BMI's Executive Summary

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From Q108 we will be calculating the Commercial Banking Business Environment Rating (CBBER) for each of the countries surveyed by BMI. This will permit a more systematic and comprehensive comparison of the conditions within the banking industries of the various countries than was possible in the past. For each country, it will also facilitate a comparison of the conditions within the banking sector and conditions prevailing in other sectors.

Slovenia's overall CBBER is 49.2. The equivalent figures for the USA and the Eurozone are 84.8 and 81.4, respectively. Slovenia's CBBER places it in the bottom half of the countries surveyed by BMI in Central and Eastern Europe.

Within the CBBER, the most important aspect is the (banking) market structure element of the limits of potential returns. This element accounts for 42% of the overall CBBER. Slovenia's rating for this element – 32.5 – is substantially lower than the overall CBBER and lower than the country structure element of the limits of potential returns – 49.5. High scores in the risks to potential returns act to offset the low limits of potential returns scores. What is not so well known is just how high Slovenia's percapita GDP is relative to other developing countries surveyed by BMI.

Economic growth in Slovenia remains robust, mainly on the back of exceptional growth in gross fixed capital formation. As a result of this strong performance we have revised up our GDP growth projections to 5.6% in 2007 and 4.5% in 2008.

The economy experienced robust GDP growth of 5.9% yaer-on-year (y-o-y) in Q207, which was lower than the 7.2% y-o-y growth seen in Q107 yet higher than the 4.7% registered in Q206. The economy is still managing to grow faster than the eurozone average (2.5% y-o-y in Q207), with long-term growth prospects still promising. The strong growth in GDP can be partly attributed to soaring investment levels, which have seen growth in gross capital formation more than trebling from 7.6% in Q206 to 25.2% in Q207. Investment has been particularly concentrated on new building projects. Indeed, by the end of 2006 some 5,953 new buildings were constructed, representing a 10% increase in floor area y-o-y. Fixed capital investment has also been substantial in industry, where investment funds have been used for new machinery, allowing for the observed expansion in domestic production. Industrial output increased by 8.9% y-o-y in July 2007, with manufacturing output alone increasing by 10.4%. In spite of the impressive growth performance, this investment boom will not be sustainable in the long term. As such, we are expecting to see growth in gross fixed capital formation to slow and stabilise at a lower, albeit still robust, level.

Countering the fall in government consumption is the strength of private consumption, which continues to buoy economic growth. Household consumption in Q207 increased by 0.4% quarter-on-quarter (q-o-q) and 3.4% y-o-y, representing an identical y-o-y growth rate for Q206. The strength of consumer demand has been supported by rising wages and the expansion in credit availability. Nominal average wages increased by 5.9% y-o-y in April 2007, with the average wage in 2006 increasing by 4.8%. Improvements in the average wage have arisen mainly from the progressive tightening of the labour market, which has seen the unemployment rate fall to 7.70% in Q207 from 8.10% in Q107. We estimate unemployment to have reached 7.30% by the end of 2007, which will continue to put upward pressure on nominal wages. However, in the long term, as nominal wages adjust and private consumption growth slows, we expect to see economic growth to decelerate to a lower level.