Press release after the meeting of the Governing Board of the Bank of Slovenia, 11 March 2014

03/11/2014 / Press release

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

2. The Governing Board of the Bank of Slovenia discussed the monthly review of economic and financial developments, and approved the release of the February 2014 report on Economic and Financial Developments and the December 2013 report on Slovenia’s International Economic Relations ( ).

The economic situation in the euro area improved at the end of last year. Activity in the core euro area countries increased, while the situation stabilised in some of the periphery countries. More favourable figures saw the European Commission raise its economic growth forecasts for the euro area for 2014 and 2015. The forecasts for Russia are continuing to be lowered.

A comprehensive revision of data during the release of GDP figures for the final quarter of last year meant that the macroeconomic picture in Slovenia changed fundamentally last year. The significant upward revisions suggest that the economic recovery has been stronger and earlier than expected. Quarterly economic growth has been on a rise last year, reaching 1.2% in the final quarter, one of the highest rates in the EU. The recovery in foreign demand in the second half of the year was reflected in growth in industrial production and merchandise exports. Value-added in the private service sector also began to increase, as a result of an increase in domestic consumption even as exports of services weakened, and also in statistical terms as a result of measures against the grey economy. The increased investment in machinery and equipment and, towards the end of the year, public infrastructure saw imports strengthen as industrial production rose, which sharply reduced the contribution of net trade to GDP growth. The current account surplus remains large, but is expected to narrow as domestic demand recovers.

The situation on the labour market remains weak, although the dynamics in certain indicators suggest an improvement. While registered unemployment remains high, there are strong flows into and out of unemployment, the most positive of which is an increase in the number of deregistrations for reason of employment. The year-on-year contraction in the workforce in employment almost came to an end in December. Wages began to rise moderately towards the end of the year. At the same time the real decline in the total wage bill slowed sharply, partly as a result of the fall in inflation.

Inflation fell further in February. It stood at just 0.2% as measured by the HICP, largely as a result of a fall in energy prices, while growth in food prices also slowed. Core inflation remained below the euro area average, primarily as a result of differences in the rates of growth in prices of non-energy industrial goods, which has been constrained in Slovenia by weak domestic demand.

The general government debt and deficit increased last year, primarily as a result of the measures to restructure the banking system. According to European Commission estimates, the general government deficit amounted to 14.9% of GDP last year while the general government debt stood at 71.9% of GDP at the end of the year, although the deficit amounts to 3.3% of GDP with the exclusion of the bank restructuring measures. Following the release of the stress test results, the required yield on Slovenian government bonds fell again in early March, the spread over the German benchmark falling by around 160 basis points between November and early March to reach its lowest value since November 2010. The positive signals from the financial markets are coinciding with improved assessments by the rating agencies after the measures to stabilise the banking system in Slovenia at the end of last year and the beginning of this year. By continuing with carefully considered measures, it is vital to ensure stable, sustained economic growth and to strengthen long-term economic potential, which will contribute to upgrades of Slovenia’s sovereign debt rating by the rating agencies. This will ease access to the financial markets for the government and the private sector, and will strengthen the banks’ access to monetary policy operations.

In contrast to the previous months, the banking system’s total assets increased in January as a result of the private sector’s increased confidence following the release of the stress test results and the capital increases in the banking system. Alongside growth in government deposits and household deposits, another factor was an increase in deposits by other financial institutions. There was a notable slowdown in the contraction in loans, while there was an increase in housing loans. The banks continued with the process of decreasing liabilities towards foreign banks and the Eurosystem.

3. The Governing Board of the Bank of Slovenia discussed the report on the performance of the banks in the current year, developments on the capital market, and interest rates.

In contrast to the previous months, the banking system’s total assets increased in January, by EUR 186 million. This was mainly the result of increases in deposits in the majority of sectors. Household deposits increased by EUR 140 million, partly as a result of seasonal effect. After December’s measures and the positive opinion of international institutions regarding the rescue of the Slovenian banking system, the increase in household deposits is probably also a reflection of the return of some of the funds withdrawn from the banking system in the previous months. The banks continued to make moderate debt repayments to foreign banks and the Eurosystem. Loans to the non-banking sector declined minimally in January. Consumer loans to households have continued to decline, while housing loans have maintained positive growth of 1.3%.

Since September 2013, following the initiation of a wind-down process at two smaller banks, the banking system’s liability interest rates have continued to fall. Long-term interest rates on deposits by the non-banking sector fell by 1.6 percentage points between December 2012 and January 2014, 0.7 percentage points of which has been recorded since last September. It is expected that the fall in liability interest rates will allow the gradual reduction of asset interest rates in the future.

The quality of the banks’ credit portfolio improved after the transfer of non-performing claims to the BAMC in December, an indication of the beneficial effect of the transfer. The proportion of claims more than 90 days in arrears declined by almost 5 percentage points to 13.4%, including non-performing claims against households.

The banks’ asset quality as measured by the proportion of claims more than 90 days in arrears improved by 0.2 percentage points in January to 13.2%.

4. The Governing Board of the Bank of Slovenia adopted amendments to the Guidelines for implementing the regulation on the assessment of credit risk losses of banks and savings banks that introduce additional requirements with regard to the reporting of exposures to debtors at the level of the individual transaction and with regard to the reporting of restructured exposures. The aforementioned changes mean that the Bank of Slovenia has already complied with the future reporting arrangements in the area of credit risk harmonised at EU level. This will give the Bank of Slovenia a better overview of the adequacy of credit risk management at banks, one component of which is effective participation in restructuring processes for indebted firms that nevertheless have long-term prospects. It will also improve client treatment in restructuring processes in the banking system, and the possibility of monitoring these processes. The aforementioned improvements also form part of a wider initiative in which the Bank of Slovenia aims to help raise economic growth by encouraging restructuring of the corporate sector.

The banks must first report exposures at the transaction level for the month of June 2014, while the deadline for reporting figures for restructured exposures is August 2014.