NATIONAL BANK OF SERBIA
Introductory Address by the Governor at the
presentation of the Inflation Report - February 2020
Dr Jorgovanka Tabaković, Governor
Belgrade, 19 February 2020
Ladies and gentlemen, esteemed members of the press, dear colleagues,
Welcome to the presentation of the February Inflation Report, where we will give you an overview of
recent macroeconomic trends, set out our new inflation and economic activity projections, and explain
our monetary policy decisions in the period since the previous Report.
Looking at the year behind us, I am pleased to say that 2019 as well was marked by positive economic
trends and prospects, despite the slowdown in global economic growth and ongoing trade and
geopolitical tensions.
This is first and foremost the result of an adequate and consistent economic policy that we are pursuing
in Serbia. A policy which provided for the positive effects of many factors in the previous seven and a
half years, contributed to the creation of a favourable business environment and turned our country
into an attractive investment destination. In this way, in cooperation with the Serbian Government, we
supported a vigorous rise in investment, which sustained a 4.3% economic growth on average in the
previous two years.
At the very beginning, I will try to sum up the period behind us by sharing the following data with you:
- For seven years in a row inflation has been firmly under the National Bank of Serbia's control. In
December 2019 it measured 1.9% y-o-y, which is also its average for the year as a whole.
- According to our latest estimate, economic growth came at 4.2% in 2019, exceeding all the
projections released in the course of the year. After stepping up to 4.8% y-o-y in Q3, GDP
growth accelerated still further in Q4 (to 6.1%), exerting the largest impact on the growth of the
Western Balkans region, as stated by the European Commission in its report.
- While many scaled down the growth forecasts of their economies, Serbia outperformed all the
projections owing to the impact of domestic factors, notably higher than projected investment.
In the past two years alone, fixed investment increased cumulatively by close to 35%,
accounting for three quarters of Serbia's economic growth.
- The NPL ratio was cut to 4.1% at end-December! This was a problem that we inherited, but
which we addressed systematically. Owing to such an approach, the share of NPLs in total loans
is now 80% lower than at the start of the implementation of the NPL Resolution Strategy.
- Goods and services exports remained vibrant in 2019, growing at the rate of 10.5%. This means
that export growth was faster also relative to 2018, when it measured 9.6%. This places Serbia
among the few countries whose exports grew faster in 2019 than in 2018.
- Gross FDI to Serbia hit its record high in 2019 - EUR 3.8 bn. Thus, Serbia attracted around 55%
of all FDI that flowed in to the Western Balkans in 2018 and 2019.
- As of yesterday, Serbia also has a 12-year dinar bond and we will work actively on lengthening
the dinar yield curve in the period ahead. The demand for the 12-year dinar bonds of the
Republic of Serbia was more than 10 times higher than the planned volume of sale and the
effective rate was 3.4%. In late 2012 the interest rate on one-year government bonds was
11.9%, whereas today the rate on our 12-year bonds is 3.4%. It is this difference between
interest rates and the maturity of dinar government bonds that all the results and Serbia's
significantly improved reputation worldwide are reflected in (only three years ago, on 7
February 2017, the rate on one-year bonds was 3.48%).
- Having increased by 30% in 2019, dinar savings are now five times higher than in 2012 when we
started implementing the Dinarisation Strategy. At end-2019, dinar savings stood at RSD 79.6
bn, while the latest data point to almost RSD 83 bn.
I will now switch to the standard format, giving an overview of recent macroeconomic trends, our new
inflation and economic growth projections and our recent monetary policy decisions.
Inflationary pressures remained low even in conditions of strong economic growth and favourable
labour market trends.
In 2019 as well, we preserved low and stable inflation which measured 1.9% y-o-y in December. By
keeping inflation low, we have preserved the real value of household and corporate incomes, while
making an important contribution to the predictability of doing business. That inflationary pressures are
still low is also indicated by core inflation which averaged 1.3% y-o-y in 2019. Low inflationary pressures
are also confirmed by both one-year and two-year ahead inflation expectations of the financial and
corporate sectors which are anchored within the NBS target tolerance band. It is a fact that by placing
inflation under control we have restored confidence in the monetary policy, which now makes it
easier for us to achieve results. Anchored inflation expectations enhance the efficiency of monetary
policy and, by extension, the economy's resilience to external shocks.
In our February projection as well, inflation will remain stable in the coming period and will approach
the target midpoint gradually, though it will most probably stay slightly below the midpoint until the end
of the projection horizon.
Chart 1 Chart 2 Inflation projection
Inflation movements and inflation expectations of the
(y-o-y rates, in %)
financial sector
(y-o-y rates, in %)
7
18
6Y average inflation = 1.9%
6
16
6Y average core inflation = 1.7%
14
5
12
4
10
3
8
2
6
1
4
2.0
1.9
2
0
1.1
0
-1
1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
-2
CPI Core inflation* Inflation expectations
12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12
2017 2018 2019 2020 2021
Sources: SORS, NBS calculation and Bloomberg.
*CPI excluding food, energy, alcohol and cigarettes.
Source: NBS.
Acceleration of economic growth in Serbia is led by investment, exports and sustainable consumption.
The economic growth in 2019 exceeded our initial projections, which we revised upwards in the course
of the year. According to our latest estimate, it amounted to 4.2%. Economic growth accelerated
significantly in H2, reaching, in our estimate, 6.1% y-o-y in the last quarter.
In the past half-decade, Serbia has been characterised precisely by the growth led by investments. Their
impact on economic activity is unambiguously evidenced by the data on fixed investment growth at an
average annual rate of around 10% during this period, whereby their share in GDP increased to around
24%. Let me reiterate that fixed investments increased cumulatively in the past two years by close to
35%, accounting for three quarters of Serbia's economic growth. An increase in their share to around
24.5% of GDP is expected this year as well, guided by continued implementation of infrastructure
projects and private sector investment.
Chart 3
IMF GDP growth projection for 2019
Chart 7
FDI structure by sector
(in %)
(in %)
100
5
April 2018 90
Otober 2018
80
April 2019
4
October 2019
70
Actual
60
3
50
40
2
30
20
1 10
0
-
2005-2008. 2009-2012. 2013-2017. 2018 2019.
0
Construction and real estate Other
Euro area Serbia
Finance Trade
Manufacturing Tradable goods and services*
Sources: IMF and NBS estimate. Source: NBS.
* Agriculture, industry, mining, transportation, catering.
One of the important sources of investment financing is also increased profitability of enterprises, to
which the NBS continues to contribute through the achieved price stability and relative stability of the
exchange rate, as well as more favourable terms of financing.
Companies are increasingly relying on favourable financing conditions for investment growth, as
evidenced by the rise in investment loans of 25% in the previous year, with the balance of these loans
higher by around EUR 1 bn than in 2018. At the level of the year, almost entire growth in lending
activity was due to investment loans which, as far back as in 2015, emerged as one of the major sources
for financing investment. In addition, owing to ordered public finances, the government is quickly
increasing the level of capital investment, whose share reached almost 5% of GDP in 2019.
Another important pillar of investment financing is the FDI inflow, which hit a record high level for the
second consecutive year, reaching EUR 3.8 bn in 2019. A particular quality comes from the fact that FDI
is mainly channelled into tradable sectors and that it is project-diversified, contributing thereby to the
growth in our exports. For this reason, its full effects are expected in the period ahead.
It is precisely the activation of earlier investment that helped maintain the high growth rate of Serbia's
goods and services exports, which was even higher than in the previous year (10.5% compared to 9.6%
in 2018), despite the slowdown in external demand.
Chart 5 Movement of main goods export components Chart 6 Movement of main goods import components
(contributions to y-o-y growth, in pp) (contributions to y-o-y growth, in pp)
14 16
11.9
13.4
14
12
11.8
9.8
12
10 8.8
7.6 9.2
7.4
10
8
8
6
5.5
6
4
4
1.2 2.4
2
2
0.5
0
0
-2
-2
2014 2015 2016 2017 2018 2019
2014 2015 2016 2017 2018 2019
Other Base metals
Other machinery and equipment Electrical equipment
Unclassified Consumer goods Intermediate goods
Rubber and plastic products Food products
Equipment Imports, y-o-y*
Agriculture Exports, y-o-y growth*
Sources: SORS and NBS calculation.
Sources: SORS and NBS calculation. * Revised data for 2018 and 2019. * Revised data for 2018 and 2019.
I will reiterate that Serbia is one of the few countries where exports rose faster in 2019 than in 2018.
The investment cycle which began in 2015, and which accelerated significantly in the past two years, is
having a considerable impact on import dynamics and structure. Import growth in that period is mostly
attributable to the economy's increased needs for intermediate goods and equipment, and partly to
consumer demand amid conditions of citizens' rising living standard. Imported equipment boosted the
Serbian economy's export capacity, therefore we expect to see high export growth rates continuing in
the medium run. External sustainability is also confirmed by the fifth year of full coverage of current
account deficit by the net FDI inflow (113% in 2019). The external position is further endorsed by the
project and geographical diversification of both exports and FDI inflow, which we worked systematically
on, broadening our international cooperation. In addition, our economy's resilience to potentially
adverse developments in the international environment is confirmed by the high level of FX reserves
of EUR 13.4 bn at end-2019, which is their maximum level at year-end in the period since 2000, when
data began to be monitored in this manner. The level of FX reserves is adequate in terms of both their
size and structure.
Chart 7
FDI structure by sector Chart 8
NBS FX reserves
(in %)
(in EUR bn)
100
16
90 Gross FX reserves
14 Net FX reserves
80
70
12
60
10
50
8
40
30
6
20
4
10
0 2
-
2005-2008. 2009-2012. 2013-2017. 2018 2019.
0
Construction and real estate Other
Finance Trade 2007 2009 2011 2013 2015 2017 2019
Manufacturing Tradeable goods and services*
Source: NBS. Source: NBS.
* Agriculture, industry, mining, transportation, catering.
Increased production capacities and competitiveness of our economy were conducive to positive
developments in the labour market. Owing to this, employment increased, while the unemployment
rate decreased to a single-digit level. Since the beginning of the investment cycle, the unemployment
rate has been halved (from 19.2% to 9.5%), and formal employment in Serbia's private sector
increased during the new investment cycle by more than 230,000 persons. At the same time, wages
are on the rise, notably in the private sector, which in turn increases household consumption and
supports the social component of growth. It is important to note that consumption is rising at
sustainable rates, i.e. that consumption growth contributes to the sustainability of economic growth.
Economic growth outlook remains favourable, therefore we expect similar GDP growth dynamics in
the medium term of around 4% per annum, as in the previous two years.
Good coordination of monetary and fiscal policies continues to provide significant contribution to
economic growth and overall stability.
The resilience of our economy was also strengthened by the maintained fiscal discipline in conditions of
full coordination of our measures, with a constantly decreasing share of public debt in GDP. It is
important to point out that such result was achieved in conditions of significantly higher government
capital expenditure. The general government deficit of 0.5% of GDP was projected in the medium term,
ensuring the continuation of the downward path of the share of public debt in GDP.
We are working systematically to improve the currency structure of public debt in order to lower the
risk of change in the value of global currencies - the share of dinar debt rose to 27.7%, while the dollar
portion contracted to one-fifth, whereas several years ago the dollar debt accounted for one-third of
public debt. The strategic introduction of the 12-year dinar bond, extending the dinar yield curve to 12
years, is an important step toward deepening the dinar securities market. An important fact for the
development of the domestic financial market is J.P. Morgan's announcement that Serbia has been
placed on Index Watch Positive for potential inclusion into the reputed Government Bond
IndexEmerging Markets (GBI-EM) series. J.P. Morgan confirmed the positive outlook by assessing that
activities which Serbia undertook in terms of adjusting its bond market to the best international practice
have led to a conspicuous rise in secondary market liquidity in the past two years. This will additionally
broaden the base of investors investing in the Serbian economy and bring Serbia into the ranks of
globally attractive investment destinations.
Thanks to the full coordination of monetary and fiscal policies, overall stability and implementation of
reforms, Serbia is one notch below investment grade, typical for economies offering high security of
investments. This is not only a confirmation of the economic progress and the results we have achieved,
but also a contribution to the further improvement of financing and investment conditions in Serbia,
and a continued rise in employment and our citizens' living standard.
Chart 10
Chart 9 Public debt*
General government fiscal and primary budget
(in %)
balance
(in RSD bn)
80
200
70.0
67.8
66.2
70
150 Budget balance
57.9
Primary balance 56.0
100 60 53.7
52.0
50
50
0
40
-50
30
-100
20
-150
10
-200
0
-250
2013 2014 2015 2016 2017 2018 2019
RSD EUR
-300
USD CHF
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
SDR Other
Public debt (% of GDP)
Source: Ministry of Finance.
Source: Ministry оf Finance. * Central government.
Furthermore, owing to the effects of past monetary policy easing, a reduced country risk premium,
low interest rates in the international money market and higher interbank competition, the
conditions of private sector financing were even more favourable in the fourth quarter. Our decisions
translated fully into the credit market and in late 2019 interest rates on dinar loans were cut to the
hitherto lowest levels: 4.0% in the corporate and 9.1% in the household sector. In regard to
euroindexed loans, financing conditions improved not only thanks to low interest rates in the European
money market, but primarily owing to the sharp fall in the country risk premium, driven chiefly by the
positive impact of domestic factors.
Chart 12
Interest rates in the primary market of dinar
Chart 11
Interest rates on new dinar loans
(weighted average values, p.a., in %) government securities and eurobonds
(p.a., in %)
16
25
Dinar securities, 5Y
Dinar securities, 7Y
14
Dinar securities, 10Y
Eurobonds, USD, 5Y
20
Eurobonds, USD, 7Y
12
Eurobonds, USD, 10Y
Eurobonds, EUR, 10Y
10
15
8
10
6
4
5
Household loans*
Corporate loans*
2
Key policy rate
0
0
2011 2012 2013 2014 2015 2016 2017 2018 2019
2011 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: NBS.
Source: Ministry of Finance.
* Excluding revolving loans, current account overdraftsand credit card debt.
The loan structure is such that lending activity also gives a full contribution to economic growth, owing
principally to stepped-up investment borrowing by enterprises. Since mid-2019, investment loans
constituted the bulk of corporate loans. The loan structure by enterprise size is also favourable given
that a major portion is channelled to micro-, small- and medium-sized enterprises. The room for further
credit growth was also created by a further reduction in the NPL share in total loans, to the new lowest
level of 4.1%.
Chart 14
Contributions to y-o-y corporate lending growth
Chart 13 NPL share in total loans, gross principle
(in pp, excluding the exchange rate effect)
(in RSD bn) (in %)
Import
500 25
15 Other
Investment
450 21.5 21.6
21.4
Export
19.0
18.6 Liquidity and current assets
400 20
10
Transaction accounts
17.0
16.9
Y-o-y lending growth rate, in %
350
15.7
300 15 5
11.3
250
9.9
0
200 10
150
5.7
-5
4.1
100 5
50
-10
0 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
-15
Other sectors
Household sector 2013 2014 2015 2016 2017 2018 2019
Corporate sector
Source: NBS.
Source: NBS. NPL share in total loans (RHS)
By preserving low inflation and financial stability, and by actively utilising all instruments, the National
Bank of Serbia will continue to support vibrant, sustainable economic growth, while preserving the fiscal
equilibrium and the downward trajectory of public debt. The level of FX reserves and anchored inflation
expectations will remain an important pillar of our increased resilience to volatile external conditions.
Ladies and gentlemen, dear colleagues,
My associates will present to you the results of our analysis of the factors underlying Serbia's risk
premium. Global factors certainly play an important role, both in the short and long run, not only for
Serbia, but for all countries. What is specific for Serbia and what has been shown and confirmed by our
analysis is that the vigorous fall in the country risk premium is crucially determined by domestic factors,
i.e. the strengthening of our economy. As confirmed by the analysis, the lowering and keeping of
inflation at a low level, a vigorous fall in the NPL share, a reduction in the public debt share and other
health indicators of our economy are the key factors why Serbia is perceived today as a low risk country.
Given that the risk premium does not reflect current developments only, but investor expectations
going forward as well, we may conclude that investors assess that the achieved price stability and
overall macroeconomic stability will be preserved in the period ahead as well.
Allow me to conclude. The policies that yield results should not be changed - this is why we shall
continue to apply a coordinated approach in pursuing economic policy, owing to which we have
stabilised Serbia and are now making it stronger. This is taken into account and emphasized by the
International Monetary Fund, other international financial institutions, rating agencies and investors.
Our aim is to preserve stability, which is the pillar of a strong economy, by further strengthening the
competitiveness of our economy and bolstering employment and the standard of living.
I now give the floor to my colleagues from the Economic Research and Statistics Department to present
our latest macroeconomic projections in more detail.