Meeting of the Governing Board of the Bank of Slovenia

1) The Governing Board discussed current economic and financial developments, and approved the publication of the May 2011 Economic and Financial Trends document, and the March 2011 document of Slovenia’s International Economic Relations.

Economic growth in Slovenia is based on a strong dynamic in export-oriented sectors, but is being held back by the construction sector. Overall growth of a moderate pace of recovery, and also high unemployment is evident. Domestic consumption remains low, partly as a result of low disposable income in the household sector and the uncertain situation on the labour market. Gross investment remains down in year-on-year terms, as a result of a decline in construction investment, but investment in machinery and equipment increased sharply. Sustained growth and a gradual fall in unemployment will depend in the medium term on the strengthening of the price and cost competitiveness of the economy, management of the imbalances in the area of financing, and the pace of implementation of the requisite structural reforms and economic policy.

Inflation remains below the euro area average. Commodity prices remained high, despite May’s correction. As a result of a high contribution by energy prices and, in part, food prices, and certain one-off effects, the inflation rate could approach 3% in the second half of the year. It is expected to fall again next year. Core inflation remains low, even compared with the euro area, but the negative contribution made to core inflation by prices of manufactured goods is gradually diminishing. This is an indication of the possible beginning of the gradual pass-through of higher cost factors into consumer prices.

According to the latest European Commission forecasts, without additional measures Slovenia could be one of just three EU Member States where the general government deficit is increasing. The general government debt remains relatively moderate compared with other countries, but could increase further in the years ahead as a result of the large deficit. Given the rejection of the pension reforms in the referendum, and given the additional commitments that the government has assumed or announced, targeting and defining additional measures to consolidate the public finances will be of key importance. Here it will be necessary to overcome the differences among the social partners and the pressures exerted by individual interest groups that are holding back the process of consolidation in different areas.

2) The Governing Board discussed the current operations of banks, developments on the capital markets and developments in the area of interest rates.

According to the figures for April 2011, bank lending to non-financial corporations is continuing to stagnate, despite the low but positive growth in GDP in the first quarter of the year. This is primarily the result of the relatively high indebtedness of the corporate sector and low investment activity in the domestic economy. The process of restructuring bank funding continued with the repayment of loans to foreign lenders. The banking system’s total assets declined in April 2011, partly as a result of a decline in government deposits at banks. Lending to the household sector increased moderately in April 2011.

3) The Governing Board was briefed on a statistical review of indicators for monitoring macroeconomic equilibria in EU Member States. The Governing Board finds that negative trends are discernible for Slovenia in the areas of competitiveness and the net international investment position.