NATIONAL BANK OF SERBIA
Introductory speech
Inflation Report - August 2022
Dr Jorgovanka Tabaković, Governor
Belgrade, 17 August 2022
Ladies and gentlemen, esteemed members of the press, dear colleagues,
Welcome to the presentation of the August Inflation Report.
During our presentation today we shall present our estimates of economic
developments and our latest projections of inflation, GDP growth and current account
Inflation Report
deficit, primarily for this and next year. In the that is before you we
have tried to give the most comprehensive risk analysis so far given that reassuring
voices in the world have become a true rarity. Due to this, psychological factors still
prevail in commodity and financial markets. It seems that, in whatever way and
whenever the conflict ends, only Europe will come out weaker than it was. This is the
greatest long-term problem facing our country. Though we have expanded the
geographic distribution of our exports and investment in the past years, the major
part of Serbian exports still go to Europe and most investment to Serbia comes from
Europe. I am intentionally using the word Europe and not only the European Union.
Russia and Ukraine are also a part of Europe, and they are its largest countries,
which is often forgotten.
In regard to current macroeconomic developments, at the very start I wish to
emphasise that in the period since our previous Report, we have seen the
materialisation of some of the key risks to the projection which originate from factors
from the international environment and which we underscored at the time. For the
time being, this has not negatively affected the GDP growth dynamics, but has
impacted inflation and the current account deficit. The first of these risks concerns
the Ukraine conflict, which has not calmed down, but, on the contrary,
geopolitical tensions have heightened further, pushing further up global
energy prices, which had already been exceptionally high. We are also seeing
signs of contracted natural gas supplies to Europe. This has resulted in further
acceleration of global inflation and faster than expected tightening of financial
conditions. There are also mounting risks that two out of the three largest world
-
economies may enter recession the USA and the euro area, which also reflects on
elevated volatility in the international financial market and diminishes the propensity
to invest.
The second risk that has materialised concerns the agricultural season in
Instead of an average agricultural season,
Serbia and, certainly, the wider region.
which we assumed in May, we will most probably face a drought for the second year
in a row, which will negatively affect chiefly the yields of corn, soybean, sunflower
and vegetables.
The materialisation of the two key risks that we emphasised in our previous reports
also reflects on our projections of key macroeconomic indicators for Serbia, which we
shall explain in detail during this conference.
***
As I stated at the beginning, in the period since our previous Report, inflation in
most countries has continued to rise above expectations, reflecting primarily the
surge in energy and food prices, which intensified further with the outbreak of the
Ukraine conflict. In some countries, inflation is rising also on account of overheated
domestic demand and labour market factors. In addition, although the costs of
international overseas transport are falling, pressures on global inflation still originate
from halts in global supply chains and shortages of some raw materials in production.
Due to such an interplay of factors, over the past months inflation in many advanced
-
economies has been at multi-decade highs in the USA at a record four-decade
high, and in the euro area at the highest level since its establishment. In such an
environment, central banks and international institutions continue to revise up their
inflation projections for the coming period. However, the majority of central banks and
international institutions assess that gradual calming of the situation in the market of
primary commodities can be expected going forward, which should also result in a
gradual deceleration of global inflation.
Chart 1 Projected average inflation and target by country Chart 2 Policy rates across selected countries
(p.a., in %)
(p.a., in %)
42
12
70.3
39
36 USA Euro area
33
UK Japan
10
30
Czech Republic Poland
27
Hungary Romania
24
8
21
18
15
12
6
9
4
630
area USA
Serbia 2
Poland Russia Turkey Norway
Ukraine Canada
Albania Sweden
Georgia
Hungary Armenia Moldova Kingdom
Republic
Romania Euro
Inflation 2022
0
Inflation 2023 United
Czech
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Target
Target tolerance band
Sources: Central banks of selected countries.
Sources: Consensus Forecasts.
Under the impact of elevated cost-push pressures mainly from the international
environment, inflation in Serbia continued to move along an upward trajectory and
touched 12.8% y-o-y in July, of which around 70% comes from food and energy
prices. Although in May, when we had data on April inflation, we assumed that
inflation would continue up over the following several months, the intensification of
geopolitical tensions and worse than expected agrometeorological conditions led to a
higher than envisaged rise in food and energy prices over the previous months.
On this occasion, I will present only some data that testify to the effects of geopolitical
tensions on the global prices of energy and primary agricultural products and the
magnitude of the energy crisis, of the kind not recorded since the 1970s.
-
In July this year, the average price of gas, which is the benchmark price for the
European market, equalled over USD 1,800 per 1,000 m3 on average, which is
a four times higher price than a year ago and 16 times higher compared to the
average for 2020.
-
Similarly, in July, in euro area countries (Austria and France), the stock
exchange price of electricity equalled EUR 360 and EUR 400 MWh on
average and was by around four, i.e. five times higher than a year ago, while
the global oil price, though declining since mid-June due to the build-up of
recessionary pressures at the global level, measured USD 109 per barrel, up
by over 46% from a year ago.
-
Measured by the FAO Index, since early 2022 the global prices of cereals
have recorded two-digit growth, which stood at around 17% in July.
Chart 4 World oil price movements
Chart 3
Electricity, natural gas and thermal coal price
(end-of-month, in USD)
movements
(end-of-month)
140
(USD/ton) (EUR/MWh)
450 425
Price of Australian coal per tonne, (LHS) 120
400 Spot gas price for Europe, (RHS) 375
Spot electricity price (RHS)
100
350 325
300 275
80
250 225
60
200 175
150 125
40
100 75
20
50 25
0
0 -25
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Sources: Refinitiv and World Bank. Sources: Bloomberg.
On the other hand, core inflation (excluding the prices of food, energy, alcohol and
cigarettes), which is most affected by monetary policy measures, moved in line with
our expectations from May. The rise in core inflation (to 7.5% y-o-y in July) was under
the strongest impact of a further increase in euro area inflation, though it remained
significantly lower than headline inflation and core inflation in countries of the region
that pursue the same monetary policy regime. A strong brake to any major increase
in core inflation came from the maintained relative stability of the exchange rate even
in an environment of globally heightened uncertainty in the international financial
market and the fact that medium-term inflation expectations of the financial sector
have been kept within the target band of 3±1.5%. According to our estimate, demand
and labour market conditions still do not trigger any major inflationary pressures in
the domestic market. This is at the same time the key reason why we tightened
monetary conditions in the past period more moderately than other inflation-targeting
countries in the region.
Chart 5 CPI movements in selected CESEE countries
(y-o-y rates, in %)
19
Poland
18 Romania Hungary Czech Republic 17.5 Serbia
16.7
17
15.6
16
15.0
14.7
15
13.7
14
12.8
13
12
11 10.4
9.3
10
9
7.5
876543210
7 8 9 101112 1 2 3 4 5 6 7 7 8 9 101112 1 2 3 4 5 6 7 7 8 9 101112 1 2 3 4 5 6 7 7 8 9 101112 1 2 3 4 5 6 7 7 8 9 101112 1 2 3 4 5 6 7
2022 2022 2022 2022 2022
Headline inflation Core inflation Inflation target Tolerance band
Source: central banks.
Under our new central projection, during the current quarter of this year y-o-y inflation
will reach a peak (most probably in September) and then start to decline, most
probably more vigorously in H2 2023, only to return within the target tolerance band
in H1 2024, i.e. by the end of the projection horizon. Acting towards the calming of
inflationary pressures will be the past tightening of monetary conditions, expected
weakening of the effects of global factors which fuelled the rise in energy and food
prices in the past period, and lower external demand. In the short run, an impetus will
be provided by the adopted government economic measures capping the rise in food
and energy prices in the domestic market. It should be noted that in this projection,
which is also the case with the projections of relevant international institutions such
as the IMF and the ECB, we assumed that geopolitical tensions will not deepen
further and that gas deliveries from Russia to Europe will not be stopped.
Chart 6 Inflation projection Chart 7 Movement in the key policy rate and average repo
(y-o-y rates, in %)
rate
(daily data, p.a., in %)
4.5
16
Key policy rate
4.0
14
Lending facilities rate
Deposit facilities rate
3.5
12 Average repo rate
3.0
10
2.5
8
2.0
6
1.5
4
1.0
2
0.5
0.0
0
6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 1 '20 4 '20 7 '20 10 '20 1 '21 4 '21 7 '21 10 '21 1 '22 4 '22 7 '22
2020 2021 2022 2023
Source: NBS.
Source: NBS.
A further build-up of cost-push pressures and higher than expected imported inflation
influenced our decision to continue to moderately tighten monetary conditions at
home in order to contain the second-round effects on inflation expectations and
ensure that inflation returns within the target tolerance band until the end of the
projection horizon. In the period since the previous Report, the NBS key policy rate
was adjusted by 50 bp in June, and by 25 bp in July and August each. It currently
stands at 3%. As I have already highlighted, when making monetary policy decisions
we had in mind that the rise in domestic inflation is led primarily by supply-side and
not by demand-side factors, and that the full effects of the earlier adopted measures
of monetary tightening are yet to materialise. We also tried to ensure the so-called
soft landing, i.e. financing conditions that will ensure the continuity of economic
growth and a reduction in unemployment.
This is supported by the fact that even amid moderate tightening of monetary
conditions lending remained an important factor of working capital, investment and
consumption financing. This was aided by the continued rise in loan demand,
preserved bank asset quality and stable sources of funding. The y-o-y rate of growth
in domestic loans to non-monetary sector accelerated further in June relative to
March. It came at 13.1% and the contribution of corporate remained higher than that
of household loans. In June, the share of NPLs in total loans dropped to a new
lowest level so far (3.26%), indicating that bank asset quality has not deteriorated
after the termination of measures of government economic assistance and that it is
no barrier to continued lending growth.
Chart 9 NPL share in total loans, gross principle
Chart 8 Lending activity to the non-monetary sector
(in RSD bn) (in %)
(y-o-y growth rates in %, excluding the exchange rate effect)
20
500 25
15
400 20
10
300 15
5
200 10
0
100 5
-5
Enterprises
Households
-10
0 0
Total
2010 2012 2014 2016 2018 2020 June
2022
-15 Household sector
Corporate sector
2010 2012 2014 2016 2018 2020 2022
Other sectors
Source: NBS.
Source: NBS. NPL share in total loans (RHS)
After a relatively sharp increase in Q1, which equalled 4.4% y-o-y, according to
SORS estimate, a similar pace of GDP growth (4%) continued in Q2, which is
above our May expectations. On the production side, growth was mainly driven by
the pick-up in services and industry, that is, consumption and investments, including
inventories, on the expenditure side. On the other hand, a higher quantity of the
imports of energy, but also of equipment and intermediate goods for the
implementation of investment projects intensifies the negative contribution of net
exports more than expected. It is worth noting that so far the escalation of the
Ukraine crisis and reduced external demand have not had a major negative impact
on Serbian manufacturing output and exports owing to the constant rise in
manufacturing capacity and in the related export supply.
A higher GDP growth outcome in Q2 relative to our May projection will most probably
compensate for the expected economic deceleration in the remainder of the year
amid deteriorated global economic outlook and mounting recession pressures in the
euro area. Nevertheless, we estimate that quarterly GDP growth rates will remain
positive for the rest of the year. Having all this in mind, we did not change the
GDP growth projection range (3.5-4.5%) for this year relative to our May
expectations. However, due to the lower carry-over effect and reduced economic
growth projection for the euro area for the next year, we did revise down our
economic growth projection for 2023 by 0.5 pp, to 3.5-4.5%. After that, we anticipate
a return to the previously expected growth trajectory of around 4-5% per year on
account of the lessened impact of the Ukraine conflict on external demand and
-
planned implementation of investment projects primarily in the area of road, railroad
and utility infrastructure.
Chart 10 GDP growth projection
Chart 11 Contributions to real GDP growth, expenditure side
(y-o-y rates, in %)
(in pp)
16
10
14
7.4
8
12
10 6
4.5 4.5
4.3
4.0 4.0
8 3.3
2.9
4
2.0 2.1
6 1.8
2
4
0
2
0 -0.7
-2
-0.9
-1.6
Change in inventories
-2
-4 Net exports
-4
Government consumption
Gross fixed capital formation
-6
-6
Household consumption
GDP (in %)
-8
-8
II III IV I II III IV I II III IV I II III IV I II
2011 2013 2015 2017 2019 2021 2023*
2020 2021 2022 2023
Sources: SORS and NBS.
Source: NBS.
* NBS estimate for 2022, 2023 and 2024.
The rise in energy imports, largely driven by the hike in energy prices, was what
pushed up the current account deficit in the first half of the year compared to the
same period last year. At the same time, it was the key reason for the upward
adjustment of the current account deficit share in GDP this year to somewhat over
9%. In the medium run, expanded export capacities, along with the expected
reduction of the negative impact of external demand and unfavourable terms of trade,
should contribute to a gradual narrowing of the current account deficit and
preservation of the country's external sustainability. The continuation of a relatively
high inflow of FDIs to Serbia will also contribute to external sustainability. The FDI
inflow this year is projected to around EUR 3.4 bn (or EUR 3.3 bn net), which is close
to expectations for the coming years as well.
Chart 12 Current account structure Chart 13 Current account and FDI projection
(in EUR mn) (in % of GDP)
4,000 15
10
2,000 2,468.2
1,970.1
5
754.7 814.8
0
0
-573.0
-5
-2,000 -2,590.8
-2,676.3
-706.9
-10
-4,749.6
-4,000
Secondary income, net -15
Primary income, net
-1,209.7
Services -20
-6,000
Goods
-25
Current account deficit
-8,000 2019 2020 2021 2022* 2023* 2024*
H1 2021 H1 2022
Secondary income Primary income
Sources: SORS and NBS.
Services Goods
Sources: NBS. * NBS projection. Current account FDI
It is important to emphasise that since mid-April, FDI inflow returned to the levels
recorded before the outbreak of the Ukraine conflict and that it exceeded EUR 2 bn in
the seven months of the year. As a result, from May until end-July, the NBS
intervened in the IFEM by buying EUR 915 mn net, which reduced the amount of net
sale from the beginning of the year until end-July to EUR 1.35 bn. The country's FX
reserves went up to EUR 15 bn at end-July (from EUR 14.1 bn at end-April), whereby
we created an additional buffer that can be used in case of potential new crises such
as these we have been facing in the past two yеаrs. I can share with you the
information that positive movements in respect of our interventions on the FX
purchase side and the consequent increase in FX reserves continued in August, and
that from May to date we have bought almost EUR 1.2 bn net.
Ladies and gentlemen, dear colleagues,
The uncertainty in the international environment is greater than it was three months
ago concerning many issues. First of all, there is the uncertainty of geopolitical
events and hence of their impact on the availability and prices of energy, industrial
raw materials and food. Further, stronger and more persistent than expected global
inflationary pressures might induce central banks to tighten their monetary policies
faster, producing more severe negative effects on global economic growth. Bearing
this in mind, the overall risks to economic growth projection are judged to be tilted
more to the downside, and those to the inflation projection to the upside.
In the period ahead, the NBS will continue to closely monitor and assess factors in
the domestic and international environment, which will determine our future decisions
and steps. Depending on geopolitical developments and key inflation factors in both
the domestic and international environment, we will estimate whether there is a need
for further monetary tightening or whether the effects of past tightening provide for a
sustainable return of inflation within the target tolerance band over the projection
horizon. The preservation of price and financial stability in the medium run remains
our monetary policy priority, along with support to further economic growth and
development, including an additional rise in employment, as well as a favourable
investment environment.
I will conclude this introductory speech by repeating the words from the press release
issued when a decade of my governorship was marked this month. Serbia and its
leaders have demonstrated that they are doing everything in their power to minimise
the effect of this triple crisis on the citizens. We have fought to deliver security in
unprecedented circumstances. Figures show that we have maintained stability during
all crises, and the crises were far from few. This is confirmed by the preserved key
indicators of defence against shocks, such as the maintained relative stability of the
exchange rate, foreign exchange reserves and liquidity of the financial system, as
well as by the lowest level of NPLs on record. Stability in the broadest sense of the
word is a result that we are particularly proud of, and we shall do everything to
-
maintain that stability going forward, because in this job there are no final victories
there is only day-to-day committed work. Our job never ends, and it is only continuity
and perseverance that bring success and development.
I now give the floor to my colleagues from the Economic Research and Statistics
Department to present the details of our latest projections.