Press release after the meeting of the Governing Board of the Bank of Slovenia -24 June 2014

1. The Governing Board of the Bank of Slovenia discussed current supervisory matters.

2. The Governing Board of the Bank of Slovenia discussed and approved the June 2014 Economic and Financial Developments report and the April 2014 report on International Economic Relations.

Economic conditions in the euro area continue to improve, but there are also indications of slowing growth in the majority of major global economies. Consensus forecasts for the euro area remain stable, while monthly movements in activity and confidence indicators in April and May 2014 were also positive. At the same time, Consensus and OECD forecasts indicate a slowdown in expected growth in the US, Japan and the BRIC countries, which increases the risk associated with growth in foreign demand. Recent events in Ukraine and Iraq have led to a sharp increase in US dollar oil prices. In the context of the simultaneous depreciation of the euro, this could lead to a rise in imported inflation and the slowing of growth in private consumption.

A gradual economic recovery continues this year in Slovenia, as well. During the first quarter of this year, value-added was up in the majority of sectors, while the quarterly decline in GDP of 0.3% was solely the result of a lower estimate of taxes on products. Growth in investment in the public infrastructure continued, which in turn continues to facilitate rapid growth in the construction sector. In the context of favourable developments on the labour market and low inflation, activity is also recovering in the majority of private-sector services, while higher value-added in public-sector services is the result of a slight increase in the number of employees. At the same time, growth in value-added in industry was weak and below expectations compared with growth in exports. Growth in exports remains high and helps maintain the current account surplus at just below 6% of GDP. According to available monthly indicators, the gradual economic recovery continued in the second quarter of this year.

This April the workforce in employment was up in year-on-year terms for the first time since the outbreak of the crisis at the end of 2008, primarily on account of certain service sectors. Figures from the labour market remained favourable in May 2014, as the number of unemployed continued to fall in the context of an increase in the number of employed persons. Gradual growth in nominal wages in the private sector continues, which in the context of low inflation contributes positively to household purchasing power.

As measured by the HICP, year-on-year inflation stood at 1.0% in May 2014, up 0.5 percentage points on April. The largest contributions to higher inflation came from energy prices, a rise in excise duties on tobacco and alcohol and changes in administered prices. Despite an increase, core inflation remains low and is positive primarily owing to government and administrative measures (a rise in VAT, excise duties and environmental taxes).

According to the cash flow methodology, the consolidated general government deficit is narrowing this year on account of relatively high growth in revenues. This is only partly a reflection of the more favourable economic conditions, as revenues were up in year-on-year terms in part due to past rises in certain tax rates and a halt to the cutting of the corporate income tax rate. The payment of concession fees for mobile telephony radio frequencies had a positive effect on revenues in May 2014. Investments co-financed by European funds were up on the expenditure side, while the interest servicing burden on past borrowing continues to rise. Until the middle of June 2014, the required yield on Slovenian long-term bonds declined to around 3%.

More favourable economic developments and the stabilisation of public finances could become jeopardized in the event of a protracted period of political uncertainty and failure to fulfil commitments regarding continued fiscal consolidation and the implementation of reforms to increase the long-term potential of the economy. It is therefore necessary to keep fulfilling given commitments in the period before the formation of a new government, and to above all prevent excessive government spending.

3. The Governing Board of the Bank of Slovenia discussed the performance of the banks in the current year, developments on the capital market and interest rates.

The banking system’s total assets declined by EUR 60 million in April 2014. The banks continued with the early repayment of liabilities to the Eurosystem from the 3-year LTROs and with debt repayments to the rest of the world. Government deposits rose temporarily due to growth in overnight bank deposits. Household deposits were down slightly in March and April following a relatively strong inflow during the first two months of this year. This year’s growth in household deposits is positive at EUR 242 million, while year-on-year growth also remains positive. The contraction in loans to non-financial corporations continued, but slowed considerably relative to previous months. Low but positive growth in housing loans continues, while growth in consumer loans remains negative. 
The banks’ net interest margin has increased notably this year, the main factors being lower liability interest rates and a reduction in the banks’ debt. There is still no notable effect from the cutting of lending rates, which could be expected owing to measures by the ECB and the corporate debt repayment process. Impairment and provisioning costs were lower than in the same period last year. The banking system recorded a pre-tax profit of EUR 88 million over the first four months of 2014. 
4. The Governing Board of the Bank of Slovenia discussed the Overview of Slovenia’s Financial Accounts 2008-2013. The overview will be published in the annual statistical publication Financial Accounts of Slovenia 2008-2013, together with detailed figures for institutional sectors and financial instruments, and the methodology and process of compilation.