Press release after the meeting of the Bank of Slovenia Governing Board

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

2) The Governing Board of the Bank of Slovenia was briefed on current economic and financial developments, and approved the release of the Report on Economic and Financial Developments for December 2012 and the Report on International economic relations (External Statistics) for October 2012.

The economic developments in the final quarter of 2012 were mostly in line with the projections in October’s Price Stability Report. After contracting by around 2% last year, GDP is expected to decline also in 2013. Economic growth is expected to be positive in 2014, with exports remaining the main engine of economic activity.

Export-oriented sectors succeeded in maintaining their level of activity last year, in contrast to the euro area overall, while domestic demand declined. Both have been reflected in a growing current account surplus, which has also been forecast for the coming years. Employment has begun falling rapidly again in recent months, while employment opportunities are also deteriorating. Inflation rose to 3.1% in December, but will gradually ease again as domestic demand remains weak. The trend of falling inflation could come to an end if inflationary pressures from rises in taxes, excise duties and prices under the influence of economic policy measures become more pronounced. The aforementioned factors have already accounted for around half of headline inflation in recent months, and prices of municipal services are also expected to be liberalised in January.

The inflation risks are thus increasingly related to administered prices and measures to stabilise the public finances. Here the Bank of Slovenia assesses that allowing local authorities to make decisions about prices of municipal services and utilities prices without appropriate regulation represents a serious risk to price stability and inflationary expectations. Despite the current low core inflation, the Bank of Slovenia is therefore concerned over the envisaged transfer of decision-making about prices of municipal services and utilities prices to local authorities without the preliminary introduction of institutional regulatory mechanisms to ensure that price rises by local providers are justified. As an input cost for many firms, rises in prices of municipal services could also directly contribute to a deterioration in the competitiveness of the economy. January’s announcements of rises of between 15% and 70% in all prices at a local level have confirmed the Bank of Slovenia’s concerns in recent months.

The key to achieving sustained economic growth is the gradual attainment of macroeconomic balances, the priority being to balance the public finances. The ongoing fiscal consolidation envisaged in the state budgets passed for 2013 and 2014 remains a vital factor in reducing uncertainty in the economic environment and in ensuring that access to foreign financing is undisrupted. In 2012 the fiscal consolidation measures were reflected in a decline in consumer confidence, and led to a decline in domestic demand. Additional consolidation measures should therefore be designed to minimise their adverse impact on economic growth and employment, with an emphasis on strengthening development potential, competitiveness and the long-term sustainability of the public finances. It is necessary to actively continue with structural reforms, where it is vital to speed up the adoption of the amendments to the Financial Operations, Insolvency Proceedings and Compulsory Dissolution Act (ZFPPIPP), and to speed up the process of financial and business restructuring at firms, which will result in lower financial leverage and responsible ownership.

Here the Bank of Slovenia assesses the adoption of the pension reform as a major factor in strengthening the credibility of economic policy. The pension reform has reduced the risk to long-term fiscal sustainability, which was assessed by the European Commission as high for Slovenia. The reform will contribute to fiscal consolidation even in the short term. The reform as adopted is also a reflection of the ability to achieve a consensus between the social partners, and constitutes a favourable signal to market participants.