Meeting of the Governing Board of the Bank of Slovenia of 7 February 2012
1) The Governing Board of the Bank of Slovenia discussed current economic and financial developments, and approved the release of the January 2012 Report on Economic and Financial Developments and the November 2011 Report on International economic relations (External Statistics).
The available data for the final quarter of 2011 indicates a contraction in economic activity in the euro area, while the outlook for economic growth in 2012 is also deteriorating.
Compared with the deterioration in confidence on international markets, developments in Slovenian industry are slightly more favourable, but activity is nevertheless continuing to contract in sectors dependent primarily upon the domestic market. Numerous survey indicators are pointing to a continuation of the crisis in construction; real revenue in the retail sector excluding motor vehicles and fuels is also declining. With confidence declining in sectors dependent upon the domestic market, the risk of a further deterioration in the labour market is also increasing.
According to initial figures, last year’s state budget deficit stood at 4.3% of GDP, less than forecast in the revised state budget. The year-on-year decline in expenditure in the final months of the year could partly be a reflection of the deferral of certain expenditures until the following months. The current state budget for this year forecasts a deficit of 3.6% of GDP (estimated when the budget was drawn up). The law on additional emergency measures for 2012 is leaving wages, pensions and transfers to individuals and households unchanged in the first half of the year. Because the macroeconomic situation is worse than estimated when the most recent budget was drawn up, expenditure will have to be adjusted to the available resources.
Inflation as measured by the HICP stood at 2.1% in 2011; the largest contributions to inflation came from energy and food prices, as a result of higher commodity prices on global markets in the early part of the year. Core inflation stood at -0.4% last year, 1.0 percentage point less than in the euro area. Low economic activity and declining demand will see inflation trending below 2% in 2012. There is nevertheless an increasing need to curb upward pressure on prices at the local level, particular in the area of public services.
2) The Governing Board of the Bank of Slovenia discussed the current operations of banks, developments on the capital markets and developments in the area of interest rates.
The Slovenian banking system has also retained adequate liquidity by means of the comprehensive drawing of funds in the 3-year refinancing auction at the ECB. December 2011 brought an end to the trend of declining secondary liquidity in the banking system, with the subscription of 18-month Slovenian treasury bills.
The deterioration in the economic situation in the real sector was reflected sharply in the banks’ balance sheets last December in two ways.
First, the banks sharply reduced their stock of loans to non-financial companies, by EUR 647 million. The reduction is partly related to investment restructuring, but is primarily a reflection of the adverse developments in demand for loans and the repayment of liabilities to the rest of the world. The factors that have for some time had an adverse impact on lending activity are downgradings and higher funding costs, the deterioration in the macroeconomic situation and the situation in certain sectors, high corporate indebtedness, insolvency and a decline in the value and liquidity of the assets available as loan collateral. The further tightening of credit standards in the final quarter of last year was a response to these developments. With lending declining, the banking system’s total assets declined by EUR 1.5 billion last year.
Second, the realisation of income risk as a result of credit risk last December was substantial. Banks recorded impairment and provisioning costs of EUR 314 million, taking the total for the year to EUR 1,096 million, up 35.4% on 2010. This was the main factor in the banking system recording a larger net loss after taxation of EUR 356 million over the whole of last year, according to unaudited and unconsolidated figures.
Credit risk as measured by the proportion of the banks’ classified assets being settled by clients more than 90 days in arrears was down slightly November 2011 (compared to the previous month, but nevertheless remained relatively high. The banks’ funding conditions abroad deteriorated last year in terms of both the volume and the maturity of new loans. The banks adjusted to this on the funding side by repaying debt of EUR 2,181 million to foreign banks, which they partly replaced with Eurosystem funding. The latter will remain a reliable and relatively favourable source of funding in the future.
Given the deterioration in the international and domestic environments, the adverse processes in the real sector will again be reflected in the banking system’s performance this year. The banks still face the challenge of how to most effectively manage and reduce the portfolio of bad investments, while satisfying creditworthy demand with sufficiently favourable supply. Recapitalisation of banks, consolidation of the banking system and faster financial and operational restructuring of companies could all help to reverse the trend.
3) The Governing Board of the Bank of Slovenia harmonised the Regulation on the tariff for charging fees for Bank of Slovenia services with the ECB’s methodology for calculating the costs of such services, and approved it.
4) The Governing Board of the Bank of Slovenia agreed that the Rules Implementing the Tax Procedure Act adopted unilaterally by the Ministry of Finance have significantly hindered business entities in their operations and their transactions in smaller sums. The Governing Board therefore believes that there should be renewed study of the adverse consequences of these rules, and that they should be amended as appropriate.
5) Given the recent public debate surrounding the emergency management board at NLB d.d., the Governing Board of the Bank of Slovenia has issued the following clarification:
The Governing Board of the Bank of Slovenia can clarify that in accordance with the Banking Act the Bank of Slovenia does not discuss such matters with the public, and has not had any discussions in this specific case. The rumours are unsubstantiated. The Bank of Slovenia constantly monitors the situation in the banking sector and at individual banks, and has a wide range of instruments at its disposal to maintain the stability of the financial system.