methodology. The general government deficit will nevertheless remain relatively high this year according to the European Commission forecasts, at 4.4% of GDP including bank recapitalisations. Slovenia must reduce its deficit to below 3% of GDP in 2015 in line with the requirements of the European Commission, which will require the introduction of additional fiscal consolidation measures, which are one of the main risks to economic growth in 2015.

3.) The Governing Board of the Bank of Slovenia discussed and approved the Performance of the banks in the current year, developments on the capital market, and interest rates report.
In September the banks’ balance sheets maintained similar trends to previous months. The banks made debt repayments to the rest of the world and early repayments of liabilities to the Eurosystem from the 3-year LTROs.The decline in the balance sheet total was slightly larger than in August at EUR 770 million, not only as a result of debt repayments but also as a result of a decline in government sight deposits, which the banks partly transferred to the Bank of Slovenia. Growth in household deposits remains positive, particularly at the banks under majority domestic ownership. 
On the investment side of the balance sheet, growth in corporate lending remains negative, while there is a pronounced contraction in loans to non-residents, which entail a significant income risk to the banks in light of the high proportion of non-performing claims. There is an indication of an increase in household lending in the wake of the favourable developments on the labour market and the increase in consumer confidence. Housing loans have continued to record positive growth, while the contraction in consumer loans is gradually slowing. 
The banks recorded a pre-tax operating profit of EUR 121 million over the first nine months of the year. The figure was down on that recorded over the first eight months of the year as a result of increased impairment and provisioning costs in September.

4.) The Governing Board of the Bank of Slovenia discussed the Direct Investment 2013 publication.
The Governing Board was briefed on the information on direct investments in 2013 that will be contained in the annual publication. In 2014 the European Union changed over to a new methodology for the balance of payments and the international investment position based on the sixth edition of the balance of payments manual (the BPM6). As a result of methodological changes (the exclusion of permanent debt between financial intermediaries), the average level of FDI between 2007 and 2013 was reduced by EUR 2.5 billion. The stock of inward FDI in Slovenia stood at EUR 8.9 billion at the end of 2013, down 3.5% on the end of 2012. Foreign owners recorded their worst annual result to date at the aggregate level in 2013 (a loss of EUR 8.4 million), which was largely attributable to the financial and insurance activities sector. The most important inward investors in Slovenia are EU countries (Austria, Italy, Germany and France) and Switzerland, which hold their largest investments by far in financial services other than insurance corporations and pension funds. The stock of Slovenia’s outward FDI declined by 10% over the course of 2013. The main factor in this decline were the high losses recorded by affiliates with Slovenian owners and co-owners in the rest of the world. Non-financial corporations have recorded losses in the rest of the world since 2009, the figure peaking in 2013 (at EUR 445.1 million). Slovenia’s outward FDI amounted to EUR 5.1 billion at the end of 2013. Slovenia’s largest holdings of outward FDI are in the former Yugoslav republics (75.1% of the total). Service activities have always prevailed in the division between production and services.
Public Relations Department
Bank of Slovenia