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Central Bank Expects 1.3% GDP Growth in 2010 (II)

Ljubljana, 06 April (STA) - Banka Slovenije forecast 1.3% economic growth for Slovenia for 2010 and 1.8% for 2011. The inflation rate will increase to 1.6% this year but fall to 1.4% in 2011, the central bank's governor Marko Kranjec told the press on Tuesday.

The announcement comes after the Institute for Macroeconomic Analysis and Development (IMAD), a government think-tank, downgraded last Friday its growth projection for 2010 by 0.3 percentage points to 0.6%.

The growth is expected to be fuelled by exports, which Banka Slovenije forecasts will rise by 5% on 2009. Imports are expected to grow by a more modest 3% as domestic consumption should remain flat or even edge lower.

Krajnec said that fixed capital formations are forecast to expand by 2.6%. "The number of employed people is expected to keep falling, contracting by 2.3% this year."

The head of Banka Slovenije's analytical centre Damjan Kozamernik said that the biggest threat to growth were the liquidity problems in the construction sector, growing unemployment and stricter lending conditions.

Bad loans as a share of total assets of banks stands at around 2.9%. The share of affected loans to the construction sector stands at 5.5%. "We believe this is still manageable," said Kranjec.

According to him, the banks will have to sit down with the construction companies to agree on an acceptable price for the excess supply. He said current real estate prices were too high.

"We are probably dealing with high margins, which the companies will have to forego." Moreover, Kranjec believes the share of construction in GDP will have to fall. "But Banka Slovenije does not see the construction sector threatening the stability of the financial system."

The biggest pressure on inflation this year, said Kozamernik, will be caused by energy prices. As for growth, Kozamernik pointed to the importance of competitiveness.

Kranjec highlighted that labour costs soared in late 2008 and 2009 compared to rival economies. "After payroll tax was eliminated, companies increased pay instead of bolstering capital adequacy and profit." He said that growth in wages outpaced productivity growth.

Meanwhile, the governor warned that the banking sector is expected to come under "renewed pressure as regards access to sources". He believes financial sources will be available at higher costs and shorter maturity.

The banks will therefore have to continue cleaning their portfolios, which will likely result in additional write-downs and subsequently lower profits, he said.

Moreover, Kranjec said the central bank was expecting the budget deficit to top 5.7% of GDP this year. The share of total national debt as a share of GDP will meanwhile rise to around 40%.

"This is a major increase on 2008, when the total debt stood at 23%," said Kranjec, adding that "the deficit and debt do not reflect the potential liabilities stemming from state guarantees in the past, which makes it possible that we are on the right side of the ball".

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