Finance-investment-growth nexus in Slovenia Arjana Brezigar Masten, - - PowerPoint PPT Presentation

Finance-investment-growth nexus in Slovenia

Arjana Brezigar Masten, Bank of Slovenia

Unlocking the investment potential, 16 November 2017

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Summary of main findings:

• Since 2006, Slovenia experienced a boom-bust investment cycle, which led from overheating to deep

recession and left the economy with a very low share of investment in GDP.

• The upward part of the cycle was spurred by excessive debt financing, high confidence and

profitability of the corporate sector. Excessive debt financing severely impaired NFCs' balance sheets which required substantial deleveraging and banking system recapitalization.

• With debt-to-equity ratio now at 2006-2007 level, NFCs have on average decreased the level of

indebtedness and are in a position to accelerate investment activity, supported by debt financing. Whether they are more resilient to potential financial shocks as they were before the crisis, should remain subject to close scrutiny.

• Despite favourable economic outlook, lessons from the past crisis must not be forgotten. As the

situation enables NFCs' to debt finance future growth in investment, it should be accompanied by NFCs' capital strengthening.

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Excessive investment was a predominant factor behind overheating in 2007-2008 period and deep recession that followed. Lately, investment shows signs of recovery, but its share in GDP is low for a catching-up economy.

• 10
• 8
• 6
• 4
• 2

2 4 6 8

• 10
• 8
• 6
• 4
• 2

2 4 6 8 04 05 06 07 08 09 10 11 12 13 14 15 16 17

in percentage points

gross fixed capital formation

• ther GDP items

GDP, y-o-y in %

Source: SORS, Bank of Slovenia calculations.

Contributions of investment to GDP growth in Slovenia 16 18 20 22 24 26 28 30 32 16 18 20 22 24 26 28 30 32 04 05 06 07 08 09 10 11 12 13 14 15 16 17

% of GDP

SK, CZ, HU EA19 Slovenia

Source: Eurostat, Bank of Slovenia calculations.

Gross fixed capital formation – international comparison

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Investment dynamics has been strongly influenced by a boom-bust cycle in construction. Investment in machinery and equipment has been recovering since 2015, while construction investment has been predominantly influenced by the government's ability to absorb EU funds.

• 28
• 24
• 20
• 16
• 12
• 8
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4 8 12 16 20 04 05 06 07 08 09 10 11 12 13 14 15 16 17

• 28
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• 12
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• 4

4 8 12 16 20 construction machinery and equipment biological resources intellectual property products total fixed assets, y-o-y in % Contributions to volume growth in total fixed assets – Slovenia

in percentage points Source: SORS, Bank of Slovenia calculations.

• 40
• 35
• 30
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• 20
• 15
• 10
• 5

5 10 15 20 25 30 35 06 07 08 09 10 11 12 13 14 15 16 17

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5 10 15 20 25 30 35 households and NPISH general government financial corporations non-financial corporations total fixed assets, y-o-y in % Sectoral contributions to nominal growth in total fixed assets – Slovenia

in percentage points Source: SORS, Bank of Slovenia calculations.

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NFCs' investment boom-bust cycle goes in line with changes in confidence and corporate

• profits. With both elements becoming supportive since 2014, NFCs investment began to
• recover. But one major element has been missing ...

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 05 06 07 08 09 10 11 12 13 14 15 16 Operating profit of non-financial corporations

EUR billions Source: AJPES, Bank of Slovenia calculations. Note: NFCs excluding SPs.

60 70 80 90 100 110 120 130 60 70 80 90 100 110 120 130 05 06 07 08 09 10 11 12 13 14 15 16 17 Slovenia EA19 Economic sentiment indicator

seasonally adjusted data, long-term average = 100 Source: European Commission.

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... bank credit! Prior to the crisis, investment boom was spurred by excessive debt financing, which severely impaired NFCs' balance sheets. In 2012, strong deleveraging process started which has now brought NFCs in shape for acceleration in investment activity, supported by debt financing. 70 80 90 100 110 120 130 140 150 06 07 08 09 10 11 12 13 14 15 16 17 70 80 90 100 110 120 130 140 150 SI EA19

Sorce: ECB, Eurostat, Bank of Slovenia calculations. %

Comparison of NFCs debt* to equity ratio between Slovenia and euro area

* Securities other than shares, loans and other accounts payable.

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Summary of main findings:

• Since 2006, Slovenia experienced a boom-bust investment cycle, which led from overheating to deep

recession and left the economy with a very low share of investment in GDP.

• The upward part of the cycle was spurred by excessive debt financing, high confidence and

profitability of the corporate sector. Excessive debt financing severely impaired NFCs' balance sheets which required substantial deleveraging and banking system recapitalization.

• With debt-to-equity ratio now at 2006-2007 level, NFCs have on average decreased the level of

indebtedness and are in a position to accelerate investment activity, supported by debt financing. Whether they are more resilient to potential financial shocks as they were before the crisis, should remain subject to close scrutiny.

• Despite favourable economic outlook, lessons from the past crisis must not be forgotten. As the

situation enables NFCs' to debt finance future growth in investment, it should be accompanied by NFCs' capital strengthening.