Press release after the Meeting of the Governing Board of the Bank of Slovenia- 10 December 2013
1. The Governing Board of the Bank of Slovenia discussed current supervisory matters.
2. The Governing Board of the Bank of Slovenia discussed current economic and financial developments, and approved the release of the November 2013 report on Economic and Financial Developments and the September 2013 report on Slovenia’s International Economic Relations.
• The international environment remains relatively stable in favour of developed countries, with promise of merely a gradual recovery.
• Economic activity in Slovenia in the third quarter 2013 was in line with expectations, and the decline in GDP at the end of last year and in the first half of this year was smaller than previously announced.
• The situation on the labour market is continuing to ease.
• The impact of fiscal consolidation measures is being constrained by the adverse macroeconomic situation.
The period of waiting for measures to ensure bank stability is coming to an end, and with it the related uncertainty surrounding the requisite amount of the capital increases. The restructuring of the banks alone without any improvement in the situation in the real sector will not be sufficient for a significant economic recovery. In addition to more encouraging external factors, it will also require deep-rooted changes in the domestic business environment, which requires an improvement in the functioning of the rule of law and its consistent application at all levels of decision-making. Furthermore, strengthening the long-term economic potential urgently requires the continuation of the structural reforms already begun. Together with fiscal consolidation this will help the further restoration of the confidence of the international financial markets, thereby ensuring access to funding abroad.
Quarterly economic growth in the euro area slowed in the third quarter, while unemployment remained high but stable. The confidence indicators also suggest a very gradual recovery in economic activity in the final quarter of this year. In light of the weak growth in the euro area, the merely gradual recovery in other developed countries and the weaker outlook in emerging countries, the OECD reduced its global economic growth forecasts for this year and next year. The ECB cut its key interest rate to 0.25% in November. Alongside the weak economic recovery and the persistently high unemployment rate in the euro area, another factor in the decision to cut the interest rate was inflation falling significantly below the ECB’s target rate. The Fed’s monetary policy remained unchanged in November, as it maintained its key interest rate in the interval between zero and 0.25% and left its non-standard measures unchanged in scope. The slowdown in global economic growth and reduced geopolitical tensions brought a further fall in oil prices in November.
The year-on-year contraction in domestic economic activity has been slowing sharply this year in the absence of further shocks in the international environment and major new cuts in public spending. GDP was unchanged in the third quarter, while according to the Statistical office of the Republic of Slovenia’s latest estimates the contractions in activity in the preceding three quarters were also less than previously announced. The upward revision to the GDP figures means that this year’s overall decline in GDP will be smaller than forecast in the Bank of Slovenia’s most recent projections. At the same time the latest national accounts are confirming predictions of an export-driven economic recovery, the rise in exports despite the weak growth in the euro area revealing the considerable competitiveness of Slovenia’s export sector. By contrast, domestic demand remains weak, in line with the developments in real wages and the government’s fiscal squeeze. In light of the current trends in the confidence indicators, there will be no new shocks in economic activity in the final quarter.
Developments on the labour market between September and November were again more favourable than in the same period last year. This was evidenced in September’s increase in the active working population and November’s slowdown in year-on-year growth in the number of unemployed. The breakdown of flows into and out of unemployment is also better. This may indicate that the deterioration in the situation on the labour market that is typical of the end of the year and is primarily the result of the termination of temporary contracts will not be as sharp this year as it was last year. Another likely factor in the improvement is this year’s labour market reform, which has reduced the stark differences between temporary and permanent employment.
Year-on-year inflation as measured by the HICP stood at 1.2% in November, up 0.1 percentage points on the previous month. Year-on-year growth in energy prices increased as a result of a base effect, while year-on-year growth in services prices slowed as a result of falls in prices of certain marketable services. Accordingly, core inflation fell again in November, and would have fluctuated around zero if the effect of the rise in VAT and this year’s other consolidation measures and administrative measures is excluded. Core inflation is reflecting weak purchasing power and the absence of demand-side pressures. Domestic supply-side pressures are also low, year-on-year growth in industrial producer prices on the domestic market having declined again in the third quarter.
The general government deficit over the first nine months of the year widened by EUR 234 million in year-on-year terms. While expenditure recorded a slight decline, revenues during the first nine months of the year were down 2.4% on the same period last year, a reflection of the economic situation and changes in corporate income tax. Revenues in the third quarter were up in year-on-year terms as a result of a year-on-year increase in non-tax revenues and following the rise in VAT, while the deficit narrowed. In mid-November the National Assembly approved the state budgets for 2014 and 2015. The European Commission isued an opinion that the budget plans for next year comply with the rules. In November Slovenia borrowed EUR 1.5 billion on the euro market via an issue of three-year government bonds. After the bond issue and the approval of the state budgets for the next two years, the required yield on long-term government bonds began to fall, reaching 5.6% by the end of November.
The current account surplus continued to widen in year-on-year terms in September. The surplus amounted to EUR 269 million, up EUR 69 million in year-on-year terms. September’s increase largely derived from an increase in the surplus of trade in services, primarily as a result of high growth in exports of foreign trade intermediation services, and a year-on-year narrowing of the deficit in factor income and transfers. The current account surplus over the 12 months to September amounted to EUR 2.4 billion or 6.8% of GDP, up just under 5 percentage points on a year earlier. The merchandise trade position accounted for two-thirds of the increase, as it moved from a deficit of 1.4% of GDP to a surplus of 1.9% of GDP by September. The surplus of trade in services increased by 1.1% of GDP over the same period, while the deficit in factor income narrowed by 0.5% of GDP.
The private sector’s net outflow to the rest of the world amounted to EUR 432 million in September, double that in August and almost a third higher than the monthly average over the last 12 months. The private sector’s claims against the rest of the world increased, largely as a result of outflows from investments in foreign securities and from trade credits granted, while there was a decline in liabilities to the rest of the world, in which debt repayment by banks was the largest factor. The net outflow from the private sector during the first nine months of the year (EUR 3.6 billion) was only partly compensated for by net inflows via the government sector (EUR 1.6 billion), an indication of the limited options for financing abroad. The net external debt declined by EUR 0.3 billion in September, taking this year’s overall decline to EUR 2.1 billion.
3. The Governing Board of the Bank of Slovenia discussed the results of the stress tests, which will be published in coming days.
The banks will continue to function as normal after the publication of the stress tests. A proper legal basis for capital increases at the banks has been adopted, and the government has made funds available to this end, so that the capital increases can be carried out very rapidly. The Bank Asset Management Company (BAMC) is also ready to receive the transfer of impaired assets from the banks.