Meeting of the Governing Board of the Bank of Slovenia of 10 January 2012
1) The Governing Board of the Bank of Slovenia discussed current economic and financial developments, and approved the release of the Report on Economic and Financial Developments for December 2011 and the Report on Slovenia's International Economic Relations for October 2011.
The likelihood of a contraction in economic activity in early 2012 is rising in the context of stagnating domestic consumption and deteriorating expectations regarding future economic growth on Slovenia's key export markets. Growth in industrial production is declining owing to deteriorating foreign demand, while the negative conditions persist in the construction sector. Revenues are also declining in the majority of trade segments. Economic development indicators do not point to a contraction in production comparable to the contraction during the recession at the end of 2008. The continuation of such developments will not facilitate any improvement on the labour market.
In the context of broad-based support from social partners, the National Assembly prevented more significant growth in expenditure on wages and transfers during the first half of 2012 by unanimously adopting an intervention act. However, the effect of the aforementioned act on the general government deficit will be limited. The required yield on 10-year government bonds fluctuated between 6% and 7% in December, while assessments of the public finance position by ratings agencies remain unfavourable. This indicates the need to formulate credible measures to consolidate public finances and to ensure a sustainable decrease in the deficit in accordance with obligations under the Stability Programme.
A significant seasonal decline in the prices of clothing and footwear, and base effects from the prices of liquid fuels and motor fuels led to a year-on-year fall in inflation to 2.1% in December 2011. Average annual inflation thus stood at 2.1% in Slovenia in 2011, and at 2.7% in the euro area. Core inflation indicators fell more sharply in Slovenia as well, in the context of the adverse macroeconomic conditions. Inflation is expected to fall further in the first half of 2012.In that regard, the Bank of Slovenia warns of the danger of rising inflationary expectations should prices rise at high rates at the municipal level in the commercial public service segment.
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.
Contributing to the decline in the banking system's total assets by EUR 861 million in November 2011 on the liability side were the banks' continuing debt repayments to the rest of the world, a decrease in government deposits and declining liabilities from issued securities and subordinated debt. Loans to banks in the rest of the world and investments in securities were down on the asset side. Growth in loans to non-banking sectors was down again slightly in November 2011 to stand at -2.6% in year-on-year terms, primarily owing to a decline in loans to other financial institutions and the continuation of stagnating growth in loans to households. Growth in impairment and provisioning costs was down on the previous month, but remains relatively high at 32% in annual terms. The banking system generated a pre-tax loss of EUR 122 million over the first 11 months of last year. The liquidity of the banking system remains at a satisfactory level, in part due to the extensive drawing of funds via the ECB's three-year, long-term refinancing operation in December 2011.In this regard, the Governing Board of the Bank of Slovenia deems the banking system's eligible collateral for ECB operations to be sufficient, but highly dependent on Slovenia's future credit rating, which is in turn dependent on economic policy measures. For this reason, the Governing Board of the Bank of Slovenia believes that urgent steps need to be taken to stabilise public finances and structural policies.
3) The Governing Board of the Bank of Slovenia took note of the report on payment systems operations for the third quarter of 2011.