By Marja Novak
LJUBLJANA, Dec 3 (Reuters) - Slovenia's growth will slump next year while the budget deficit will widen due to the global financial crisis, the new finance minister in the euro zone member country told Reuters on Wednesday.
France Krizanic said global interbank liquidity was still low and monetary policy in the euro zone has so far not proved effective, but he expected the crisis to wear down by the end of 2009.
"There is still a perception that risks are big, to which banks are reacting by reducing credit activity and creating additional provisions," Krizanic said in his first interview since taking office on November 21.
"Banks' interest rates are well above the targeted (ECB) interest rate, which means that in some way the monetary policy is not effective in this area," he said.
He said Slovenia's growth would slow to some 2 percent of gross domestic product (GDP) next year from about 5 percent in 2008, mainly due to the expected lower growth of exports.
"Next year I expect growth of at least 2 percent ... But if the crisis in the European Union continues it is possible that growth in Slovenia will stop," he said.
Year-on-year inflation will this year and in 2009 fall to below 3 percent from 5.7 percent in 2007, but the budget deficit might in the worst case jump to 2.5 percent of GDP next year.
The previous government forecast the 2008 deficit at less than 0.1 percent of GDP.
He said Slovenia will earmark 1.2 percent of GDP or some 420 million euros ($530.8 million) for boosting the economy, in line with the European Commission proposals.
But he ruled out a possible cut in the value added tax (VAT), which some EU members hope to use to boost consumer spending and economic growth.
Slovenia has yet to decide how to spend those funds but could use them for investment in technology and development and for reducing taxes on labour and profit.
"I hope that, with adequate economic policies harmonised on the EU level and globally, we will stop this crisis and that the situation will improve at the end of 2009," Krizanic said.
He did not say how big a cut of the ECB interest rate he expected on Thursday but said that the ECB interest rate could in the future be equal to the main U.S. interest rate.
At present, the ECB rate amounts to 3.25 percent and most economists expect a 50 basis point cut on Thursday. The U.S. Federal Reserve rate is 1 percent and is also expected to be cut further this month.
Krizanic is a member of the centre-left Social Democrats of Prime Minister Borut Pahor who won the September 21 general election, ousting the previous centre-right government. (Reporting by Marja Novak, Edited by Zoran Radosavljevic and Andy Bruce)