NATIONAL BANK OF SERBIA
Introductory speech at the presentation of the
Inflation Report - August 2023
Jorgovanka Tabaković,
Dr Governor
Belgrade, 16 August 2023
Ladies and gentlemen, esteemed members of the press, dear colleagues,
Welcome to the presentation of the August Inflation Report, where we shall present
current macroeconomic developments, our new macroeconomic projections and the
measures we have undertaken in the period since the previous Report.
As customary, at the very start of the conference, I wish to outline several key facts
concerning the current macroeconomic developments and our new projections, which
I shall explain later on in detail.
-
First, y-o-y inflation in Serbia is on a downward trajectory, hitting 12.5% in
July, down by 3.7 pp from March, when it touched its peak. The data on core
inflation, which declined from 11.3% in March to 9.4% in July, suggest that
inflation's slowdown is due not only to the falling global prices of energy and food,
but also to the monetary policy measures undertaken by the NBS. In the
remainder of the year, we expect y-o-y inflation to drop by 1 pp each month, and
end the year at around 8%. Inflation's return within the target tolerance band is
expected in Q2 2024, earlier than we projected in May, on account of further
tightening of monetary conditions in June and July.
-
Second, economic growth at home picked up to 1.7% y-o-y in Q2, on account of
the recovery of the construction sector, gradual weakening of the effects of
elevated costs in production and the resolution of global supply chain halts,
despite the lingering global uncertainty and further tightening of global financial
conditions. We expect economic growth to accelerate further in the rest of the
year, and reach between 2.0% and 3.0% at the year level. We now estimate that
the growth rate will be closer to the lower bound of the projected band. The
reason behind our caution are primarily poorer performances of the production
sectors of our key trade partners, notably Germany, and lower personal
consumption in the year so far.
-
Improvement of the country's external position continued in Q2, mostly in
the area of commodity exchange, where the deficit narrowed significantly, as a
result of elevated export and dented import, chiefly of energy. Improvements
were also observed in the net export of services and, to a lesser degree, on the
secondary income account, where the surplus widened. Given that H1 saw the
lowest current account deficit on record, equalling only 1.6% of GDP, we now
project it at around 2.5% of GDP at the level of the entire year, instead of 4.5%
that we expected in May, though back then we also emphasized the high
probability that the deficit would be lower than projected.
-
According to preliminary data, foreign capital inflow from FDIs reached
EUR 2,442 mn in seven months, exceeding the current account deficit
multiple times. This fuelled appreciation pressures, to which the NBS responded
by buying foreign currency worth close to EUR 2.5 bn net in the year to July,
boosting FX reserves to a new record high of EUR 23.1 bn in late July.
-
In the year so far, fiscal trends have exceeded expectations, owing to higher
revenues, notably in light of increased profitability of corporates last year and
savings on funds intended for overcoming the energy crisis. This opened room
for the provision of support to domestic investment and consumption, without
jeopardising the projected downward public debt trajectory in the medium run or
triggering any major inflationary pressures. Under the latest data, the share of
central government public debt is at a level only slightly above 50% of GDP.
In the remainder of the conference, we shall present macroeconomic developments
and our new projections in more detail.
***
As usual, we shall first elaborate on developments in the international environment,
as they largely determine both domestic macroeconomic trends and our monetary
policy decisions. At the very start, I wish to underscore that the risks to
macroeconomic projections associated with the international environment are now
weaker than three, six or nine months ago, but there is still higher probability that
they may be detrimental to domestic developments.
Consistent with expectations, global economic growth has slowed this year, on
the back of pronounced geopolitical tensions, relatively high inflation and tight global
financial conditions. The negative effect of these factors was partly offset by a better
situation concerning global supply chains and a preserved labour market, wherefore
the IMF's global growth estimates are somewhat more favourable than three months
ago. The euro area growth, as the most important for our economy, was also slightly
adjusted upwards, but will be led mainly by service sectors and, to a lesser extent,
production sectors, with a mild recession projected for Germany.
Chart 2 World Food Price Index
Chart 1 Headline and core inflation in selected countries,
(daily data, p.a., in %)
June 2023
(y-o-y rates, in %)
270
FAO index Meat
Euro area
Dairy products Cereals
240
Core inflation
Vegetable oil Sugar
Germany
Inflation
Inflation target
210
Italy
USA 180
Romania
150
Hungary
120
Poland
90
Czech
Republic
60
0 3 6 9 12 15 18 21
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Sources: Centralbanks of selected countries.
Source: FAO, UN.
The dissipation of pressures generated by import prices on prices in Serbia is
an important driver of inflation's projected return to the target. Inflation is
declining globally owing primarily to falling energy and food prices, though it remains
relatively high in a large number of countries. Caution is associated primarily with
core inflation, which continues to demonstrate signs of resilience, with many central
banks, notably of advanced economies, continuing to tighten their monetary
conditions, though at a slower pace than last year.
World food prices are on a downward trajectory and are below their March 2022
peak by more than 20%. These prices are likely to decline further after this year's
-
harvest. Expectations are similar for most other primary commodities as well
these prices will trend along a downward path throughout the projection horizon.
***
Consistent with our expectations stated in the May Inflation Report, since April y-o-y
inflation in Serbia has been on a downward trajectory, measuring 12.5% in July. Its
slowdown reflects primarily weaker growth in processed food and energy prices, as
well as lower core inflation, which returned to a single-digit level in June and declined
further to 9.4% in July, on account of not only the easing of global cost-push
pressures, but also the tightening of monetary conditions. A decline in y-o-y inflation
would have been sharper had vegetable prices not grown at a pace unusual for the
season in May and June due to inclement weather, i.e. heavy rainfall.
Chart 4 Inflation projection
Chart 3 Y-o-y inflation and change in contribution of main CPI
(y-o-y rates, in %)
components to y-o-y inflation
(in %, in pp)
18
18
Change in contribution of CPI components (in pp)
Y-o-y inflation (in %)
17
16
14
16
16.2
12
15
10
14
8
13
6
12.5
12
4
11
2
10
0
March Proce- Energy Industrial Services July
2023 ssed food Unprocessed food goods 2023
-2
excluding
6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6
food and energy
2021 2022 2023 2024 2025
Sources: SORS and NBS calculation.
Source: NBS.
Under our new central projection, y-o-y inflation will continue to slow until the end of
the projection horizon. After falling to around 8% late this year, it will return within the
target tolerance band in Q2 2024. Inflation's further decline will be supported by the
weakening of global cost-push pressures, their completed pass-through to other
prices, and the drop-out of high energy and food prices from H2 2022 from the y-o-y
calculation. Inflation will also decline on account of the slowdown in imported inflation
and softer demand amid slower global growth. Inflation's return to the midpoint of 3%
is anticipated in late 2024.
Aiming to facilitate a faster decline in inflation expectations and ensure inflation's
sustainable return within the target tolerance band, at our June and July meetings we
raised the key policy rate by 25 bp each, to 6.5%, which translated onto interest rates
in the markets of money and dinar loans. We kept the key policy rate on hold in
August, given the need to view the full effects of earlier implemented measures.
Under the impact of our tightening of financial conditions, including in the euro area,
lending growth at home slowed to around 1% y-o-y in June, though the slowdown
was also partly driven by the maturing of loans under the guarantee scheme. It is
noteworthy that
monetary tightening prevented domestic demand from
producing additional inflationary pressures, but did not negatively affect
financial stability. This is indicated primarily by the share of NPLs in total loans,
which remained close to the historically lowest level of 3% in June.
Chart 5 Chart 6 NPL level and share in total loans, gross principle
Movement in the key policy rate and average repo
(in RSD bn) (in %)
rate
(daily data, p.a., in %)
Household sector
500 25
9
Key policy rate Corporate sector
Other sectors
Lending facilities rate
8
NPL share in total loans (RHS)
Deposit facilities rate
400 20
Average repo rate
7
6
300 15
5
4
200 10
3
2
100 5
1
0
0 0
1 '20 5 '20 9 '20 1 '21 5 '21 9 '21 1 '22 5 '22 9 '22 1 '23 5 '23
2011 2013 2015 2017 2019 2021 June
2023
Source: NBS.
Source: NBS.
In view of the anticipated inflation movements over the monetary policy horizon, the
cycle of monetary policy tightening is most likely coming to a close. Nevertheless, the
NBS will continue to keep a close eye on all key factors affecting inflation
movements and react additionally, if needed. Our future decisions will depend on
the anticipated movements of key inflation factors, i.e. on incoming data, taking into
account the time needed for the full effects of past monetary tightening to play out.
According to the preliminary estimates of the Serbian Statistical Office, y-o-y GDP
growth in Q2 picked up to 1.7%. In our estimate, on the production side, growth was
driven by the recovery in construction, as well as stepped-up activity in the services
sectors, agriculture and industry. On the expenditure side, just as in Q1, growth was
driven by net exports owing to real growth of goods and services export and a decline
in import, as well as fixed investments, while consumption and inventories gave a
negative contribution. The same movements were recorded by our regional peers as
well.
With production costs subsiding and investment and consumer confidence being
restored, we expect economic activity growth in the international environment to
accelerate. These factors will also speed up the pace of Serbia's economic growth
relative to the first two quarters. At the year level, we still expect GDP rate growth in
the 2.0%-3.0% range, though we now estimate that the growth rate will be closer to
the lower bound of the projected band. Weaker performance in the production
sectors of our key trade partners, notably Germany, is mirrored by our somewhat
lower perception of the additional acceleration in manufacturing and net export
growth in the remainder of the year. Nonetheless, we estimate that this year net
exports will contribute to economic growth more than we anticipated in May, primarily
due to the results achieved in the year to date. A positive contribution is also
expected from fixed investments, thanks to increased profitability of the economy and
a high inflow on account of FDI, as well as government investments in road
infrastructure. Household consumption will continue to increase, propped by higher
employment and wages, though to a lesser extent than what we expected in May.
Chart 7 GDP growth projection
Chart 8
Contributions to real GDP growth, expenditure side
(y-o-y rates, in %)
(in pp)
10
16
8
14
6
12
4
10
2
8
6 0
4 -2
Change in inventories
2 -4
Net exports
Government consumption
Gross fixed capital formation
0
-6
Household consumption
GDP (in %)
-2
-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* 2025*
2021 2022 2023 2024 2025
Sources: SORS and NBS.
Source: NBS.
* NBS estimate.
As the global economy continues to rebound, and by extension external demand,
and due to the anticipated pick-up in the implementation of investment projects in
road, energy and utility infrastructure, as of 2024 we expect Serbia's GDP growth to
accelerate to 3.0-4.0%, and then return to the pre-pandemic growth trajectory of
around 4% annually.
As I already underlined, our external position continued to improve in Q2 this
Relative to H1 2022, the goods exchange deficit decreased by EUR 2.1 bn,
year.
thanks to the lower energy balance deficit amid the falling global prices of energy,
lower import in terms of quantity and increased export of electricity, as well as growth
in manufacturing exports at high rates. It is important to underline that despite
dampened external demand, manufacturing exports remained high as a result of prior
investments in tradable sectors. Together with the rising surplus in services trade and
in the secondary income account, this has helped the current account deficit to equal
only EUR 527 mn or 1.6% of GDP in the first six months of the year. With this in
mind, we now project the annualised current account deficit at a much lower level,
around 2.5% of GDP, compared to the 4.5% we projected in May. The anticipated
pick-up in the investment cycle and the associated import of equipment and
intermediate goods, as well as an increase in export capacities and a rebound in
- -
external demand which will mostly offset increased import will keep the current
account deficit at 4% of GDP over the medium term. This is a level that ensures
external sustainability.
In the first seven months, inflow under FDI measured more than EUR 2.4 bn,
exceeding the current account deficit several times and thus helping to boost
appreciation pressures. In response to these pressures, the NBS net purchased
foreign currency in the amount of EUR 2,455 mn in the first seven months. According
to our estimate, net FDI inflow of around 5% of GDP in the medium term will continue
to fully cover the current account deficit, as in the previous eight years, thus
supporting the sustainability of our external position. Moreover, we expect FDI to
remain highly diversified in terms of geographies and projects, and mostly channelled
to tradable sectors.
I would like to emphasize once again the importance of maintaining the relative
stability of the dinar exchange rate, which helps us to maintain business and
investment confidence at a high level and thanks to which we contributed to limiting
the effects of the spill-over of imported prices on domestic prices in the period of
elevated global uncertainty and the conflict in Ukraine. It is also conducive to overall
macroeconomic stability in conditions of heightened global uncertainty.
Chart 9 Structure of the current account
Chart 10 Current account and FDI projection
(in EUR bn)
(in % of GDP)
Goods
7
25
Services Secondary income Primary income
6
Primary income, net
Services Goods
20
Secondary income, net
Current account FDI
5
Current account deficit
15
4
3 2.8
10
2.7
2
5
1
1.5
0.9
0
0
-0.5
-1
-5
-2
-2.9
-3.2 -10
-3
-4 -15
-1.7
-5.3
-5
-20
-1.2
-6
-25
Source: NBS.
-7
2019 2020 2021 2022 2023* 2024* 2025* 2026*
H1 2022 H1 2023
Sources: SORS and NBS.
Source: NBS.
* NBS projection.
In the year so far, fiscal movements have also played out better than anticipated.
This was facilitated by revenues that were higher than planned, notably on account of
increased corporate profitability in the previous year, which equalled RSD 864 bn in
2022 and was by more than a quarter higher than in the year before. At the
consolidated level, in the six months we posted a surplus of RSD 45 bn (1.2% of
GDP), while at the level of the year a deficit of around 3% of GDP was planned. The
medium-term fiscal framework, anchored in the adopted fiscal rules, envisages the
continuation of responsible fiscal policy conduct, with a reduction of the deficit to
around 1.5% in 2025. Going forward, a significant portion of budget funds should be
earmarked for increasing investments in road infrastructure and the energy sector,
which will contribute to growth in production potential.
Chart 12 Budget balance and general government public
Chart 11 Dinar exchange rate and NBS transactions in the
FX market debt
(in % of GDP)
(EUR/RSD)** (in EUR mn)
140 750
General government public debt (lhs)
90 4
General government public debt, previous projection (lhs)
135 600
Maastricht public debt criterion
Budget balance, previous projection (rhs)
130
450 80
Budget balance (rhs) 2
125
300
70
120
150
0
115
60
0
110
-150 -2
50
105
-300
100
40
-4
-450
95
-600
30
90
-6
-750
85
NBS transactions in the FX market, monthly (RHS)*
20
-900
80
EUR/RSD, monthly average (LHS)**
-8
10
-1,050
75
70 -1,200
0 -10
2011 2013 2015 2017 2019 2021 2023
Source: Ministry of Finance.
2014 2016 2018 2020 2022 2024* 2026*
Source: NBS.
Source: Ministry of Finance.
* + net purchase; - net sale.
* Projection according to the Fiscal Strategy for 2024 w ith Forecasts for 2025 and
** EUR 1 in RSD.
2026.
Ladies and gentlemen, dear colleagues,
Over the past several years, our economy was exposed to shocks from the
international environment unprecedented in the recent history. If we had not reacted
duly with appropriate measures, in coordination with the Serbian Government, these
shocks would have left immeasurable negative consequences on our country's
economy. The lesson we have learned in these 11 years with me at the head of the
NBS is that the measures undertaken and the results achieved are indeed important,
but perhaps even more so are the conditions in the country at the moment a crisis
breaks out. Therefore, it was critical that with appropriate reaction we not only
preserved macroeconomic and financial stability, economic growth and the living
standard of our citizens, but we also built up reserves to fortify Serbia's resilience to
-
external challenges. I will name only two indicators the country's "savings" and the
savings of our citizens.
The country's "savings" or FX reserves, which are a national resource of vital
economic importance in hedging against external shocks, were doubled during these
11 years with me leading the NBS. In other words, the stock of reserves we had
when I came to the Bank is equal to the amount we additionally accumulated in these
11 years, therefore at end-July they measured EUR 23.1 bn. This is their highest
level on record, and it exceeds all measures normally used to assess their adequacy
(import coverage, money supply and short-term foreign debt, the IMF's ARA, etc.) I
need not emphasize how important this fact is in terms of hedging against risks from
the international environment and securing overall macroeconomic stability going
forward.
Chart 14 Dinar savings
Chart 13 Value and structure of NBS FX reserves
(in EUR mn)
(end-of-period, in RSD bn) (end-of-period, in %)
25,000
120 7
Securities
23,134
Dinar savings (LHS)
Foreign cash and deposits abroad
SDRs
6
Share of dinar savings in total
Gold
100
20,000
Nominal FX reserves savings (RHS)
Thousands
5
80
15,000
4
10,915
60
110.7
3
10,000
40
2
5,000
20
1
17.9
0 0
0
Source: Ministry 2012 of 2013 Finance. 2014 2015 2016 2017 2018 2019 2020 2021 2022 July
2009 2011 2013 2015 2017 2019 2021 2023*
2023
Source: NBS.
* Data at 31/7/2023.
Source: NBS.
Besides the country's "savings", we also see continued growth in the savings of
households, which is an indicator of the confidence in our domestic financial sector
and the sound sources of credit growth. In the past 11 years, dinar savings rose six
times, to RSD 110.7 bn at end-July. Concurrently, households' FX savings almost
doubled, from EUR 7.7 bn to EUR 14 bn. All of this creates a foundation that enables
us to successfully face the challenges emanating from the international environment,
which we will almost certainly encounter again in the future.
The NBS will continue to monitor and analyse trends in the international commodity
and financial markets to better assess their impact on our economy and mount an
appropriate response. Our priority is the return of inflation within the target band,
while maintaining financial stability and preserving as much room as possible for
growth of our economy and employment, and improvement in our citizens' living
standard.
In the remainder of the conference, we welcome your questions.