Macroeconomic environment

Slovenia

The Slovenian economy was characterized on the one hand in 2012 by declining economic activity, a contraction in investment spending and a decline in household and government consumption, and by the slowing of economic growth in the EU and a lack of confidence on the part of the international financial markets in Slovenian long-term government debt and thus in banks on the other hand. The result of the sustained economic and financial crisis is the continued deterioration in the operating conditions of Slovenian companies and a decrease in their demand for loans, in particular demand for investment loans. The over-indebtedness of the non-financial sector relative to equity remains high at 144%. Notable debt repayments were made by households, whose debt is quite low compared with the euro area average. This is reflected in a decrease in approved banking loans. The main factors in the decline in disposable household income were a reduction in public sector wages and a decrease in the scope of social assistance linked to fiscal consolidation measures.

GDP contracted by 2.3% in 2012, primarily as the result of a significant decline in domestic investment spending, low government and household final consumption and a weak contribution from the balance of foreign trade. Exports rose by just 0.3%, while imports were down 4.3%. The current account surplus widened significantly (2.3% of GDP), primarily due to the improved trade balance on account of the contraction in domestic consumption and thus imports. On the other hand, the government adjusted final consumption to the adverse fiscal conditions, while households adapted to the adverse economic conditions, as seen in high unemployment and a decline in purchasing power.

The labor market responded to the economic situation with a rapid contraction in employment, while employment opportunities also deteriorated, as seen in the sharp drop in the number of job vacancies and new hires. The registered unemployment rate rose to 13.0% at the end of the year due to the increased influx of first-time job seekers. A similar trend was seen in the ILO surveyed unemployment rate, which stood at 9.6%, a year-on-year increase of 0.9 percentage points.

Inflation rose gradually in 2012 until September, primarily due to higher prices of energy, alcohol and tobacco products, then fell slightly during the remainder of the year. In 2012, the average harmonized index of consumer prices stood at 2.8%, which is 0.3 percentage points higher than the euro area average.

The budget deficit began to narrow on account of public sector savings and at the end of 2012 according to preliminary estimates reached -3.7% of GDP (-6.4% of GDP in the previous year). The narrowing of the deficit is the result of a more rapid decline in expenditure than in revenue. General government gross debt continued to rise and was up further at the end of the year owing to the October issue of 10-year US dollar bonds, the issue of treasury bills and loans raised, and according to first estimates rose to 54.1% of GDP. The rapid growth in Slovenian public debt and the slow response to implement the necessary reforms did not go unnoticed by ratings agencies, the three largest of which downgraded Slovenia again. Moody’s downgraded Slovenia’s long-term debt from “A2” to “Baa2”, Standard & Poor’s from “AA- to “A” and Fitch from “AA-” to “A-”.

Banking sector

The operations of Slovenian banks were affected again in 2012 by the economic and financial crisis, which continues to have an adverse effect on the operating conditions of Slovenian companies and drive down their demand for loans, which in turn resulted in a contraction in the total assets of Slovenian commercial banks by EUR 2.6 billion to EUR 46.1 billion. Loans to the non-banking sector were down 5.8%, primarily due to the contraction in loans to nonfinancial corporations and declining growth in housing loans. The decline in household deposits and debt repayments to foreign creditors resulted in a contraction in banks’ lending potential to the domestic private sector, which also drove up the price of new funding. The interest rates of Slovenian banks on long-term household deposits were 1.6 percentage points higher than the euro area average at the end of the year. In contrast, interest rates on short-term deposits were 0.5 percentage points below the average. The low level of foreign sources of funding and high impairment and provisioning costs drove down the supply of loans, resulting in higher interest rates on corporate loans than the euro area average.

The high level of credit risk faced by banks continued to increase in 2012, but at a slower pace than the previous year. The proportion of claims more than 90 days in arrears rose to 14.4% or EUR 6.9 billion, while the proportion of claims against non-financial corporations has already risen to 24.1%.

The income risk of banks remained high due to the decline in lending and the deteriorating quality of the portfolio, which resulted in an increase in impairment and provisioning costs of 23.0% compared with the previous year. Interest income declined more sharply in relative terms than interest expense. Favorably priced, threeyear longer-term refinancing operations (LTROs) by the ECB prevented even worse operating results. The banking system’s pre-tax loss was 43.0% higher than the previous year to stand at EUR 769.0 million. Negative operating results for the third consecutive year diminish the attractiveness of the Slovenian banking system for potential investors and hinder the generation of internal capital by banks.

South-eastern Europe

Economic activity cooled throughout the region in 2012. Positive economic growth was recorded only in Kosovo (2.7%),while negative growth was recorded in the remaining countries. The main factors in the contraction in economic activity were the adverse conditions in the international environment, which affected the foreign trade of countries in the region, and fiscal consolidation, which resulted in a drop in domestic consumption.

The highest growth in consumer prices among the countries of South-eastern Europe was recorded by Serbia. It reached 12.2% by the end of the year, which was up 5.2 percentage points compared to the end of 2011. A trend of rising inflation was noted in all countries of Southeastern Europe in the middle of the year, while the trend of rising prices eased somewhat towards the end of the year. Energy and food prices were the main factor in price growth in the majority of countries. At 2.1% and 2.5% respectively, Bosnia and Herzegovina and Kosovo recorded the lowest inflation.

The trend in industrial output in 2012 was in complete contrast with the previous year. Weakness in the international environment, poor competitiveness and weak consumer and manufacturing purchase power contributed to the very low or negative industrial output recorded in the countries of South-eastern Europe. The most significant decline was recorded in Montenegro (-7.1%), while the decline ranged between -5.5 and -2.9% in other countries.

The situation on the labor market did not improve in 2012. In addition to the weak economic recovery, sharply focused austerity measures implemented by individual governments led to the deteriorating situation. The unemployment rate remains highest in Kosovo and Bosnia and Herzegovina, where more than 40% of the active population is out of work. The registered unemployment rate was up slightly in Croatia to exceed 20% at the end of the year, while the ILO surveyed unemployment rate in Macedonia and Serbia stood at 30.9% and 25.5%, respectively.

Banking sector

The banking sectors in Macedonia, Kosovo and Bosnia and Herzegovina recorded growth in 2012, with total assets up in all three countries, by 9.4%, 2.1% and 1.5% respectively. Growth in total loans was highest in Serbia (3.3%), while somewhat lower growth was recorded by the banking systems in Bosnia and Herzegovina (2.3%) and Macedonia (1.1%). Croatia recorded the highest growth in total deposits (3.8%), followed by Serbia (2.8%) and Kosovo (2.4%). The Macedonian banking sector in particular demonstrated good stability, while maintaining its liquidity and solvency. The total assets of the banking system in Croatia, on the other hand, contracted by 1.9%. Total loans were down 0.9% in Croatia, while total loans were up 3.3% in Serbia.