Meeting of the Governing Board of the Bank of Slovenia of 2 November 2011

1) The Governing Board of the Bank of Slovenia discussed current economic and financial developments, and approved publication of the Report on Economic and Financial Developments for October 2011 and the Report on Slovenia's International Economic Relations for August 2011. 
Available data for the third quarter of 2011 indicate the continuation of weak, but positive growth in economic activity in the euro area. At the same time, outlooks for economic growth in the euro area for this year and next year are deteriorating, while forecasts for countries in central and eastern Europe are also being revised downwards. The differences in economic growth between euro area countries are widening under the significant influence of the credibility of public finance consolidation, competitiveness and the soundness of the financial systems of individual countries. Increased uncertainty is seen in a sharp deterioration in the values of confidence indicators, while the financial markets have for the most part reacted positively to the decisions from the meeting of EU heads of state on 26 October 2011.

Waning activity in the international environment is having an adverse effect on the Slovenian economy. Growth in exports remained high in August 2011. However, figures from the manufacturing sector in recent months indicate slowing growth in output. Domestic demand remains weak in the context of high unemployment and the severe crisis in the construction sector. Possibilities to lower the unemployment rate are limited in the context of a slow economic recovery.

Uncertainty regarding the implementation of fiscal consolidation in Slovenia has been seen in the downgrading of sovereign debt and a gradual increase in the required yield for the financing of general government debt compared with countries with a sound public finance position. This increases the costs of general government financing, and indirectly the costs of financing the private sector. Even though the sovereign debt is lower than the majority of euro area countries, rapid growth in the debt must be reined in. Adopted austerity measures are primarily based on limiting investment expenditure in the short term. The prompt adoption of long-term sustainable measures to reduce the deficit in accordance with obligations set out in the Stability and Growth Pact is therefore necessary. Economic policies must be aimed at reducing uncertainty regarding the implementation of fiscal consolidation, and thus improve sovereign and private sector access to the international financial markets.

Inflation was close to the euro area average in October 2011, at 2.9%. It is expected to stay at a similar level until the end of the year according to Bank of Slovenia projections, and then fall below 2% in the early months of next year. In the context of weak domestic demand, the decline in prices will primarily be the result of easing energy prices.

2) The Governing Board of the Bank of Slovenia discussed regular monthly information regarding the current operations of banks, developments on the capital markets and developments in the area of interest rates. 
The banking system’s total assets were down in September 2011. The main factors on the funding side were a decline in banks' liabilities to foreign banks and to the Eurosystem, and a decline in the balance of debt securities. On the investment side, banks continued to reduce the amount of loans to non-banking sectors. High impairment and provisioning costs associated with lending to non-financial corporations were created in the amount of EUR 150.3 million. The banking system generated a loss of EUR 107 million over the first nine months of this year. 
The operating results of banks are a reflection of the wider macroeconomic environment, while the capital adequacy and liquidity of the banking system overall are adequate.
3) The Governing Board of the Bank of Slovenia discussed on and approved the release of the publication Direct Investment 2010.