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Central Bank Says Supplementary Budget Necessary for Stability

Ljubljana, 05 July (STA) - The board of governors of Banka Slovenije said on Tuesday that the general government deficit and the deadlock in the implementation of structural reforms were increasing insecurity in the Slovenian business environment, which is why a supplementary budget was necessary to shore up stability.

According to the central bank's board of governors, current economic trends are confirming the projections from April for economic growth and inflation. Growth will continue to be fuelled by exports, while the situation in construction is worse than expected.

The growth of GPD will near 2% this year and range from 2-3% in the next two years, the bank forecasts. Inflation will rise in the second half of the year, mostly due to a rise in core inflation. In the coming year, it should approach the eurozone average of around 2%.

Globally, economic activity is slowing down in the second quarter of the year, which is hampering growth in industrial output in Slovenia. The labour market is slowly recovering, which is reflected in moderate growth of employment in the last few months.

As the situation on the labour market remains rough, no increase in domestic spending is expected. Consequently, growth will remain low in all service activities linked to domestic demand.

The board of governors is warning that risks associated with future growth abroad are expected to grow, mostly due to financial problems of some countries and the effects of this on financial stability.

Insecurity is rising also in the domestic environment, which is why the central bank governors believe the supplementary budget being drawn up by the government for this year is needed to fulfil the promise made to the EU to bring down the budget deficit to below 3% by 2013.

If rating firms were to lower Slovenia's ratings, the financing of businesses, which are in some part highly indebted, would get increasingly dearer, the board warned.

To maintain sustainable economic growth and to do away with macroeconomic imbalances, competitiveness will need to be boosted in terms of prices and expenditure while appropriate fiscal consolidation will also be necessary, the board of governors said.

The governors also examined the operations of banks, the situation on financial markets and interest rates. Total assets of the banking system did not significantly increase in May, while the stagnation of loan activity for the non-banking sector continued.

The share of loans to highly indebted non-financial companies was decreasing, while banks were giving out more loans than usual to households.

On the budget revenue side, the process of restructuring continued with an increased role of households and other financial organisations and with the redemption of debts abroad.

The costs of write-offs and provisions increased in May, but the banking system posted EUR 63.1m in profit in the first five months of the year.

The central bank believes that the efficiency of the financial restructuring of companies and banks needs to be boosted and their capital strength enhanced to revive credit and economic growth in the long run.

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