Jorgovanka Tabakovi: A new global context - challenges of an
uncertain future
Speech by Dr Jorgovanka Tabakovi, Governor of the National Bank of Serbia, at the
31st Kopaonik Business Forum, Kopaonik, 4 March 2024.
* * *
Slides accompanying the speech
Esteemed members of the Government, representatives of the diplomatic corps,
members of the business community, fellow economists, ladies and gentlemen, dear
friends,
How much is the ideal from the famous sentence worth today: "government of the
people, by the people, for the people"?
It is a sentence of Abraham Lincoln on the new birth of freedom in his Gettysburg
address, delivered in 1864 in honour of the soldiers who fell at Gettysburg in one of the
decisive battles of the American Civil War. Today we speak about the challenges of an
uncertain future, though future is always uncertain.
However, we live in a time when the past is uncertain too and is often intentionally
falsified in order to use that fake money to buy believers for new theories to which real
money and real values need to be redistributed.
In December last year, we celebrated 150 years of the Serbian dinar as the national
currency. Marking that important anniversary, I said that few nations in the world can
boast of having a currency of their own for a century and a half.
In addition to the conventional national symbols - coat of arms, flag and anthem, the
spirit and strength of a country are made up of its tradition, culture and national
currency. The duration of these state symbols is an indicator of how long-lasting, how
stable and how enduring a nation is.
They are a reflection of the history and achievements of a nation, and they are of
essential importance for its sovereignty and reputation in the world.
No matter what we discuss during these three days, it will all be pointless if a part of our
people does not have the right to their own currency and basic means of livelihood.
No one has the right to deny our people the right to their own currency, nor the right to
live in peace, and this calls for the response of each and every person and institution in
order to have a future at all!
It is easy to remain untouchable and lofty, to not get involved in the problem, to stand
aside, to dispense advice, to stand up and preach, to confidently talk about theory. It is
easy to flaunt your moral convictions, to use helplessness as an excuse...
Words, platitude....Words as a beginning because it is only actions and results that
speak of us all.
On the global front, changes seem to have never been faster. The world economy went
from almost deflation to high inflation in a very short time. From negative interest rates
and cheap money, to never faster tightening of monetary policies by leading central
banks.
There is almost fanatical buzz about the green economy, the positive and negative
sides of the rapidly growing generative artificial intelligence. Various forms of
fragmentation and polarization are testing consumer and investment confidence and
have the power to change the global economic landscape. All of this reminds us that
any serious discussion about recent and future developments must take into account
the complexity of macroeconomic conditions and geopolitical relations in which
economic policy decisions are made and implemented.
Economic policy, always and everywhere, must be guided by medium-term objectives,
which are not a wish list. That is why I will repeat the conclusion from last year - what
separates theory from practice is our responsibility for people, for growth and
development, and for social stability. We depend on the conditions of the time we live
in, but also on the decisions we make and the consequences of which we are held
accountable for.
Ladies and gentlemen,
(Slide 2) In such a global environment, the resilience of the Serbian economy has
again been tested and confirmed! Let me give you a few examples.
The record exports of goods and services worth EUR 41 bn in 2023 are by 75%
higher than in the pre-pandemic 2019.
We have ensured record high FX reserves in the amount of EUR 25 bn, which are
by 87% higher than in the pre-pandemic 2019.
We have built an environment for record high FDIs of EUR 4.5 bn last year, or
around 20% higher than in the pre-pandemic 2019.
The unemployment rate is at its lowest level.
Formal employment in the private sector is around 10% higher than before the
pandemic.
Average wage in December was 64% higher than pre-crisis.
Because of all this, analysts and investors agree that "the Serbian bonds are
shining", which is confirmed by the huge demand for eight-year dinar bonds, while
the difference in yields on foreign currency bonds compared to German bonds is
significantly reduced.
All these results attest to the appropriateness of the economic policy we have
implemented. That's why we are relentlessly working towards the goal of Serbia getting
an investment grade, and are more focused than ever. We tackle all the factors that can
affect the outlook/ratings upgrade. Our commitment to that goal should result in even
more investments and expand the investor base, and position Serbia even better on the
investment map in terms of both FDI and portfolio investment.
This is the ideal moment to ask a question: What is the difference between investments
by domestic and foreign investors? Someone please show me an analysis of the effects
where the state has made it difficult for domestic investors to invest, and give me one
piece of evidence to support that claim. And please tell me what foreign or domestic
investors are guided by, except by the same two goals: to make money, to have a
profit, to pay as little tax as possible and to use that profit as they wish. There is no
difference. In this sense, getting an investment grade, which has been practically
recognised through investments, is something we will work on to obtain improved
outlook formally as well.
(Slide 3) That is why today, when we are taking a look at the results and
challenges, I will talk about five topics:
The first are inflation factors, as the key global issue in economic discussions in
the past three years;
The second is the monetary and macroprudential policy response;
he third topic, important from the aspect of navigating our economy through
numerous challenges, are the indicators of our resilience to external risks;
The fourth topic, also important within the framework set for discussion here at the
Forum, is the contribution of macroeconomic stability to corporate performance;
And the fifth are the National Bank of Serbia's projections, with the assessment of
key risks.
Let's go from the first one.
(Slide 4) The good news is that in most countries inflation struck a downward
path last year. In Serbia too, inflation has been on a firm downward trajectory
since last April. At end-2023, it was half the level recorded at end-2022, in line
with our projection stated here a year ago.
Along with a good agricultural season, the strongest disinflationary factor was the
easing of cost-push pressures in food production at the global level, which had
been the largest contributor to domestic inflation in the first place.
Inflationary pressures weakened also in response to lower energy prices, and the
resolution of a major part of supply chain bottlenecks.
Inflationary pressures subsided in the past year also on account of other import
and producer prices.
This was coupled with the disinflationary effect of external and domestic
aggregate demand, with tighter monetary conditions.
In January, y-o-y inflation dropped further, to 6.4%, fully consistent with our nowcast
model, supported by artificial intelligence. According to our estimates, inflation
decelerated further in February, to 5.5% y-o-y.
(Slide 5) In relation to occasional discussions about inflation factors and peaks in
Serbia and other Central European countries, let me just introduce a few facts:
Inflation rise in Serbia over the past three years was mostly driven by food and
energy prices - which account for 53-75% of y-o-y inflation and are crucially
affected by global factors.
In comparable Central European countries, inflation spiralled up to highs unseen
in decades, though peaking at different points in time. In Serbia, inflation peak
was reached somewhat later and was generally lower than in those countries, so
the high base effect from the same period in 2022 was also comparatively lower.
Serbia's inflation peaking later compared to other countries may be explained by
the fact that in the first wave of the energy crisis our state assumed the major part
of the cost burden. It thus reduced uncertainty in the domestic market and
mitigated the first wave of the crisis, while in the majority of other countries, the
bulk of these price adjustments were made abruptly already in 2022.
Also, core inflation, excluding the prices of food and energy and measuring the
impact of monetary policy, edged up less in Serbia than in the majority of
comparable Central European countries over the past three years.
(Slide 6) The second topic builds on the first one. Last year was marked by the
further tightening of monetary conditions by the majority of central banks, which
is certainly one of the factors behind the declining inflation path.
The NBS was one of the first to tighten monetary conditions as of October 2021,
nd our timely and well-calibrated decisions allowed for a more moderate response
in 2023.
In 2023, we lifted the key policy rate by a total of 1.5 percentage points and as of
July it equals 6.5%.
Further, in September, using the required reserve tool, we permanently mopped
up a portion of excess dinar liquidity from the market.
The goal of our measures is to anchor inflation expectations and limit
secondround effects of the higher food and energy prices on the rise in other prices.
That the interest rate channel works well is confirmed by the fact that past key
policy rate increases have passed through to all dinar interest rates.
At the same time, the efficiency of the expectations channel is confirmed by the
return of financial sector inflation expectations within the target band and the
anchoring of their medium-term expectations, as well as by the decline in
shortterm inflation expectations of the corporate sector.
As a responsible regulator and looking into all aspects of the impact of the interest
rate rise in the euro money market on the domestic financial market, we adopted
a temporary measure of capping interest rates on housing loans. The effect of this
measure on the financial result of the banking sector does not jeopardise banking
sector operations in any way, while it does contribute to the preservation of
financial stability by preventing a rise in non-performing loans. This measure also
boosts disposable household income, but to the extent that does not undermine
the inflation's firm downward trajectory, as it accounts for around 0.3% of total
household consumption in Serbia over one year. In this way, we struck the right
balance in the hierarchy of objectives - price stability, financial stability and
economic growth.
(Slide 7) he third topic is the resilience of the Serbian economy, which was tested
and affirmed in 2023 as well.
Last year our GDP increased by 2.5%, whereby cumulative growth in the past four
challenging years climbed to 12%. The composition of last year's growth was also
sound - it was driven by net exports and fixed investments despite the
decelerated growth in the euro area and our other major trade partners.
Investment growth benefited from higher corporate profitability, high FDI inflows
and government capital investments.
Resilience is also confirmed by the goods and services exports which reached
EUR 41 bn in 2023 - 3.5 times more than in 2012 and over 75% more than in the
pre-pandemic 2019. The importance of higher export capacities is evidenced also
by the fact that commodity exports to Germany, our most important trade partner,
went up by 14% last year, despite the decline in their economic activity.
FDI inflow also continues to break records with over EUR 4.5 bn in 2023, more
than 60% of which remains channelled into tradable sectors.
We also ensured record high FX reserves of EUR 25 bn, while increasing gold
reserves to over 40 tonnes or around 10% of total reserves. Relative to 2012, the
value of gold reserves increased by four times.
(Slide 8) We also preserved the relative stability of the dinar exchange rate
against the euro, as one of the key pillars of financial stability, the certainty of
doing business, and investment and consumer confidence.
Amid prevailing appreciation pressures, in six out of seven years the NBS turned
out a net buyer of foreign exchange. In 2023 alone, we net bought close to EUR 4
bn and as of 2017 over EUR 9 bn.
That is why I am confounded over and over again by concerns raised by some
individuals about the overvaluation of the dinar and their advice to allow its
depreciation for the sake of greater support to exports. Why are such
recommendations flawed, in addition to neglecting the fact that we have
witnessed pronounced appreciation pressures for a number of years? They are
flawed because they disregard the fact that it is the real rather than nominal
exchange rate that is determining exports, while potential dinar weakening would
reflect on inflation growth. For the sake of reminder, the dinar's depreciation
against the euro in 2010 and 2012 significantly amplified the effect of imported on
domestic inflation, without any major positive effects on external competitiveness
of our economy. Let me repeat that competitiveness is bolstered by structural
policies, and not by the exchange rate policy!
All these results point to at least three obvious conclusions. First, that Serbian
policymakers worked strategically to build up buffers against shocks. Second, that
Serbian policymakers knew how to respond to numerous shocks by taking appropriate
and well-timed measures. And third, these results are the most reliable indicator of
policymakers' future responses.
(Slide 9) Esteemed colleagues,
The contribution of macroeconomic stability in Serbia to our corporate sector's
operations is an issue repeatedly discussed in forums of this kind. The data
indicate the following:
1. The real operating income of the corporate sector rose by 5% p.a. on average in
the 2013-2022 period, reflecting significant expansion of the corporate sector's
business activity.
2. The rise in real operating income was a significant factor behind lower unit labour
costs, profitability growth and stronger financial position of the domestic economy,
which is also confirmed by the fact that growth is broadly dispersed across sectors.
3. The rise in real operating income, especially in the foreign market, also signals
that Serbia's economic expansion is linked with increased competitiveness and
export propensity, underpinned by higher investment in capacity expansion and
modernisation, technology transfer and the introduction of new business models.
4. Additionally, thanks to the Government's well-timed and comprehensive
responses to the negative effects of the pandemic and mounting geopolitical and
geoeconomic tensions, real operating income growth was not only preserved but
even picked up to 8.2% in the period since 2019.
5. Finally, if the observed ten-year period is divided into two five-year subperiods, we
see that the net profit of the corporate sector increased cumulatively by EUR 18.6
bn in the second five-year period. The key source of such increase is the
improved operating sub-balance which contributed EUR 10.3 bn, or 55.6% of the
recorded increase in net profit. Total calculated lower financial costs in respect of
interest rates and exchange rate differences measured EUR 6.9 bn or 37% of the
total increase in net profit, observed through the relation of two five-year periods.
6. Even such quantified effect unambiguously confirms the importance of price
stability and relative exchange rate stability for the successful performance of our
corporate sector, and, by extension, for growth and employment. In addition to
having a positive impact on corporate cash flows, creating additional own
resources for investment, they are also important for ensuring additional external
financial support. Moreover, in a predictable business environment, the financial
potential is more efficiently mobilised for extending and modernising the existing
and for building new capacities.
(Slide 10) The last topic refers to our expectations for the coming period and the
challenges ahead of economic policymakers.
Let me start by concluding that the macroeconomic projections of the National Bank of
Serbia which I presented in the last year's Forum were consistent with the ensuing
developments. Going forward, we expect an even better medium-term growth outturn,
taking into account the new investment plan, which is why we revised up our growth
projection for the coming two years. In order of priority:
End-2023 inflation was half its level a year ago, consistent with our expectation
which I presented last March.
We expect inflation to retreat within the target band in mid-2024, approach the
target midpoint of 3% late in the year and remain around this level in the medium
run. This too is consistent with the projection I presented last March.
When it comes to the impact of international factors, the prices of most primary
commodities in the global market subsided in 2023. Though the prices of
overseas transport went up amid problems in the Red Sea and issues
surrounding the transport of oil and other commodities, there have been no major
effects on the oil price and inflation so far.
Global economic growth is expected to stay below its long-term average this year
due to tight financial conditions in most countries and weak global trade and
investment, which should also help soothe inflationary pressures.
GDP growth of 2.5% last year was also consistent with our projection. We still
expect GDP growth to accelerate to 3-4% this year, but we revised up our growth
projection for the next two years to 4-5% p.a. Faster growth will be underpinned
by continued accelerated implementation of planned investment projects in
transport, energy and utility infrastructure.
When it comes to balance of payments movements, the current account deficit
was at an all-time low of 2.6% of GDP last year. This outturn is 4.3 pp better than
in 2022 and was supported by lower global prices of energy, the resilience of our
exports and the rebound in electricity exports. The current account deficit is
expected to range from 4% to 5% of GDP this year and in the medium run,
ensuring external sustainability. This will be underpinned by investment cycle
acceleration and the associated higher import of equipment and intermediate
goods. We also expect the current account deficit to stay fully covered by net FDI
inflow, as in the past nine years.
Naturally, like all macroeconomic projections, this one too is characterised by numerous
risks.
When it comes to economic risks, they still dominantly emanate from factors
arising from the international environment, though to a lesser extent than six or 12
months ago. By contrast, we have stronger risks on account of geopolitical
tensions, fragmentation, unfavourable demographic structure, climate factors,
some aspects of artificial intelligence use which require new answers, as all of
these factors combined have a potential to turn into pronounced economic risks.
Aggravated geopolitical relations and the widening gap in the global political
scene are acting as a drag on global trade and capital flows, which can be
particularly harmful to small and open emerging countries.
Changes in the demographic structure are also a challenge for a number of
countries, notably in terms of the decrease in active working population and the
widening skills gap in the labour market. This is why investing in people, their
education and improvement of living conditions is a key global priority.
Without global and regional cooperation there can be no adequate answer to
climate change, which has economic as well as far deeper consequences. This is
where no progress can be made unless we all join forces. The challenges arising
from the drastic changes in climate conditions and the sustainability of natural
resource exploitation can cause disruptions in the global food supply chain.
Finally, accelerated development of artificial intelligence creates a multitude of
possibilities, but also gives rise to many risks. The quantitative technological
breakthrough is certainly conducive to productivity growth, but can also lead to
major changes in the labour market, and this has already mandated a special
policy. What will prevail depends on us. Indisputably, investment in development
and implementation of new technologies is necessary if we want to remain
competitive, but this must be done in a way that will enable all members of society
to benefit from them.
Esteemed participants of the Business Forum,
By embracing the fact that future is always uncertain, and even more so today when we
are witnessing an interplay of numerous social, technological and biological factors
shaping and changing our reality, our only answer can be the creation of a system that
is not afraid of change.
A system in which all advantages of the inevitable changes will be fully utilised for the
growth and development of society. Still, our attention should also focus on building a
system that is more than resilient, and is most aligned with the term of antifragility, as
defined by Nassim Nicholas Taleb, a well-known thinker in the remit of risks and
unpredictable events. Taleb said that "antifragility is beyond resilience or robustness.
The resilient resists shocks and stays the same; the antifragile gets better." To build a
resilient system, and I have often spoken about this, we need the following, among
other things:
Stability - political, macroeconomic and financial;
Cooperation and solidarity at home and abroad;
Strengthening and sharing knowledge for a modern 21st century society;
Overcoming differences and supporting everything that is good for the growth and
development of Serbia.
Speaking of the challenges of an uncertain future, I would like to refer to Morgan
Housel, who recently published his book Same as ever where he says that instead of
wondering what the future will be like in one, two or ten years, we should focus on
things that will not change. And what will always be true is that there are no and there
can be no shortcuts on the path to growth and development. I believe that the only path
to sustainable growth in all conditions is through dedicated work, accountability for the
decisions made, and readiness to implement those decisions, no matter how painful
they might be.
The realisation of the programme "Leap into the Future - Serbia Expo 2027", which
President Vui presented, will help us strengthen domestic growth factors and the
resilience of our economy, which is why I will say one more time that we have raised
our growth projection for 2025 and 2026, with the central value of 4.5%.
And once again - no matter what we discuss during these three days, it will all be
pointless if one part of our people does not have basic means of livelihood. No one has
the right to deprive our people of their right to their own currency, or the right to live in
peace. Each and every person and institution must react in this case! We should bear in
mind "government of the people, by the people, for the people"!
Thank you for your attention. I wish you all a fruitful 31st Kopaonik Business Forum.