Press release after the Governing Board of the Bank of Slovenia meeting on 22 April 2014
Continuation of gradual economic recovery, and increase in banking system’s total assets
1. The Governing Board of the Bank of Slovenia discussed and approved the April 2014 Economic and Financial Developments report.
The available figures for the first quarter of this year support the Bank of Slovenia’s spring forecasts, and indicate the continuation of Slovenia’s gradual economic recovery. The most important growth factors were solid export growth and the recovery in private-sector services and construction. Industrial production declined in February, most likely as a result of temporary factors, but the confidence indicators are nevertheless rising alongside exports, while turnover on the domestic market is stable. The confidence indicators have been improving since the beginning of the year, with stronger signs of a recovery in the domestic part of the economy. The latter is evident in the stabilisation of the current account surplus as a proportion of GDP.
Inflation stood at 0.6% in March. The slight increase in inflation relative to February was the result of higher growth in prices of non-energy industrial goods, most notably as a result of rises in prices of clothing and footwear. These are also components of core inflation, which has therefore overtaken the euro area average. Given the relatively low demand-side pressures, in which the persistently low consumer purchasing power remains a significant factor, there is nevertheless no expectation of any significant changes in short-term developments in inflation. The latest rises in excise duties will also have a relatively small impact on inflation, forecast at 0.2 percentage points in 2014 and 0.1 percentage points in 2015.
There were favourable developments on the labour market in February and March. Unemployment fell in March, and there was a notable increase in employment. Unemployment nevertheless remains high, at around 127,000. Manufacturing firms recorded a slight rise in wages in the early part of the year. For the further strengthening of competitiveness it is important that wage developments do not outpace the anticipated increase in productivity, which could simultaneously contribute to the elimination of imbalances on the labour market.
According to the government’s fiscal consolidation plans, this year’s general government deficit is forecast at 4.1% of GDP, or 3.2% of GDP excluding bank recapitalisations. This is less than last year, when the deficit excluding recapitalisations amounted to 4.4% of GDP. The general government debt is forecast to widen from 71.7% of GDP to 80.9% of GDP this year. Slovenia issued 3.5-year and 7-year government bonds on the euro area market in early April, with a total nominal value of EUR 2 billion. After measures were taken to stabilise the situation in the banking system, the required yields on issued government securities fell, which given the large surplus demand is an indication of the government’s greater access to funding on the international financial markets. Despite the improvement in the international financial markets’ views of Slovenia, the reform processes and fiscal consolidation must continue in the direction of balanced action on the revenue and expenditure sides.
2. The Governing Board of the Bank of Slovenia also discussed and approved the report on the performance of the banks in the current year, developments on the capital market, and interest rates.
The banking system’s total assets increased in February for the second consecutive month. Government deposits and household deposits were key factors in the increase. Household deposits increased by EUR 290 million in the first two months of this year, most notably at the large domestic banks, a reflection of the restored confidence in this part of the banking system. The small domestic banks and savings banks have also recorded increases in deposits, thereby bringing an end to the trend of household deposits migrating from the domestic banks to the banks under majority foreign ownership. Deposits are increasing despite the fall in liability interest rates. The anticipated beneficial effect of lower funding costs in reducing the price of corporate loans is already evident at the large domestic banks.
The banks are continuing to make debt repayments on the financial markets, having repaid a total of EUR 11.3 billion of liabilities since the outbreak of the crisis. Liabilities to foreign banks now account for just 12% of total liabilities, a third of the figure before the outbreak of the financial crisis. In March five banks also made a partial prepayment of liabilities from the 3-year LTROs at the ECB, thereby reducing the stock of such liabilities by EUR 1,082 million. Lending activity in the early months of the year has not yet shown any significant reversal, although the negative rates of growth are not deepening.