Press release - New Economic and Financial Developments report and Monthly information on bank performance in February 2017

The Governing Board of the Bank of Slovenia on meeting on 11 April 2017 discussed and approved the April 2017 Economic and Financial Developments report and Monthly information on bank performance in February 2017*.

1. Economic and Financial Developments 
The outlook in the international environment from the beginning of this year has provided the basis for continuing rapid growth in Slovenia’s export sector. This year’s economic growth will outstrip last year’s growth, while confidence in the euro area economy is high, despite uncertainties in the international environment. Economic growth forecasts for Slovenia’s main trading partners are also more favourable.
At 2.5%, the Slovenian economy recorded one of the highest growth rates in the euro area last year in the context of low government investment. The export sector expanded exports by close to 6% for the third consecutive year, while growth in industrial production was significantly higher than the euro area average. In line with the strengthening of the domestic market, value-added in services also increased significantly. Construction was the sole retarding factor, as a result of the large decline in government investment caused by the uneven disbursement of EU funds. By contrast, corporate investment in machinery and equipment strengthened significantly, which is vital for increasing the country’s economic potential. Growth in domestic final consumption was also higher than across the euro area, as employment out-performed expectations and the government relaxed austerity measures, while consumer loans also began to grow. The economy has continued to flourish in the early part of this year: the economic sentiment is high, while the labour market and consequently domestic demand are strengthening further. There was also a sharp increase in exports in January and February.
Employment continues to grow rapidly, while on the labour market an increasingly visible role is being played by foreign workers, who for the moment are merely compensating for the net emigration of residents. However, the qualifications of those foreign workers are poorer. Economic growth continues to be driven primarily by employment, while growth in labour productivity is extremely low and stood at just 0.6% last year. The background to this pattern remains high unemployment, which for the moment is still ensuring an adequate supply of labour. However, unemployment is falling sharply and the excess supply of labour could be exhausted over the medium term. Continuing economic growth will thus depend on the economy’s ability to change over to an intensive, productivity-driven model of growth. This would also require a change in economic policy in the direction of the differentiation and selection of business entities according to quality. 
Last year’s improvement in Slovenia’s fiscal position outperformed the forecasts of the Ministry of Finance, and a further rapid reduction of the deficit is also expected this year. According to the latest figures, Slovenia reduced its general government deficit to 1.5% of GDP last year, having forecast a deficit of 2.2% of GDP. This year’s deficit should be smaller than forecast in the current budget, as additional improvements in the economic situation are expected, which will raise tax revenues. At the same time the pace of disbursement of money from EU funds is forecast to increase, which means that government investment should no longer act as a brake on economic growth. Expenditure will also increase, with the key being to restrain growth in expenditure within the bounds of the forecast. 
Although domestic price pressures are also strengthening, the leap in inflation in the first quarter of this year was primarily the result of external factors. Inflation as measured by the HICP averaged 2.0% in the first quarter of the year, outpacing the euro area average by 0.4 percentage points, primarily because the basket of goods and services for Slovenian households contains an above-average proportion of motor fuels, which are under the direct influence of movements in oil prices on global markets. The rise in inflation was also largely attributable to a rise in prices of unprocessed food, which reflected a supply shock on the market for fresh food caused by bad weather in southern Europe. Growth in domestic demand and the increase in unit labour costs are not yet having a stronger impact on price developments: growth in the narrowest core inflation indicator stood at just 0.7% in the first quarter.

2. Monthly information on bank performance in February 2017.
Over the first two months of 2017 the banks increased their investments in government bonds, of both Slovenian and foreign issuers, and increased their lending to household and corporates. The banks paid down additional debt on the wholesale markets and reduced their dependency on those markets to less than one tenth of total assets. The inflow of deposits, particularly from households, strengthened at the beginning of the year, in part due to seasonal factors.
After several years of decline, total loans to the non-banking sector were up for the third consecutive month. Corporate lending also recorded positive growth in February, of 2.4% in year-on-year terms. While certain major loans contributed to December’s sharp growth in corporate loans, the continuing growth in January and February was likely a reflection of increased corporate demand, as identified by surveys of banks and corporates. With regard to SMEs, both corporates and banks have reported increased needs for financing and higher demand for loans, as well as better access to banks loans than in the past. 
Household lending continues to strengthen. Housing and consumer loans recorded year-on-year growth of 5.0% and 9.4% respectively. Favourable conditions on the labour market and increased consumer confidence in the context of the more active lending policies of certain banks are spurring households to raise loans. The supply of fixed-rate loans of longer maturities is increasing, which means reduced interest rate risk for borrowers. A slight trend of rising interest rates can be seen in the consumer loan segment. 
The quality of bank investments continued to improve in the early months of 2017. The proportion of claims more than 90 days in arrears stood at 5.3% in February, while the stock of those claims fell to EUR 1.8 billion. The proportion of the banks’ non-performing exposures fell to 8.2% according to the broader EBA definition (the most recent figure is for the end of 2016).
Increased borrowing by households is accompanied by an increase in the stock of savings at banks by the aforementioned sector. Year-on-year growth in household deposits was 7% in February. The stock of the aforementioned deposits increased by EUR 288 million over the first two months of the year, to reach EUR 16.9 billion. The shortening of maturities on household deposits continues and thus on total deposits of the non-banking sector, which account for 71% of all bank funding. Sight deposits account for 65% of total deposits by the non-banking sector. 
The liquidity of the banking system remains favourable and improved further in March when the banks participated in the final TLTRO II operation. The banks thus increased their long-term sources of funding by a further EUR 509 million. 
The banking system’s gross income was up by 6.1% during the first two months of 2017 relative to the same period last year on account of a one-off jump in non-interest income, while net interest income continues to decline Pre-tax profit amounted to EUR 82 million, an increase of 3.7% relative to the figure recorded over the first two months of 2016. 
According to the latest figures from the end of 2016, the solvency of the banking system was down slightly. Increased lending in December led to an increase in total capital requirements and a slight decline in capital adequacy on an individual basis, to 20.8%, while capital adequacy on a consolidated basis stood at 19.1%.

Also new publication Summary of macroeconomic developments, April 2017 is published.

*publication Economic and Financial Developments is from 12 May available in english version, other publication is only in Slovenian language:

Mesečna informacija o poslovanju bank, april 2017