Slovenian economic mirror January 2009, No. 1, Vol. XV Slovenian Economic Mirror ISSN 1318-3826 No. 1 / Vol. XV / 2009 Publisher: IMAD, Ljubljana, Gregorčičeva 27 Director: Boštjan Vasle, MSc Editor in Chief: Jure Brložnik, MA Matej Adamič (International Environment); Barbara Ferk, MSc, Katarina Ivas, Janez Kušar, Jože Markič, MSc, Tina Nenadič, Jure Povšnar (Economic Developments in Slovenia); Saša Kovačič, Tomaž Kraigher, Ana T. Selan, MSc (Labour Market); Katarina Ivas, Slavica Jurančič, Mateja Kovač, MSc, Miha Trošt (Prices); Jože Markič, MSc (Balance of Payments); Marjan Hafner (Financial Markets); Barbara Knapič Navarrete, Jasna Kondža (Public Finance); Barbara Ferk, MSc (Disposable Income and Consumption of Households and NPISH, 2007); Mojca Vendramin, MSc (Environmental Taxes, 2006), Barbara Knapič Navarrete (General Government Expenditure by Function (COFOG), 2007) Editorial Board: Lidija Apohal Vučkovič, Marijana Bednaš, MSc, Alenka Kajzer, PhD, Rotija Kmet Zupančič, MSc, Janez Kušar, Mateja Peternelj, MSc, Boštjan Vasle, MSc Translator: Marija Kavčič Language Editor: Terry Troy Jackson Data Preparation and Graphs: Bibijana Cirman Naglič, Marjeta Žigman Concept and Design: Katja Korinšek, Pristop DTP: Ema Bertina Kopitar Print: Tiskarna Solos Circulation: 500 copies The contents of this publication may be reproduced in whole or in part provided that the source is acknowledged. Contents In the Spotlight................................................................................................................................................3 Current Economic Trends................................................................................................................................5 International Environment...............................................................................................................................................7 Economic Developments in Slovenia...............................................................................................................................................9 Labour Market.........................................................................................................................................................................................14 Prices..................................................................................................................................................................................16 Balance of Payments.......................................................................................................................................................20 Financial Markets...................................................................................................................................................................................22 Public Finance..........................................................................................................................................................................................25 Selected Topics..............................................................................................................................................29 Disposable Income and Consumption of Households and NPISH, 2007 ......................................................................31 Environment Taxes, 2007....................................................................................................................................................................32 General Government Expenditure by Function (COFOG).......................................................................................33 Statistical Appendix......................................................................................................................................35 Boxes Box 1: European Commission Interim Forecast. Box 2: Prices of Food..................................................... Box 3: Impact of the Financial Crisis on the Slovenian Banking Sector ,..8 ,18 ,23 Slovenian Economic Mirror, February 2009 3 In the Spotlight In the spotlight The European Commission and the IMF revised their forecasts of economic growth downward again in January; for 2009, the IMF projects world growth to fall to its lowest rate since World War II. In its January outlook, the IMF scaled down its forecast for world economic growth from 2.2% to 0.5%. Similarly, the EC also revised downward its forecast for economic growth in the euro area in January, by 2.0 p.p. to -1.9%, and predicted a slower recovery in 2010 (from 0.9% to 0.5%). New forecasts for all of Slovenia's main trading partners are also significantly lower than IMAD assumptions in the Revised Autumn Forecast of Economic Trends. The deterioration of forecasts is not surprising, given that economic activity in the euro area dropped sharply in November. Amid slowing economic activity and further oil price drops, inflation totalled 1.1% in January and continues to slow. In January, the ECB cut its key interest rate again, by 50 basis points to 2.0%. In November, economic activity also slowed notably in Slovenia. The y-o-y real decline in merchandise exports (-14.2%) in November was the largest since 1995, while the decline in industrial production in manufacturing (-12.7%) was the largest since 1992. In November, the value of construction put in place posted its first y-o-y decline in 2008 (-8.1%). Growth in retail trade continued to slow, particularly in the sale of durable goods. The business climate indicator dropped again in January, hitting a new low since measurement began in the year 2000, which suggests a further slowdown of economic activity in the first months of 2009. The weaker economic activity is already reflected in the labour market. Employment growth fell sharply in November. After the fall in October, the y-o-y growth of the number of employed persons declined by a further 0.5 p.p. to 2.2%. Relative to October, the number of persons in employment dropped most notably in manufacturing and construction. In the final quarter of 2008, the number of the registered unemployed increased by more than a tenth (up by approximately 7,000 from the end of September). November's growth of wages was the lowest in the past four years. The gross wage per employee was 8.9% higher in nominal terms than in the previous month, but the November increase was the lowest in the last four years as a result of a smaller number of recipients and a lower amount of extra payments in 2008. Owing to weak y-o-y growth of wages in the private sector, where growth was only recorded in production services, y-o-y growth of the total gross wage (3.9%) moderated significantly as well, while public sector wages recorded much stronger growth. Despite the slowdown in y-o-y growth over the last two months, growth of the total gross wage in the first eleven months of 2008 (8.3%) was still notably stronger than in the same period of 2007. Y-o-y inflation (2.1%) and inflation excluding prices of non-processed food and energy declined further in December (3.9%). Due to lower prices of liquid fuels and food and a concurrent decline in economic activity, growth of the harmonised index of consumer prices declined in the second half of2008, from 6.9% in July to 1.8% in December, which was a much faster decline than in the total euro area (from 4.0% to 1.6%). With slower growth in November, the current account deficit exceeded EUR 1.8 bn in the first eleven months of2008. In November, the current account deficit was among the lowest in 2008. In the first eleven months, it was EUR 676.3 m higher than in the same period of 2007. The deficit narrowed in November on account of a higher surplus in the services balance and a lower trade deficit. In the first eleven months, the current account deficit totalled EUR 1,825.6 m (compared with EUR 1,149 m in the same period of2007). Growth of general government revenue started to ease at the end of the year. According to the available data on paid taxes and social security contributions for 2008 as a whole, growth of general government revenue slowed gradually from July onward, after favourable growth in the first half of the year, and totalled 9.8% for the year as a whole. According to the consolidated balance, general government revenue increased by 11.1% and general government expenditure by 9.8% % in the first ten months of2008. Slovenia closed the year2008 with a negative net position of its state budget towards the EU budget in the amount of EUR 64.7 m. On the basis of the new estimates of statistical aggregates for Slovenia, total payments into the EU budget in 2008 were 10% higher than envisaged in the supplementary budget, while the absorbed funds were more than one half lower than planned (44.4%). Slovenian Economic Mirror, January 2009 In the Spotlight 4 5 Slovenian Economic Mirror, January 2009 Current Economic Trends "Ö £ A \ ; 1 ' \ 1/ V A / \V'- -J\ : ^ tj! /v ft* Af M Figure 13: Limiting factors in construction according to business tendency surveys 50 45 40 ■ Insufficient demand -High costs of finance Difficulties in acquiring loans Source: SORS; calculations by IMAD. contracts was 10.8% lower in November, relative to the same month of 2007. In the first eleven months of 2008, the value of new contracts was 1.4% lower than in the same period of 2007, particularly as a result of the decline posted in the last few months. A similar moderation is also indicated by business tendency data on limiting factors, according to which the share of enterprises citing insufficient demand as a factor limiting building activity is growing. This indicator reached its six-year high in December and stayed at that level in January. Over the last few months, construction companies are also increasingly facing difficulties in acquiring loans as well as higher costs of finance. The data on new contracts and business tendencies show that the slowdown of activity is set to continue. According to the construction statistics, the value of the stock of contracts was 10.8% lower in November, relative to the same month of 2007. In the first eleven months of 2008, the value of new contracts was 1.4% lower than in the same period of 2007, particularly as a result of the decline posted in the last few months. A similar moderation is also indicated by business tendency data on limiting factors, according to which the share of enterprises citing insufficient demand as a factor limiting building activity is growing. This indicator reached its six-year high in December and stayed at that level in January. Over the last few months, construction companies are also increasingly facing difficulties in acquiring loans as well as higher costs of finance. Growth in the volume of road freight transport slowed notably in the third quarter of 2008 and is expected to deteriorate further in the last quarter. After it had increased by 25% in the first half of 2008, the volume of road freight transport rose by a mere 7.7% in the third quarter, and by 18.8% in total in the first three quarters y-o-y. In Q3, growth of international road freight transport by domestic Source: SORS. carriers was twice as high (8.5%) as growth of transport in Slovenia (4.1%). Given the decline in industrial production (and in the volume of construction) in Slovenia and in our main trading partners over the past few months, the prospects for Q4 growth are modest. In Q3, the volume of rail freight transport slightly increased, but dropped in the first nine months by 1.9% year-on-year in total, even though national transport increased by a tenth. The share of national transport in both road transport and rail transport thus accounts for a mere 19% of all transport services, while the other transport is international. Within other categories that together represent just over a third of all transport activities, harbour and maritime transport rose by 6.3% and 20.4% y-o-y, respectively, in the first Figure 14: International road freight transport an industrial production in Germany aaaaaaaa Sources: SORS, Eurostat; calculations by IMAD. 35 30 rc 25 20 10 5 0 108 104 100 -a 96 m 92 13 Slovenian Economic Mirror, January 2009 Current Economic Trends eleven months of 2008. Within passenger transport, urban transport and suburban commuter transport stagnated (-0.7% and -0.2% y-o-y, respectively, in the first eleven months), while rail transport increased by 6.1% year-on-year in the first three quarters of 2008. Due to the high base (Slovenian presidency of the EU), growth in air and airport traffic started to slow rapidly in the second half of 2008, but will remain high at the annual level. Electricity production increased significantly in 2008, while electricity consumption dropped. The latter reflects the deepening of the economic crisis over the past few months. Electricity production increased by 6.7% y-o-y in December, and by 9.7% in 2008 as a whole. The output of hydroelectric power plants surged by as much as 120.6% in December and by a quarter in 2008 as a whole; the 2008 output of the nuclear power plant (without the regular overhaul) increased by a tenth, as expected, while the output of thermal power plants recorded practically no increase (0.5%). Electricity consumption dropped by 14.0% y-o-y in December, and by 5.4% in 2008 as a whole. December's reduction in consumption by direct users was by far the largest in 2008, at 38.2%, as was the decline in consumption from the distribution network (9.7%), which goes hand in hand with a further decline in industrial production in December 2008. Exports increased by a quarter and imports declined by a seventh; Slovenia thus posted net exports accounting for 19.2% of production in December and 10.6% in 2008 as a whole, the largest since 2001. Figure 15: Electricity consumption and industrial production in manufacturing _ Electricity consumption Industrial production ^ O < ^ O Sources: SORS, ELES; calculations by IMAD. In November, activity in the retail trade3 of durable and semi-durable goods continued to slow. Y-o-y growth of real turnover in retail trade moderated significantly in October and November. Real turnover in the sale of motor vehicles where growth has been slowing since March dropped y-o-y for the second successive month. Growth in the sale of automotive fuels more than halved relative to the average growth in the first three quarters. After being strong in the first two months of 2008, the growth of the number of new car registrations slowed in the following months; the number of new car registrations in November was lower than in the previous November (-18.9%) for the second month in a row. In the first eleven months of 2008, growth in the sale of non-food products more than halved relative to the same period of 2007, while growth in the sale of food remained strong. Activity in retail trade can be expected to moderate further in the coming months, as according to the seasonally adjusted data the confidence indicator in January again dropped to its lowest level in the whole analysed period. Figure 16: Turnover in retail trade ■ Retail trade Non-food Fuels Food, beverages, tobacco - Sale of motor vehicles E 20 3 In retail trade, sale and maintenance of motor vehicles and retail sale of automotive fuels combined (50+52) Source: SORS; calculations by IMAD. Activity in hotels and restaurants also declined in November. Real turnover dropped y-o-y for the fifth consecutive month, again largely on account of lower real turnover in accommodation and related services (-15.7%). In the first eleven months of the year, the y-o-y decline of the real turnover in this group (-5.9%) was three times higher than in the hotel and restaurant group and almost twice as high as in the bar group. The number of overnight tourist stays also dropped again year-on-year in November (-4.4%), given that the number of overnight stays by foreign tourists dropped y-o-y for the fourth month in a row (-11.9%). With a 0.9% decline in overnight stays by foreign tourists (9.0% growth in 2007) and a 4.8% increase in overnight stays by domestic tourists, the number of tourists' overnight stays increased by 1.4% in the period to November relative to the same period of 2007 (7.2% in 2007). Consumer sentiment deteriorated again in January; major purchases of durable goods moderated significantly over the past few months. In January, for the third month in a 50 40 râ 30 E 10 0 15 10 5 0 -15 14 Slovenian Economic Mirror, January 2009 Current Economic Trends Figure 17: Turnover in hotels and restaurants 10 8 6 4 2 0 -2 -4 -10 -12 -14 - Hotels and restaurants Food - Accommodation Beverages Source: SORS; calculations by IMAD. row, the consumer confidence indicator dropped to its lowest level so far; its original value fell by as much as 8.0 p.p. relative to December. Consumers are very pessimistic regarding the economic situation in the next twelve months (as well as regarding the past economic situation), unemployment and major purchases. Moreover, they also think that now is the time to save and are planning to save more in the next twelve months (these indicators rose to their highest levels since July 2007). Purchases of durables moderated notably in the second half of the year. In the second half of 2008, natural persons registered roughly 1,100 passenger vehicles (-7.5%) less than in the same period of the previous year. The value of furniture and household appliance purchases was still higher than the year before, but the growth rate slowed notably from 12.5% y-o-y in the first half to 2.0% in the second half of the year. Figure 18: Purchases of durable goods - Car registrations, natural and legal persons - Furniture, household appliances, construction material The business climate indicator dropped in January again, hitting a new low since its formation in 2000. The values of all five sub-indices fell again and reached their lowest levels since the beginning of measurement for the third consecutive month (with the exception of construction). In January, the overall decline was mostly underpinned by the decline of the indicator in services, where the values of most sub-indices (business situation, demand, expected employment, selling price expectations and trust) dropped to their lowest levels since the beginning of measurement, and the decline in the consumer confidence indicator. Figure 19: Business tendency ■ Economic sentiment Retail trade ■ Service act. - Manufacturing ■ Consumers Construction rAi- ( > I\I ' } V M / X * 1 M h il \(f 1 V IH Source: SORS; calculations by IMAD. Source: SORS, Eurostat. Source: SORS. Labour market The situation in the labour market in terms of employment is deteriorating further. The number of persons in employment declined by 0.1% in November; the y-o-y growth rate fell by 0.5 p.p. to 2.2%. Compared with October, the number of employed persons continued to increase in most services (most notably in distributive trades). The largest declines were recorded in construction and manufacturing. In December, the number of registered vacancies and the number of persons hired dropped for the third month in a row, by 22.0% each relative to November and by 13.4% and 8.1%, respectively, year-on-year. The number of work permits for foreigners, which already exceeded 90,000 in October, is not falling yet and increased by a further 261 (to 90,696) in December. At the end of January, the government adopted the decree laying down the work permit quota for 2009 - 24,000, which is less than last year (32,000). Unemployment also continued to grow in December. The number of persons who lost their jobs has been rising already since September. Among these, the shares of people who lost a fixed-term job and were made 40 30 K 20 10 0 40 30 20 .E 10 t0 Slovenian Economic Mirror, February 2009 Current Economic Trends 15 Figure 20: Change in the number of employed persons by activity Sep 08/Aug 08 «Oct 08/Sep 08 «Nov 08/0ct 08 (U u O " Figure 21: Movement of the number of registered unemployed persons Number of registered unemployed (left axis) -Q-o-q growth (right axis) 5 s or <3 0 Source: ESS; calculations by IMAD. QQ Source: ESS; calculations by IMAD. 2.0 20 1.5 90 1.0 80 10 0.5 o 70 60 50 40 redundant are increasing. The number of persons who found work is dropping.4 The registered unemployment rate climbed to 6.7% in November. Even though the number of the registered unemployed increased for the third successive month and rose by 11.7% relative to the previous quarter in Q4 2008 alone, it was still 3.2% lower y-o-y in December. On average, 63,215 persons were registered as unemployed in 2008, 8,121 (11.4%) fewer than in 2007. In 2008, the number of the unemployed declined primarily owing to the lower number of registered first-time job seekers (15.1% fewer than in 2007). The total number of all other people who registered as unemployed because they lost work also decreased by November, but December's inflow was so high (6,349 persons) that in 2008, as a whole, the total number of these unemployed was 1% higher than the year before. Among the unemployed who lost their jobs in 2008, 57.1% lost their fixed-term jobs, 12.6% quit their jobs voluntarily (these shares are still rising), 16.2% were laid off for business reasons, 4.7% lost work due to bankruptcy, while the rest (9.5%) were left jobless for other reasons. Outflows from unemployment, on the other hand, were lower than in 2007. There was 15.2% fewer unemployed who got a job, while outflows from various administrative reasons declined by 12.3% relative to 2007. The share of women among the unemployed dropped somewhat in 2008 (to 52.8%, which is 2.1 p.p. less than the year before). The shares of young unemployed persons and firsttime job seekers are increasing, while the share of older unemployed people aged over 50 is rising (accounting for 34.7% in 2008, 3.6 p.p. more than the year before). In November, wage growth surged on account of year-end extra payments; in the first eleven months of2008, it was still significantly stronger than in the same period of2007, despite the y-o-y moderation recorded in the last two months. The gross wage per employee rose by a nominal 8.9% in November compared with the previous month, which is the lowest November rise in the past four years. Without extra payments, the November gross wage would have been even somewhat lower than in October, partly also due to two fewer working days. The slowdown of wage growth was even more pronounced y-o-y (3.9%), mainly due to a considerable wage growth decline in the private sector. The average gross wage growth was 8.3% in the first eleven months of 2008 and was much higher than in the comparable period of 2007 (5.9%), while in real terms it even lagged behind. With somewhat faster growth of wages and progressive taxation, net wage growth in the same period was half a percentage point slower. Table 3: Labour market indicators In % 2007 XI 08/ X 08 XI 08/ XI 07 I-XI 08/ I-XI 07 Labour force 1.6 0.0 1.5 1.9 Persons in formal employment 3.5 -0.1 2.2 3.1 - Employed in in enterprises and organisations and by those self-employed 3.3 -0.2 2.2 3.2 Registered unemployed -16.9 1.2 -7.3 -12.1 Average nominal gross wage 5.9 8.9 3.9 8.3 - private sector 6.9 11.2 1.0 8.0 - public sector 4.1 3.4 12.2 9.4 2007 XI 07 X 08 XI 08 Rate of registered unemployment, v % 7.7 7.3 6.6 6.7 Average nominal gross wage (in EUR) 1,284.79 1,491.65 1424.08 1,550.29 Private sector (in EUR) 1,217.14 1,467.82 1333.46 1,482.97 Public sector (in EUR) 1,485.09 1,563.28 1696.23 1,753.49 4 See Slovenian Economic Mirror, December 2008 Sources: ESS, SORS, calculations by IMAD. 16 Slovenian Economic Mirror, January 2009 Current Economic Trends Figure 22: Nominal gross wage per employee 14 12 -C S 10 o ro ? 8 6 4 2 0 - Total - Private sector (A-K) Public sector (L-O) Public sector wages recorded strong growth in November (3.4%); the y-o-y and average wage rises remained higher than in the private sector. The monthly growth of wages was unexpectedly strong, particularly in the public administration, largely due to increased payments to judges (by slightly over 15%). Wages increased by 12.2% on average (relative to November 2007) and by 9.4% in the first eleven months of 2008 (relative to the same period of the previous year). As a result of the funds disbursed to eliminate wage disparities, high y-o-y and average wage rises were seen in all public sector activities, particularly in health and social work (20.1% y-o-y growth in November) thanks to the highest volume of disbursed funds. In other community, social and personal services, wages dropped y-o-y in November (by 3.2%), which is attributable to the fact that most employees in these services work in the private sector where wages also mainly declined. < ^ O < ^ Source: SORS; calculations by IMAD. The movement of wages in the private sector has begun to mirror the tightening of economic conditions. The November increase in the gross wage in the private sector (11.2%) was otherwise characterised by year-end extra payments, though these were more modest than in 2007. The average amount of 13th month payments was 8.8% lower; the percentage of recipients was also lower (19.9%, 3.9 p.p. less than in November 2007). The gross wage increased by a mere 1.0% year-on-year, and by 8.0% on average in the first eleven months. Positive y-o-y growth was only recorded by wages in the group of production services (G to I; 5.1%), while in all other groups wages declined by just below one percent on average. These wage dynamics are linked to last year's smaller volume of year-end extra payments (as a result of adverse business situations) and the high base in 2007. Figure 24: Gross wages in the public sector Public administration (L) - Education (M) - Health and social work (N) Other community, social and personal services (O) < ^ O < Source: SORS; calculations by IMAD. 18 16 25 20 ro 10 5 0 Figure 23: Gross wages in the private sector -----Agriculture, fishing (A, B) -Industry, construction (C to F) -Production services (G to I) -----Business services (J to K) Source: SORS; calculations by IMAD. Source: SORS, Eurostat. Prices Y-o-y inflation in Slovenia stood at 2.1% in December.5 In Slovenia, inflation slowed faster than in the euro area. In the second half of the year, y-o-y growth of the harmonised index of consumer prices dropped from 6.9% in July to 1.8% in December, while at the level of the total euro area it dropped from 4.0% to 1.6% in the same period. The faster slowdown of y-o-y inflation in Slovenia was, similarly to the period of rising inflation, 5 For more on inflation movement see Slovenian Economic Mirror, December 2008. Data on inflation in January 2009 will be published by SORS on 9 February, because in January 2009 some methodological changes regarding consumer price indices will be carried out, such as a change of weights, updating of the list of goods and services and of the points of sale where the prices are collected. 17 Slovenian Economic Mirror, January 2009 Current Economic Trends Table 4: Prices 2007 2008 XII 2007/ XII 2006 O (I 07-XII 07)/ O (I 06-XII 06) XII 2008/ XI2008 XII 2008/ XII 2007 O (I 08-XII 08)/ O (I 06-XII 07) Consumer prices (CPI) 5.6 3.6 -0.6 2.1 5.7 Goods 6.0 3.2 -1.0 1.3 6.0 - Fuel and energy 9.8 3.1 -5.8 -7.2 10.6 - Other 5.2 3.2 0.1 3.2 5.0 Services 4.8 4.5 0.3 3.8 5.0 Consumer prices (HICP) 5.7 3.8 -0.7 1.8 5.5 Administered prices' 7.2 2.6 -5.8 -7.8 9.6 - Energy 9.6 2.7 -8.8 -11.9 14.4 - Other 1.5 2.4 0.3 0.4 0.1 Core inflation - trimmean 3.2 2.3 -0.1 2.6 3.9 - excluding (fresh) food & energy 4.0 2.7 0.2 3.9 4.6 Consumer prices in the EMU 3.1 2.1 -0.1 1.6 3.3 Producer prices of domestic manufacturers - domestic market 6.3 5.4 -0.4 3.1 5.6 - EMU 0.9 5.0 -1.1 -0.1 2.1 Sources: SORS, Eurostat, calculations by IMAD. Note: 1 due to annual changes of the administered price index, figures are not directly comparable across years. mainly due to the approximately 60% higher share of liquid fuels for transport and heating in the structure of average household expenditure and, thus, in the domestic consumer price index than at the level of the total euro area. Core inflation also continued to ease in December. Y-o-y growth of the consumer price index excluding non-processed food and energy prices was down over the few past months, totalling 3.9% in December. The moderation Figure 25: Contributions of individual price groups in 2008 2.0 15 1.0 si 05 ci -C 0.0 S or CT -0.5 ot n oi -1.0 tu bi irt tn -1.5 o u -2.0 -2.5 -3.0 1st half of the year 2nd half of the year of core inflation was still mainly underpinned by slowing prices of processed food; their growth dropped from 11.3% in April to 5.2% in December. Prices under various regimes of regulation declined in 2008 (-7.8%). Energy prices dropped by 11.9%; other administered prices rose by 0.4%. Last year's growth of administered prices was thus in line with the Plan of Administered Price Adjustment for 2008 and 2009, Figure 26: Inflation in Slovenia and in the total euro area - Slovenia: Inflation Slovenia: Inflation excluding energy and unprocessed food - Euro area: Inflation Euro area: Inflation excluding energy and unprocessed food Food Liquid fuels Services Other Source: SORS; calculations by IMAD. Source: SORS, Eurostat. 12 10 8 6 4 2 0 18 Slovenian Economic Mirror, January 2009 Current Economic Trends lagging behind the market-determined price rises, which increased by 3.6%, by our estimate. In December, domestic producer prices of manufactured goods on the domestic market dropped for the fourth month in a row. Price growth also declined y-o-y, from 3.6% to 3.1%; growth of prices for sale on foreign markets dropped from 2.5% to 0.8%. The slowdown of y-o-y price growth is largely a consequence of slower price rises in the manufacture of food, beverages and animal feeds, as well as of price drops in the manufacture of metals and metal products where in December 2008 prices on the domestic and foreign markets dropped by a respective 2.8% and 5.4% relative to December 2007. After improving at the monthly level for five months, in November price competitiveness measured by relative consumer prices also improved year-on-year. Amid a slightly decelerated monthly decline (-0.4%; -0.8% in October), the real effective exchange rate deflated by relative consumer prices also dropped year-on-year in November (-0.7%; in the first eleven months together, it was 3.0% higher), for the first time since March 2006. The nominal effective exchange rate continued to decline (-0.2% at the monthly level and -1.7% y-o-y) under the influence of a strong depreciation of the EUR against the USD, JPY and CHF; at the same time the EUR appreciated against most other EU currencies, most notably against the GBP and slightly less against the SEK, HUF and PLN. Relative prices Box2: Prices of food The prices of food increased significantly on global markets and also in Slovenia in 2007 and in the first half of 2008. In this period, prices of agricultural commodities on global markets increased at a very rapid pace. Slovenian prices of agricultural products increased as well, which led to accelerated growth of prices in the manufacture of food, beverages and animal feeds and in the retail prices of food. The growth of retail food prices was, in addition to price rises in liquid fuels for transport and heating, the main factor of faster consumer price rises in Slovenia in this period. Food price rises on global markets translated into faster food price rises in the whole euro area. Similar to Slovenia, intermediate prices in the manufacture and final prices in retail trade increased also in the euro area. Price rises in the manufacture of food, beverages and animal feeds and retail trade in Slovenia were much more pronounced than in the euro area average, which was the key difference in the food price dynamics between Slovenia and the euro area. In addition, food price rises in the retail sector in Slovenia exceeded price rises in the manufacturing sector, in contrast to the euro area where they lagged behind. In the second half of2008, prices of agricultural commodities started to slow both on global markets as well as in Slovenia, which had no impact on retail prices. In the second half of the year, prices of agricultural commodities on global markets declined. A similar downward trend was also seen in prices of agricultural products by Slovenian producers and was reflected in prices at the next link of the food chain, which began falling as well (i.e. prices in the manufacture of food, beverages and animal feeds). At the level of the total euro area, these developments came to be seen in September 2008, while in Slovenia they became more pronounced in December 2008. Final retail food prices, however, remain relatively high and do not mirror the price drops at the beginning of the chain neither in the euro area nor in Slovenia. Figure 27: IMF food price index and index of domestic producer prices of agricultural products - Index of agricultural producer prices in Slovenia (excluding wine)* Figure 28: Price indices in the manufacture of food, beverages and animal feeds and in retail food prices ■ HICP -Slovenia HICP -Euro area ■ PPI -Slovenia PPI - Euro area Source: SORS, IMF. Note: *wine is not included in the IMF food price index, but has a high weight (15%) in the Slovenian index of agricultural products; therefore we excluded it from our calculations. Source: SORS, Eurostat. 115 90 80 95 19 Slovenian Economic Mirror, January 2009 Current Economic Trends Figure 5 4 3 2 ct I 0 Figure 29: Administered prices o -10 u -Plan of AP 2008 -Realisation -2008 '.£ ïï £ £ '.£ ïï E -ž Source: SORS; calculations by IMAD. 30 20 10 0 dropped at the monthly level again in November (-0.2%) and the slowdown of their y-o-y growth (to 1.0% from 1.6% in October) again became more pronounced. Price competitiveness measured by relative producer prices continued to improve slowly at the y-o-y level in November. In November, the real effective exchange rate deflated by relative producer prices in manufacturing6 increased relative to October (by 0.8%); its y-o-y drop was, consequently, lower as well (-0.2%; -1.0% in October). The November deterioration of the otherwise favourable trends was linked to a more pronounced increase in relative prices (1.0% at the monthly level; 1.5% y-o-y), following their modest one-year growth when producer Figure 30: Producer prices of manufactured goods on the domestic market Producer prices of manufactured goods, total Manufacture of food products and beverages Manufacture of metals and metal products Vir: SURS. 6 On the domestic market. -1 -2 -3 C3C3C3C3C3C fU —» fU —» fU —» fU —» fU —» fU Source: ECB, SORS, OECD; calculations by IMAD. prices in manufacturing in Slovenia rose at a similar rate as in its trading partners. In November, all euro area countries posted better price competitiveness than the year before. Slovenia was among the Member States with the lowest y-o-y drop in the real effective exchange rate deflated by the HICP. Amid the still relatively high inflation, which otherwise gradually slowed,7 the depreciation of the euro had a Figure 32: Components of the real effective exchange fC —^ fC —^ fC —^ fC —^ fC —^ fC Source: ECB, SORS, OECD; calculations by IMAD. 7 Slovenia shared the 1st to 2nd places with Belgium in terms of y-o-y inflation as late as in September, 3rd to 4th places in October, while in November it was ranked 5th to 6th together with Greece. Despite a relative reduction of the disparities, in the first eleven months Slovenia still recorded the highest y-o-y inflation in the euro area. : Real effective exchange rate 20 Slovenian Economic Mirror, January 2009 Current Economic Trends Figure 33: Real effective exchange rates in the euro area, deflated by the HICP Figure 34: Components of the current account balance 6 5 4 3 £ 2 ï o m 1 o ^ 0 S < -Source: ECB; calculations by IMAD. I Trade balance I Factor incomes -Current account Services balance Current transfers Source: BS. 0 relatively smaller positive impact on Slovenia's price competitiveness, owing to the above-average share of Slovenia's trade in the euro area. In the total of eleven months, price competitiveness in all euro-area members was still worse than the year before; Slovenia was among the countries where the slowdown was modest. Balance of payments With somewhat slower growth in November, the current account deficit exceeded EUR 1.8 bn in the first eleven months of2008. In November, the current account deficit was among the lowest recorded in 2008 (EUR 157.5 m) and also somewhat lower than in November 2007, which was the result of a higher surplus in the services balance and a lower trade deficit. Deficits in factor incomes and current transfers, in contrast, widened. In the first eleven months of 2008, the current account deficit reached EUR 1,825.6 m and was EUR 676.3 m higher than in the same period of 2007. The trade deficit totalled EUR 181.4 m in November and was the lowest since May (when it started to grow at a faster pace). In November 2008, the trade deficit also narrowed somewhat compared with November 2007; in the first eleven months of 2008, it was EUR 980 m higher than in the same period of 2007. The merchandise trade deficit widened by EUR 980 m in the period of the first eleven months: the deficit with EU countries increased, while the surplus with non-EU countries decreased. According to data for the first ten months, a breakdown by purpose shows that the merchandise trade deficit rose largely as a consequence of a widening trade deficit in intermediate goods, which is, given the high import component in exports, linked to the cooling of the international environment and weaker foreign demand. Even though the year-on-year deterioration of the terms of merchandise trade was marginal in October, it nevertheless contributed more than two-thirds to the trade deficit increase in the first ten months of 2008 (68.5%). The surplus in the services balance in November was narrower than in previous months, albeit still notably higher than in November 2007, largely on account of high business services exports. The surplus in the services balance totalled EUR 132.0 m in November. The y-o-y increase was mainly underpinned by higher exports in trade in other business services, especially merchanting and various business, professional and technical services. While net exports of construction services posted a significant increase in October, their contribution was already considerably lower in November. The trade surplus in the group of other services strengthened y-o-y in October and November, while the trade surplus in travel and the trade surplus in transport services narrowed. The narrowing of the latter was consistent with the decline in merchandise trade growth. In the first eleven months of 2008, the surplus in the services balance increased by EUR 522.6 m y-o-y to EUR 1,652.8 m. The factor income deficit, which was rising due to higher net interest payments in 2008, widened y-o-y in November largely due to higher net outflows from dividends. The growth of net interest payments on foreign loans, which slowed somewhat in November, remains the main driver of factor income deficit growth. Net interest receipts from securities (mostly bonds and notes of the banking sector) declined in November year-on-year. Net outflows from dividends have been rising year-on-year since September, as in this period foreign direct investors increased payments of dividends and distributed profits more than Slovenian direct investors abroad. In the first eleven months of 2008, the factor income deficit totalled 21 Slovenian Economic Mirror, January 2009 Current Economic Trends Table 5: Balance of payments I-XI 2008, EUR m Inflows Outflows Balance1 Balance, I-XI 2007 Current account 25,810.2 27,635.8 -1,825.6 -1,149.3 - Trade balance (FOB) 19,062.7 21,416.1 -2,353.4 -1,373.3 - Services 4,694.9 3,042.1 1,652.8 1,130.2 - Income 1,156.8 2,084.9 -928.1 -669.4 Current transfers 895.8 1,092.7 -196.9 -236.8 Capital and financial account 4,689.3 -2,934.1 1,755.2 1,221.8 - Capital account 237.7 -280.5 -42.9 -31.5 - Capital transfers 234.8 -271.9 -37.1 -29.0 - Non-produced, non-financial assets 2.9 -8.6 -5.7 -2.5 - Financial account 4,451.6 -2,653.4 1,798.1 1,253.3 - Direct investment 1,017.4 -929.0 88.5 -319.1 - Portfolio investment 650.9 -259.4 391.5 -2,300.6 - Financial derivates 0.0 5.7 5.7 -22.7 - Other investment 2,767.4 -1,470.8 1,296.6 3,828.3 - Assets 28.8 -1,455.9 -1,427.1 -4,946.7 - Liabilities 2,738.6 -14.9 2,723.7 8,775.0 -Reserve assets 15.9 0.0 15.9 67.5 Net errors and omissions 70.3 0.0 70.3 -72.5 Sources: BS. Note: 1a minus sign (-) in the balance indicates a surplus of imports over exports in the current account and a rise in assets in the capital and financial account and the central bank's international reserves. the world. In November, receipts from the EU budget exceeded payments from the state budget by EUR 30.3 m. The deficit in current transfers totalled EUR 196.6 m in the first eleven months of 2008 and was EUR 39.9% lower y-o-y, largely due to a higher surplus in other transfers. After posting net outflows in October, financial transactions with the rest of the world recorded a net capital inflow in November. The net capital inflow was largely driven by a higher net inflow from securities. The net financial inflow from direct investment also increased, while the net financial inflow from other investment declined, largely on account of repayment of foreign loans. The net financial flow totalled EUR 1,782.3 m in the first eleven months of 2008, against EUR 1,185.8 in the same period of 2007. External financial liabilities declined in November relative to the previous month, largely as a result of lower liabilities from commercial bank loans; liabilities from currency and deposits of the BS and inflows from foreign direct investment increased. In November, commercial banks took out EUR 237.0 m of long-term loans and repaid EUR 820.6 m of short-term foreign loans. Among external financial liabilities, long-term bank loans prevailed in the first eleven months of 2008 (EUR 1,159.5 m), but their share in total loans declined; the volume of long-term loans raised by banks also dropped relative to the same period in 2007 (EUR 1.855.0 m). Bank financing through the ECB increased again in November. Liabilities of the BS to the Eurosystem, through which the BS ensures uninterrupted access of banks to liquid assets, increased. Inflows from EUR 928.1 m, EUR 258.7 m more than in the same period of 2007. In the total capital income balance, the greatest share (80.7%) came from net paid interest on loans. The deficit in current transfers widened slightly y-o-y in November due to the general government deficit. The general government deficit was underpinned by higher net payments of taxes and contributions to the rest of Figure 35: Financial transactions of the balance of payments Direct investment I Financial derivatives -Net financial flow Portfolio investment ■ Other investment 22 Slovenian Economic Mirror, January 2009 Current Economic Trends indirect investment remained modest since August 2008, while liabilities between affiliated enterprises increased. The inflow from indirect investment (EUR 1,017.4 m) was EUR 121.5 m higher in the first eleven months of 2008 than in the same period of 2007. bn (EUR 28.5 bn at the end of2007). Slovenia's net external debt amounted to EUR 8.5 bn at the end of November (22.7% of the estimated GDP) and rose by EUR 2.3 bn compared with December 2007. External financial assets also declined in November, which was largely related to a further considerable decrease of assets in portfolio investment and other investment. After investing in money market instruments in September and October, the BS withdrew from these investments in November and assets in money market instruments notably declined (by EUR 649.5 m). In November, foreign enterprises repaid part of their short-term trade credits in the amount of EUR 130.4 m. The volume of short-term trade credits to the rest of the world dropped y-o-y in the first eleven months of 2008, totalling EUR 5.7 bn at the end of November 2008. The structure of short-term trade credits is similar to the structure of Slovenian merchandise exports. Slovenia thus recorded most claims on Germany, Italy, Austria, France and Great Britain. In November, the rest of the world also net repaid loans to Slovenian commercial banks, as the repaid debt (long-term) exceeded given loans (short-term). The drop in assets in currency and deposits of banks in November was the largest in 2008 (457.0 m). Within external assets, capital exports in the form of direct investment abroad (EUR 928.9 m), trade credits (EUR 591.5 m), loans (EUR 439.1 m) and currency and deposits (EUR 425.3 m) prevailed in the first eleven months of 2008. At the end of November, Slovenia's gross external debt totalled EUR 39.6 bn (EUR 34.7 bn at the end of 2007) and Slovenia's gross external assets in debt instruments EUR 31.1 Financial markets After slowing gradually in the first ten months of 2008, the lending activity of domestic banks almost ceased in November due to the tightening conditions in international interbank markets, and was at its lowest since March 2005.8 The tightening also coincided with the repayment of a major loan raised by NLB abroad in June 2008, which contributed to a further slowing of the lending activity of domestic banks. In November, banks thus net repaid foreign loans in the amount of EUR 583.6 m, which is the highest figure so far. Net repayment is thus a result of the repayment of short-term loans in the amount of EUR 820.6 m; in spite of the tightened conditions, banks managed to obtain long-term loans in the net amount of EUR 237.0 m, which is the third highest figure in the first eleven months of 2008. The lending activity of domestic banks otherwise strengthened somewhat in December, but was still very low relative to the first ten months of 2008 (the monthly net flow of loans was EUR 63.5 m). Despite the relatively weak lending activity in December 2007, the y-o-y growth rate thus declined by another 0.8 p.p. to 18.1% at the end of the year and was 14.2 p.p. down from the end of 2007. The volume of assets in mutual funds dropped also in December and was, at 5.9%, the lowest in the final quarter of 2008. A large part of the decline is due to a further Table 6: Financial market indicators Nominal amounts, EUR bn Nominal loan growth, % 31. XII 2007 30. XI 2008 30. XI 2008/ 31. X 2008 30. XI 2008/ 31. XII 2007 30. XI 2008/ 30. XI 2007 Loans total 26,715.5 31,488.6 0.0 17.9 18.9 Enterprises and NFI 19,378.7 23,107.4 0.0 19.2 20.6 Government 519.2 596.5 15.4 14.9 19.2 Households 6,817.7 7,784.7 -0.9 14.2 14.0 Consumer credits 2,742.5 2,891.0 -1.3 5.4 3.4 Lending for house purchase 2,667.9 3,336.6 -0.6 25.1 27.1 Other lending 1,407.3 1,557.0 -1.0 10.6 10.6 Bank deposits total 12,541.8 13,507.4 1.2 7.7 13.0 Overnight deposits 5,387.7 5,303.6 0.9 -1.6 4.2 Short-term deposits 5,112.4 5,519.6 1.5 8.0 13.4 Long-term deposits 1,286.0 1,824.1 2.8 41.8 43.5 Deposits redeemable at notice 755.6 860.1 -2.4 13.8 18.8 Mutual funds 2,924.4 1,513.4 -5.9 -48.2 -48.2 Sources: Monthly Bulletin of the BS, SMA (Securities Market Agency), calculations by IMAD. 8 See Slovenian Economic Mirror, December 2008. 23 Slovenian Economic Mirror, January 2009 Current Economic Trends Box3: Impact of the financial crisis on the Slovenian banking sector Due to its low exposure to the securities that triggered the financial crisis, the Slovenian banking sector was mainly indirectly affected by the financial crisis. The conditions in interbank markets, which were the most important source of financing the lending activity of domestic banks, tightened significantly after the spillover of the financial crisis in September 2008. The lending conditions deteriorated, in particular, given that interest rates increased (reference interest rates and spreads) and the maturity of loans shortened as a result of high uncertainty. The lending activity of Slovenian banks thus started to slow gradually in 2008 and almost ceased at the end of the year. As banks largely resorted to external financial resources over the past years, the ratio of loans to deposits saw a significant drop. Over the last few years, bank financing abroad became cheaper and available to the whole banking sector; deposits of non-banking sectors were partly transferred to other forms of investment with higher expected returns. In the last three years,1 banks net borrowed EUR 6.6 bn abroad; deposits of non-banking sectors recorded net inflows of EUR 4.8 bn, reaching 30% growth, while the volume of loans to non-banking sectors more than doubled. The change in the attitude of Slovenian banks towards deposits is also reflected in the evolution of deposit interest rates, which used to be so low in the past that they did not even allow savings in banks to maintain their real value. Short-term interest rates were kept at a lower level than in EMU from the second half of 2006 to October 2008, even though inflation in Slovenia was higher than in EMU. Long-term interest rates in that period moved only slightly above the EMU level; the gap widened somewhat in 2008, due to the worsening of conditions in international interbank markets. The ratio of loans to deposits thus declined significantly in the period to December 2008. While deposits of domestic and foreign non-banking sectors still exceeded the level of loans to domestic and foreign non-banking sectors at the end of 2004, they only accounted for just over 60% of loans to non-banking sectors at the end of December, which is significantly less than the EU average (86.5%2), where the loan-to-deposit ratio has not been changing substantially over the past five years. The external vulnerability of the Slovenian banking sector increased significantly over the last few years.3 While in 2004 it still reached less than half of total assets of banks and was lower than the EU average, it climbed to just below two-thirds by 2007, exceeding the EU average by almost 10 p.p. The gap with EMU is even wider, as the bank vulnerability in EMU does not even reach half of the total assets of banks. Given the small share of domestic sources and an increasingly higher proportion of foreign financing of banks' lending activity, the vulnerability of Slovenian banks to developments in international financial markets increased. This was also evidenced at the end of 2008, when the situation in the international interbank markets worsened significantly and the availability of financing sources shrank; as Slovenian banks also had to pay maturing external liabilities at the same time, the lending activity, which had already been slowing gradually in previous months, almost came to a halt. Y-o-y growth Figure 36: Evolution of deposit interest rates Figure 37: Loan-to-deposit ratios in Slovenia and in the EU ro ro ro ro Source: BS, ECB. 1 From November 2005 to November 2008. 2 The figure refers to December 2007. 3 The external vulnerability is measured as the stock of all external assets and liabilities with regard to banks' total assets. 24 Slovenian Economic Mirror, February 2009 Current Economic Trends rates of loans thus dropped to their lowest levels in the last few years. Their decline was much more notable than that at the level of the total euro area. The interest rates in interbank markets dropped significantly over the last few months, but the situation is not yet stable enough to allow for a full refinancing of foreign bank loans, let alone new borrowing. Banks thus still obtain a large part of the necessary assets from non-banking sector deposits. The government adopted several measures to increase banking sector liquidity, bank guarantees among other things to restore confidence in interbank markets; however, these measures have not yet had a significant impact on the liquidity of the banking system. The spillover of the crisis into other sectors of the economy, which have already started to face liquidity problems, represents an ever greater liquidity risk. The conditions of operation deteriorated considerably in the final quarter of 2008, which will have a negative effect on the capability of enterprises and NFI to repay loans. Over the last three years, corporate and NFI net borrowing totalled EUR 12.0 bn and accounted for just over three quarters of total net flows of non-banking sector loans. Figure 38: External vulnerability as a share of banks' total assets Figure 39: Lending conditions and growth of bank loans to non-banking sectors other than general government S 50 Lending conditions* - Slovenia (right axis) -EMU (right axis) 45 40 lyirNm^rvorNm^ri^rNm^rcorNm^. oaaaoaaaoaaaoaaa Source: ECB, BS; calculations by IMAD. 70 60 35 40 30 30 25 20 20 £ 9-10 15 0 10 5 0 decline in the value of investments and only slightly over a tenth to net outflows from mutual funds, which were, in December, the lowest in the last four months (EUR 13.2 m). The bulk of net outflows came from stock and mixed mutual funds. While the volume of assets in mutual funds managed by domestic administrators recorded almost 90% annual growth, on average, in 2000-2007, the value of these assets almost halved in 2008. Mutual funds thus lost EUR 1.4 bn in 2008. The decline in the volume of assets was recorded by almost all groups of mutual funds, the largest by stock mutual funds (by more than a half). At the end of 2008, an increase was only recorded by money market mutual funds that mainly place assets in the safest and most liquid investments; however, these assets only account for just over 1% of all assets in mutual funds managed by domestic administrators. Almost 80% of the total decline is due to the lower value of investment, while the rest can be attributed to net outflows, which totalled EUR 303.6 m (against record inflows of EUR 469.7 m posted in the year before). Despite high net outflows, the structure of Figure 40: Net inflows into mutual funds managed by domestic administrators and y-o-y growth rates of the volume of assets Other MMMF Balanced mutual funds Stock mutual funds 600 500 400 c 300 0 1 200 cc ZD 100 s £ 0 C I -100 -200 -300 -400 ^^m Funds of funds immjIndex mutual funds Bond mutual funds -Growth rates (right axis) 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: SMA; calculations by IMAD. 25 Slovenian Economic Mirror, January 2009 Current Economic Trends mutual funds saw no major changes in 2008, given that more than 95% of assets come from riskier stock and mixed mutual funds. The value of the SBI20 index recorded 3.8% growth in January, after falling throughout 2008. For the second month in a row, the main index on the Ljubljana Stock Exchange no longer moved in line with foreign capital markets, where the values of indices fell significantly again in February, following the relatively favourable developments in December. Among the selected main world indices, the highest decline (9.8%) was recorded by the main Tokyo and Frankfurt stock exchange indices (NIKKEI 225 and DAX 30). Public finance In 2008, revenue from taxes and social security contributions increased by 9.8% relative to the year before. According to the data on paid taxes and social security contributions,9 the payments totalled EUR 14.2 bn. In 2008, general government revenue was created according to slightly amended tax legislation and tax instruments in a relatively favourable macroeconomic environment and amid higher inflation. After a fairly favourable growth in the first half of 2008, the dynamics of revenue from taxes and contributions moderated gradually from July onward. The slowdown of growth was particularly pronounced in November and December, when the cooling of the business cycle contributed to slower growth of revenues from all categories of taxes and contributions. At the end of the year, total general government revenue was somewhat higher than envisaged in the supplementary budgets and financial plans of the national Health Insurance Institute (HIIS) and the Pension and Disability Figure 41: Taxes and social security contributions -Taxes on income and profit -Social security contributions -----Domestic taxes on goods and services -----Other taxes 100 0 I^I^I^I^COCOCOCOC^ OOOOOOOOO Source: Public Payments Administration; calculations by IMAD. 9 Based on the Report on payments of all public revenues, January-December 2008, Public Payments Administration. Insurance Institute (PDII), especially in personal income tax, social security contributions and excise duties, while revenue from other categories, particularly from value added tax, was even lower than planned. General government revenue from personal income tax recorded the fastest growth (21.1%) in 2008. The Personal Income Tax Act, which was modified and amended several times in 2008, increased general tax relief for taxpayers in lower income brackets and introduced tax relief for investment in research and technological development for sole proprietors, as well as investment in agricultural holdings. Among the categories of revenue from personal income tax, revenue from tax on wages and salaries, which account for the major part of the personal income tax, increased by 12.7%. The growth of revenue from this tax was fairly stable for the total period to December; December's developments deviate from the dynamics recorded in previous years, mainly due to lower 13th month payments. Revenue from other personal income tax categories increased by nearly 21% in 2008. After reaching very high values due to accelerated sales of securities in the middle of 2008, revenues, particularly from tax on income from capital gains and tax on wealth, moderated at the end of the year. Personal income tax refunds in 2008 were much smaller than in 2007; revenue from personal income tax thus declined by EUR 59 m in 2008, compared with EUR 158 m in 2007, which was largely a result of the changes in the personal income tax scale. The growth of revenue from corporate income tax (12.9%) was also higher than total revenue growth in 2008. After the final assessments of the corporate income tax based on annual accounts for 2007, growth in revenue from this tax was slowing from July onward. Monthly advance payments declined gradually in the last months of 2008 (from around EUR 92 m in July to around EUR 86 m in December) as, in light of the pending economic crisis, taxpayers were increasingly taking advantage of the (otherwise procedurally complicated) possibility of adjusting advance payments to new tax bases according to the new (lower) rate of taxation. In this sense, an amendment to the Tax Procedure Act (Act Amending the Tax Procedure Act) was adopted in December as a measure to increase the liquidity of legal persons and mitigate the negative impacts of the financial crisis, enabling all taxable persons to immediately adjust (reduce) advance payments of the corporate income tax according to the new act. Revenue from domestic taxes on goods and services increased by 7.8% in 2008. Within that, revenue from value added tax rose by 8.2% and revenue from excise duties by 8.4%, while revenue from tax on insurance transactions increased by a mere 1.1% and revenue from taxes on special gambling and real estate transactions even declined. The dynamics of domestic taxes on goods and services also moderated at the end of the year. In December alone, revenue from domestic taxes on goods and services declined almost by 9% year-on-year. This slowdown can also be attributed to the timing of value 26 Slovenian Economic Mirror, January 2009 Current Economic Trends Table 7: Consolidated general government revenues and expenditure 2007 2008 EUR m % of GDP Growth. % EUR m I-X 08 X 08/ X 07 I-X 08/ I-X 07 Revenues - total 14,006.1 40.6 8.1 12,524.1 98.9 111.1 - Tax revenues 12,757.9 37.0 8.5 11,518.2 103.4 111.3 - Taxes on income and profit 2,917.6 8.5 6.7 2,868.5 111.9 120.4 - Social security contributions 4,597.9 13.3 8.7 4,165.2 113.0 111.6 - Domestic taxes on goods and servises 4,498.6 13.1 10.3 3,999.5 95.3 109.9 - Receipts from the EU budget 347.9 1.0 -0.1 242.1 16.3 97.5 Expenditure - total 13,915.5 40.4 5.4 12,053.9 110.4 109.8 - Wages and other personnel expenditure 3,276.9 9.5 3.0 2,885.1 109.0 106.1 - Purchases of goods and services 2,212.2 6.4 6.7 1,932.6 112.2 115.2 - Transfers to individuals and households 5,093.3 14.8 4.6 4,545.9 110.8 108.4 - Capital expenditure 1,130.5 3.3 25.4 809.3 80.5 118.9 - Capital transfers 334.3 1.0 -17.4 276.6 148.6 146.7 - Payment to the EU budget 355.9 1.0 23.6 319.4 161.1 115.6 Soure: MF. calculations by IMAD. added tax and excise duty payments, as well as to weaker activity and waning domestic demand at the end of the year. December 2008 and January 2009 saw a rise in excise duties on oil products, which will increase revenue from excise duties in 2009. Revenue from social security contributions increased by 10.7% in2008. The growth of revenue from social security contributions was very stable up to December when it more than halved y-o-y. Relative to November, December's growth of revenue from social security contributions was among the lowest in the past years (4-5 p.p. slower than in previous years). The social security contributions are Figure 42: Consolidated general government revenue Source: MF; calculations by IMAD. based on the movement of the wage bill, which was in the last months of 2008 affected by layoffs of workers and a decline in 13th month payments as a consequence of the economic crisis. According to the consolidated balance10 of the Ministry of Finance, general government revenue rose by 11.1% and general government expenditure by 9.8% in the first ten months of2008 relative to the same period of2007. General government revenue according to the consolidated balance of the Ministry of Finance (using the cash flow method) totalled EUR 12.5 bn, posting substantially stronger growth than in the comparable period of 2007 (7.7%). Consolidated general government expenditure in the same period totalled EUR 12.1 bn and also recorded stronger growth than in the same period of 2007 (5.0%), albeit weaker than general government revenue. In terms of the economic structure of expenditure, the largest y-o-y increase in the first ten months was seen in expenditure on investment and investment transfers (25.0%). The increases in payments to the EU budget, in expenditure on goods and services and in expenditure on subsidies (11.6%) were also higher than the total expenditure increase. In the first ten months of 2008, expenditure on transfers to individuals and households rose by 8.4% relative to the same period of 2007; within that, the increase in expenditure on social security transfers (13.5%) was higher than the total increase, largely as a result of the one-off payment of the cost-of-living allowance for pensioners and expenditure on other transfers to individuals and households (16.7%), within which free meals for secondary-school pupils 10 The consolidated balance includes revenues and expenditures of state and local government budgets as well as the pension and health funds. 27 Slovenian Economic Mirror, January 2009 Current Economic Trends were introduced at the beginning of the school year in September and free kindergarten care for the second child in a family. Family benefits and parental allowances also recorded strong growth (13.9%). Expenditure on pensions increased by 7.1% y-o-y in the first ten months of the year; the growth of expenditure on pensions is set to strengthen after the adjustment of pensions in November (by 4.6%). Expenditure on transfers to the unemployed dropped y-o-y in the first ten months of the year (-6.9%); the decline in this expenditure is decreasing month to month. In the wake of September's disbursement of the first quarter of funds to adjust public sector wages, wages, contributions and other personnel expenditure strengthened somewhat in the first ten months of 2008, increasing by 6.1%. Expenditure on interest payments dropped by nearly 6% y-o-y in the first ten months of the year. Figure 43: Main consolidated general government expenditure -Wages and other personnel expenditures ................. Expenditure on goods and services ---------Transfers to individuals and households -Capital expenditures and capital transfers ---------Payments to EU budget E 300 t. / \ / \ s A /4 / v y Source: MF. Slovenia closed the year 2008 with a negative net position of its state budget towards the EU budget (EUR 64.7 m). Whether Slovenia will remain a net recipient of EU funds will not be known until the data have also been published by the European Commission.1 As expected, payments into the EU budget rose in December. In 2008, they were higher than planned, as Slovenia's obligations to the EU increased on the basis of the new estimates of statistical aggregates for Slovenia.2 total planned funds were absorbed in 2008.3 In December, absorption was even lower in nominal terms than in previous years (with the exception of 2004). It was highest in the area of funds under the heading of the common agricultural policy for the rural development programme according to the new financial perspective. Absorption from the European Social Fund and the Cohesion Fund for transport and environment projects according to the old financial perspective increased. The absorption of cohesion funds increased somewhat in 2008 relative to the previous year, while the absorption of structural funds remained approximately at the same level as in the year before in nominal terms and was the lowest to date (with the exception of 2004). Absorption from the European Regional Development Fund was lowest, while the utilisation of funds for implementing the common agricultural policy was, as in previous years, almost in line with expectations. Figure 44: Planned and absorbed funds from the EU budget Common Agricultural Policy Cohesion policy Internal policies Other Pre-accession EU funds I Funds planned by the state budget for 2008 I Funds planned by the state budget for 2007 I Total funds received in 2008 (Jan-Dec) Total funds received in 2007 (Jan-Dec) 10 200 300 41 EUR million Source: MF; calculations by IMAD. 0 0 500 After the high utilisation of funds in November, absorption in December was lower than expected; less than half of 1 The data published by the Ministry of Finance comprise funds returned to the state budget in the calendar year, while the data released by the European Commission comprise funds (payments to both the state budget and directly to final recipients) for individual budgetary periods and are therefore higher. See also Slovenian Economic Mirror, December 2008. 2 See Slovenian Economic Mirror, December 2008. 3 As a result of the gross budget principle, the data on expenditure and revenue published by the Ministry of Finance also include the funds Slovenia paid into the EU budget in January 2008 to meet its obligations from December 2007, as well as the overpaid amounts refunded by the European Commission into Slovenia's budget. For the purpose of our analyses, we excluded these funds in the amount of EUR 15.5 m on both expenditure and revenue sides, which has no impact on Slovenia's net position, as it only affects the levels of paid and absorbed funds (44.4% of planned funds). 28 Slovenian Economic Mirror, February 2009 Current Economic Trends 29 Slovenian Economic Mirror, January 2009 Current Economic Trends u Ü O "O