Macroeconomic Environment

Slovenia

The last quarter of 2008 already indicated that the global economic and financial crisis would affect the national economy. From month to month, short-term indicators recorded increasingly lower economic activity resulting in the biggest decline in economic growth after 1992. Because the economy largely depends on exports, Slovenia was strongly affected by the drop in outside demand, which quickly resulted in decreased exports. An over 30% drop in investment, a decrease in foreign trade by approximately 25%, and over 15% decline in the manufacturing industries’ added value left a mark on the economy. Despite the second half of the year indicating improved economic activities, economic growth dropped by 7.8% in 2009.

Due to the affected foreign trade, during the year the improved trade and income balance contributed to a significant decline in the current payment balance account in 2009. Despite slightly decreased public financial expenditures, public financial revenue also decreased, exceeding the reference budget deficit limit.

The fragile economic activity and the movement of oil prices on the world market also affected national price movements in 2009. Given the high growth rate in previous years, the rate of cost of living was subject to deflation in 2009. Last year, the average annual inflation was 0.9% and, after two years of exceeding the convergence criterion of price stability, it returned to the permitted range.

Delayed by a few months, the worse economic activity and severe economic climate also affected the labor market. The rate of registered unemployment increased month by month, and surpassed the 10% mark by the end of the year.

The Slovenian government tried to avoid the negative effects and consequences of the crisis by taking different measures in support of the financial and real sector.

SE Europe

In 2009, NLB’s strategic SE European markets were also affected by the financial and economic crisis, which had already hit developed economies a year earlier. Due to their strong dependence on the external environment, the negative effects of the crisis mostly affected NLB’s strategic markets via the real sector. Negative economic growth, which had already affected most of the countries at the beginning of the year, further deteriorated. In 2009, in all countries observed except Kosovo, negative economic growth was primarily caused by the withdrawal of foreign investors, resulting in a fall in direct foreign investments, and decreased foreign trade, manufacturing, and consumption. Croatia saw the largest fall in economic growth (5.8%). Other countries will experience a decrease in GDP between 1 and 5%.

Lower domestic and foreign demand quickly affected the volume of industrial production, which underwent a substantial decrease in 2009. With respect to individual industries, the construction sector was considerably affected, whereas by individual countries the volume of industrial production mainly declined in Montenegro (by approximately 30% y/y), Bulgaria, and Serbia (more than 12%). The Republika Srpska, an entity of Bosnia-Herzegovina, which saw a high growth due to the opening of new mines, was an exception.

After the inflationary pressures from the world markets subsided, prices in SE European countries started to fall. Among other things, due to the high bases in 2008, the strong downward trend of industrial product prices started to slowly subside in the final months of 2009. Kosovo and Serbia were the only countries that were not affected by a deflation of industrial product prices. A similar deflationary trend was observed in cost of living: Kosovo (−2.4%), Macedonia (−0.8%), and Bosnia- Herzegovina (−0.4%). Serbia was the only country with high annual average inflation (8.4%).

Decreased economic activity also impacted the labor market. Once again, the unemployment rate rose in all countries and prognoses expect even worse for 2010. Kosovo and Bosnia-Herzegovina continue to have the highest unemployment rates, at over 40%, followed by approximately 30% in Macedonia and between 10% and 20% in other countries in the region. In addition to increased unemployment rates in 2009, all countries saw a slowdown in salary increases. Last year, the previously high increase rate between 10 and 25% in 2008 dropped to under 1% in most of the countries. Bulgaria and Serbia, however, experienced somewhat higher growth. In the majority of the countries, the average monthly per capita gross wage still amounted to around €500. Kosovo, where the average salary was much lower, was the exception on the low end, whereas Croatia averaged more than €1,000.

Due to the decrease in foreign trade (most of the countries experienced a 20% decrease in exports and a 30% decrease in imports) deficits in the current account of their payment balance also decreased. Last year, the increase in state expenditure resulted in an even greater need for resources to finance the state budget. The temporary discontinuation of the privatization process forced most of the countries to raise urgently needed resources, above all by borrowing from the domestic financial market. Therefore, the public debt of these countries notably increased. In particular, Serbia saw itself facing this problem in the second half of the year, whereas Bulgaria and Croatia were affected by overly high external debts, which almost exceeded the value of their GDP.

Effects of the Financial Crisis

Whereas the conservative and, above all, underdeveloped financial system protected SE European countries from the worst negative effects of the global financial and economic crises, the markets observed were mainly affected because of their substantial reliance on foreign investors. In 2009, foreign investors almost completely withdrew from these markets, first resulting in a decrease in direct foreign investments and later, due to reduced foreign demand, also affecting foreign trade. In the second half of the year, the negative effects also affected the real sector.

Negative forecasts and, above all, an insecure future fuelled psychological momentum, which additionally

shook trust in the banking systems. Initially, this absence of trust manifested itself in a significant outflow of deposits, which was largest in Bosnia- Herzegovina and Serbia, whereas the possibility of acquiring financial resources abroad diminished almost everywhere. The banks were confronted with difficult liquidity problems. Therefore, in order to bridge the effects of the economic and financial crisis, governments and central banks took a series of measures in 2009. The governments mainly focused on acquiring financial resources abroad. In order to regain trust in the national banking system, they increased the volume of guaranteed deposits in national banks. Once the scope of the crisis was evident, governments focused on measures to help the real sector. Because the bank’s credit activities were almost entirely discontinued, by acquiring resources abroad the countries provided for various credit lines to finance the economy, particularly small and medium-sized companies. In 2009, Serbia and Bosnia-Herzegovina used resources from special drawing rights arising from membership in the International Monetary Fund.

The growing demand for money was a result of the banking system’s poor liquidity. Central banks were forced to change their restrictive monetary policy to an expansive one. The decrease in the volume of minimum reserves, the manner of their calculation, short-term credit offers by the central banks, and the return of deposits to customers contributed to improved liquidity for the banks and the banking system. Furthermore, changing the amount of reference interest rates became a frequently used monetary policy instrument. In 2009, reference interest rates were mostly lowered by the National Bank of Serbia (from 17.8% to 9.5%) and the National Bank of the Republic of Macedonia. Compared to 2007, at the end of 2009 the central banks started to take measures to increase the banks’ credit activities. Despite decreasing the prescribed amount of reserves and more favorable conditions for structural credit adjustments, the banks were aware of the risk. Exaggerated crediting in the next year would worsen already bad assets.

NLB Group
Annual Report 2009