Business News

Central Bank Warns of High Reliance on Debt Financing (adds)

Ljubljana, 20 May (STA) - Slovenia's central bank has highlighted troubles with financing, especially the high reliance by business on debt rather than share capital, as a key constraint to faster economic recovery in its annual Financial Stability Report.

According to Banka Slovenije, Slovenia's economy is still highly reliant on debt financing, especially that obtained abroad.

Banks rely on foreign sources to get most of their financing, while the domestic financial market still lacks liquidity, the report states, warning that this does not bode well for growth.

The report, which was released on Friday, states that Slovenian companies are overly indebted and rely too much on bank loans for financing.

There can be no quicker growth until the current high level of leveraging is reduced, the bank said.

A high level of leveraging is hurting the credit capacity of companies and adversely affecting their growth and operations, head of the Department of Financial Stability at Banka Slovenije Tomaz Kosak said.

Kosak added that Slovenian companies would have to overhaul their financing and do it quicker than they have been doing until now.

Meanwhile, Governor Marko Kranjec highlighted in presenting the report that Slovenia's attitude to share capital as a means of financing business ventures was poor.

The amount of share capital in Slovenia rose by EUR 438m in 2010, but even that was on account of foreign investors, which pumped EUR 600m of fresh share capital into the economy.

Kranjec stressed that debt was a less stable way of financing business than share capital.

Moreover, with companies reliant on debt financing, the dependence of the economy on foreign debt sources rose again in 2010 despite efforts by Slovenia's banks to reduce their debt abroad.

Indeed, the share of foreign debt sources rose from 36.5% of GDP in 2009 to 38.1% last year.

The bank highlighted that the share of foreign debt financing in GDP has risen by 33.6 percentage points since 2001.

The volumes of loans issued by banks to companies in 2010 grew by a modest 0.3%, with the growth being contributed by domestic banks, whereas foreign-owned banks reduced loans to companies.

Instead, foreign-owned banks issued 10% more loans to consumers last year than a year before, which they provided at lower interest rates than domestic banks.

Despite the increase in loans to consumers, Slovenian household debt amounts to only 35% of GDP, which represents half the average of the EU.

Slovenian households also have an above-average savings rate, meaning they are a cornerstone of financial stability, according to the report.

Meanwhile, Kosak said that banks in Slovenia had solid solvency and sufficient liquidity despite the tough conditions on financial markets, including rising credit risk.

The share of bad loans rose by 66% last year, amounting to 3.7% of the total loan portfolio of banks.

As a result, banks in Slovenia increased impairments and provisions by 33% to EUR 2.4bn by the end of last year. By comparison, banks in the eurozone have already begun reducing their impairments and provisions for bad loans.

Kranjec said that the central bank expected credit risk to peak this year, meaning that provisions and impairments would stabilise and begin to turn downwards.

The capital adequacy ratio of banks in Slovenia stood at 11.3% last year, compared to 13.2% in the eurozone.

To reach the eurozone average, banks would require an additional EUR 1.2bn in fresh capital, Kosak said.

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