NATIONAL BANK OF SERBIA
Introductory speech
Inflation Report - February 2023
Jorgovanka
Dr Tabaković, Governor
Belgrade, 14 February 2023
Ladies and gentlemen, esteemed members of the press, dear colleagues,
Welcome to the presentation of the February Inflation Report, where we shall present
the current macroeconomic developments in the international environment and at
home, our latest macroeconomic projections, as well as the measures we have
undertaken in the period since the previous Report.
At the very start, I would like to underline several key facts with regard to the current
macroeconomic movements and our latest projections:
-
Firstly, due to the weakening of global cost-push pressures, decline in imported
inflation and effects of monetary policy measures, for the first time in two years
the projected inflation for the current year is at a lower level than in the
prior projection, and the projection for 2024 has been lowered to an even
greater extent. We now expect inflation to return within the target tolerance band
in mid-2024, which is sooner than previously expected.
-
Secondly, unlike the previous inflation projection, where we saw very
pronounced risks skewed to the upside, we now judge the risks to be less
pronounced and that it is equally likely that inflation in 2023 and 2024 turns
out lower than projected.
-
Though we did not change the projected 2.0%-3.0% GDP growth rate for this
year with which we came out in November, we now estimate that it is much
The reason for this is the fact that
more certain that it will indeed materialise.
we have practically come out of winter months, which are particularly risky in
terms of energy supply to Europe, and that global economic slowdown is not as
strong as initially expected. The current and projected global energy prices are
lower, and the euro area has so far managed to avoid recession.
-
Developments that are more favourable than expected are best visible in
the domain of the balance of payment movements. The current account
deficit in 2022 was lower than projected in November and amounted to 6.9% of
GDP, as a result of faster real growth in goods and services export and lower
than expected energy import at the end of the year. According to our new
projection, this year, we expect the share of the current account deficit in GDP to
remain similar as in 2022, instead of more than 9% as expected in November.
-
Equally important is that even in such a difficult situation, once again, for the
eighth consecutive year, the current account deficit was fully covered by
net FDI inflows. In 2022, FDI inflows to Serbia again exceeded our November
expectations, and in conditions of elevated global uncertainty they measured
EUR 4.4 bn (or 7.1% of GDP), which is the new highest level of annual inflow on
record.
-
The NBS FX reserves are also at an all-time high, measuring EUR 20.9
billion in January and guaranteeing the stability of our economy, as indicated by
the fact that they have exceeded the benchmark values of all reserve adequacy
metrics.
- of our economy's stability and its
A confirmation favourable growth prospects
going forward, as well as of the full coordination of monetary and fiscal policies,
investors' high demand for
are our securities in the international financial market
last month and the achieved financing conditions, especially if compared with
countries that have already been rated investment grade.
In the remainder of the conference, we will present macroeconomic movements in
greater detail and our latest projections.
***
As for international developments, the period since we last met in November was
marked by somewhat more favourable global growth prospects and signs that
inflation is gradually retreating from its multidecade highs. Against the backdrop of
the energy crisis and tighter financial conditions, optimism emerged as the prices of
gas and other energy fell in the EU, and China backtracked on the zero-tolerance
strategy to the coronavirus. There is no doubt that global economic growth will
tightening of central banks' monetary policies
decelerate this year, notably over the
and the prolonged conflict in Ukraine. Still, estimates indicate that the second half of
the year will see a recovery, propped by the accelerated economic growth in China,
gradual balancing of the energy market in Europe, abated global uncertainties and
further resolution of bottlenecks in international supply chains.
Chart 1 Global inflation projection for 2023 and 2024 Chart 2 Global supply chain pressures and overseas
(in %)
container transport prices
(index,
(in USD)
show n in standard deviations)
12 12,000 5
2022 2023 2024 Global price of contrainer transport, LHS
9.9
GSPI, RHS
10 10,000 4
8.8
8.1
8
7.3 8,000 3
6.6
5.5
6
6,000 2
4.6
4.3
4
4,000 1
2.6
2
2,000 0
0
0 -1
Global inflation Advanced economies Emerging economies
2018 2019 2020 2021 2022 2023
Source: IMF.
Source: Federal Reserve Bank of New York, Freightos.
Inflation remains high in a number of countries, though it is slowly starting to
decelerate, primarily thanks to lower energy prices. Also, indicators of halts in
global supply chains and container transport costs have almost returned to their
pre-pandemic levels, therefore cost-push pressures generated on this account
are starting to dissipate. Yet, the indirect effects of elevated prices of energy and
industrial raw materials in the prior period, combined with a tight labour market, are
still affecting growth in core inflation in many countries. The ECB forecasts core
In addition, we
inflation above 2% throughout the entire projection horizon.
should bear in mind the fact that more robust growth in China would very likely drive
up the prices of energy and other primary commodities, thus rendering fight against
According to the IMF's latest estimate from January this
inflation more difficult. year,
global inflation will remain above the pre-pandemic level (the level from 2017-2019)
-
of around 3.5% not only this, but next year as well. Therefore, leading central banks
the Fed and the ECB, continue with monetary policy restrictiveness, making global
financial conditions tighter.
***
Chart 3 CPI movements in selected CESEE countries
(y-o-y rates, in %)
26
Hungary 24.8
Romania Poland Serbia
Czech Republic
24
24.5
22
20
18 16.4 16.6
15.8
15.1
16
14
14.5
13.3 11.5
12
10.1
10
8
6
4
2
0
1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112
2022 2022 2022 2022 2022
Headline inflation Core inflation Inflation target Tolerance band
Source: central banks of selected countries.
In the final quarter of 2022, y-o-y inflation measured around 15%, which is slightly
less than we expected in our November projection. Around two-thirds of this
continued to originate from food and energy prices. As in other countries, the
contribution of energy prices decreased over the past months, while that of food
prices went further up. In addition, y-o-y growth in producer and import prices
remained relatively high, though lower than in the previous quarter, spilling over to
core inflation at home, i.e. inflation excluding prices of food, energy, alcohol and
cigarettes. Still, thanks to the maintained relative stability of the exchange rate
in extremely uncertain global circumstances, core inflation continued to move
below headline inflation and measured 10.1% y-o-y in December.
Chart 4 Inflation projection
Chart 5 Movement in the key policy rate and average repo
(y-o-y rates, in %)
rate
(daily data, p.a., in %)
18
7.0
6.5
Key policy rate
16
6.0 Lending facilities rate
14
Deposit facilities rate
5.5
Average repo rate
12 5.0
4.5
10
4.0
8
3.5
6 3.0
2.5
4
2.0
2
1.5
1.0
0
0.5
-2
0.0
12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12
1 '20 5 '20 9 '20 1 '21 5 '21 9 '21 1 '22 5 '22 9 '22 1 '23
2020 2021 2022 2023 2024
Source: NBS.
Source: NBS.
When it comes to our expectations for the coming period, as I pointed out at the
beginning, the new inflation projection is lower than three months ago. Under the
February central projection, we expect y-o-y inflation to remain elevated in Q1 2023
as well, mostly due to the continued pass-through of high cost-push pressures from
the previous period onto prices of food and other industrial products, and to the
adjustment in electricity and gas prices. It is then expected to strike a downward
path and decline more sharply in the latter half of the year, with inflation at end-
2023 being two times lower than at the start of the year. Inflation is anticipated
to retreat within the bounds of the target tolerance band around mid-2024,
Inflation's decline
which is sooner than we expected in our previous projection.
should be supported by past monetary tightening, waning effects of global factors
driving energy and food price growth in the past period, a slowdown in imported
inflation, and subdued external demand amid the anticipated slackening of global
growth. The downward trajectory of food inflation, expected until the end of the
projection horizon, may possibly be moderated, though not jeopardised, by the
imperfect market structure on the supply side, i.e. the absence of any stronger
competition in this segment.
As global cost-push pressures remain robust despite signs of easing, we have
continued to raise the key policy rate. In this way, we influenced inflation
expectations and contained the second-round effects from elevated food and energy
prices on other prices. We also ensured that inflation should return within the target
band over the projection horizon. Our response was, however, more moderate than
before. Hence, after raising the key policy rate by 50 basis points in December, in
January and February we lifted it further by 25 basis points each, to 5.5% at
present.
At the same time, by maintaining the relative stability of the dinar exchange rate
against the euro, we have helped limit the effects of the pass-through of high import
prices to domestic prices and sustained macroeconomic stability in the conditions of
heightened global uncertainty. The dinar strengthened by 0.2% against the euro in
nominal terms in 2022. We intervened in the interbank foreign exchange market
by buying EUR 1 bn net to prevent excessive strengthening of the dinar, thereby
further boosting the country's
foreign exchange reserves to the highest level on
record. The level of foreign exchange reserves well exceeds the benchmark values of
all typically used reserve adequacy metrics, which indicates that they are an
important buffer against a wide range of potential risks from the international and
domestic environment. In particular, I wish to highlight that, in the current
circumstances of extreme uncertainty, when gold purchases by central banks globally
have climbed to an all-time high, we have increased our gold holdings in foreign
exchange reserves to 10.8%, which is well above the average for emerging
economies and close to that for advanced economies. One of our text boxes in this
Report deals with recent foreign exchange reserve trends worldwide, as well as the
reserve adequacy metrics, with special emphasis on Serbia.
Chart 6 Dinar exchange rate and NBS transactions in the FX Chart 7 Value and structure of NBS FX reserves
(in EUR mn)
market
(EUR/RSD)** (in EUR mn)
140 750 20,000
Securities
135
600
18,000
Foreign cash and deposits abroad
130
450
SDRs
125 16,000 Gold
300
120
150
14,000
115
0
110 12,000
-150
105
10,000
-300
100
-450
8,000
95
-600
90
6,000
-750
85
NBS transactions in the FX market, monthly (RHS)*
-900
80 4,000
EUR/RSD, monthly average (LHS)**
-1,050
75
2,000
70 -1,200
2010 2012 2014 2016 2018 2020 2022
0
Source: NBS. 2009 2011 2013 2015 2017 2019 2021
* + net purchase; - net sale.
** EUR 1 in RSD.
Source: NBS.
Monetary tightening passed through to dinar interest rates in the markets of money,
loans and savings, indicating the efficiency of the transmission mechanism through
ECB's continued monetary policy
the interest rate channel. The normalisation pushed
up the interest rates on euro-denominated loans at home. Lending activity rose by
7.3% at annual level, and continued to be led mostly by corporate loans. It is also
important to note that the share of NPLs in total loans fell to a new low of 3% in
December, indicating that the increase in loan repayment costs did not affect
the quality of banks' assets
and that financial stability has been preserved even
during the multidimensional crisis we have been facing for the past three years.
Chart 8 Lending activity to the non-monetary sector Chart 9 NPL level and share in total loans, gross principle
(in RSD bn) (in %)
(y-o-y growth rates in %, excluding the exchange rate effect)
Household sector
500 25
20
Corporate sector
Other sectors
NPL share in total loans (RHS)
15
400 20
10
300 15
5
0
200 10
-5
Households
Enterprises 100 5
Total
-10
-15 0 0
2010 2012 2014 2016 2018 2020 2022 2010 2012 2014 2016 2018 2020 Dec
2022
Source: NBS.
Source: NBS.
In making the decision on the key policy rate, we assessed that the current tightening
of monetary conditions would not have a major negative impact on domestic demand.
Factors at home, such as the continuation of positive trends in the labour market and
the success in attracting FDIs, continue to prop up economic growth. On the other
hand, economic activity at home slackened in H2 2022 as expected, reflecting
subdued external demand, heightened global cost-push pressures and drought which
resulted in lower agricultural yields. According to the preliminary SORS estimate,
Serbia's real GDP growth measured 0.4%
y-o-y in Q4 2022, and 2.3% in 2022 as a
whole, which is largely consistent with the NBS's November
projection.
Under our new projection, Serbia's GDP growth
rate this year will range between
2.0% and 3.0%, unchanged from our November expectations. The risks to the
projection are estimated to be less pronounced than three months ago, as the
uncertainty regarding gas supply to Europe has decreased and economic activity
indicators for the euro area at end-2022 and early this year turned out better than
expected. Assuming that the global economy and, by extension, external demand
recover as of the second half of 2023, and in view of the planned implementation of
investment projects, primarily in road, railway, energy and utility infrastructure,
we
expect GDP growth to accelerate from 2024 to the range of 3.0-4.0%, and return
to the pre-pandemic growth trajectory of around 4% p.a. thereafter.
Chart 10 GDP growth projection
Chart 11 Contributions to real GDP growth, expenditure side
(y-o-y rates, in %)
(in pp)
10
16
7.5
8
14
12
6
4.5
4.3
4.0
3.5
3.3
10
4 2.9
2.5
2.3
2.0 2.1
1.8
8
2
6
0
4
-0.7
-2
-0.9
-1.6
2
Change in inventories
-4 Net exports
0
Government consumption
Gross fixed capital formation
-6
-2
Household consumption
GDP (in %)
-4
-8
IV I II III IV I II III IV I II III IV I II III IV
2011 2013 2015 2017 2019 2021 2023* 2025*
2020 2021 2022 2023 2024
Sources: SORS and NBS.
Source: NBS.
* NBS estimate.
year's GDP
This growth will be led by domestic demand, primarily private
consumption and inventories. On account of lower production costs and reduced
global uncertainty, as well as relatively high planned government capital investment,
as of next year we also expect a relatively high contribution from fixed investment,
whose share in GDP should remain close to 23%. On the other hand, due to the
-
expectedly high imported quantity of key energy commodities gas and oil, and a
cautious approach to euro area growth, net exports are projected to provide a
negative contribution to GDP this year. As of 2024 their contribution is expected to
turn out mildly positive, consistent with the expected recovery of external demand
and the effects of new investment in export-oriented sectors.
The current account deficit amounted to 6.9% of GDP in 2022 and was by
around 2 pp lower compared to our November projection. The better than
anticipated outturn was primarily a result of lower than expected energy imports in
the last quarter thanks to a global energy price drop, faster real growth in goods and
services export and a higher surplus in the secondary income account. The current
account deficit was fully covered by net FDI inflows for the eighth year in a row,
supporting the sustainability of our external position. The record high FDI inflow
remained geographically and project-diversified in 2022 as well and channelled
mainly to tradable sectors. You can read more about balance of payment trends in
2022 and factors behind the better than expected outcome in one of our text boxes
and my colleagues will give a more elaborate presentation later on. As for the current
account deficit share in GDP, this year it is projected to remain similar as in 2022,
and to gradually decline to around 5% in the medium run. As in previous years, the
current account deficit this year will be largely covered by net FDI inflow.
Chart 12 FDI structure by sector
Chart 13 Current account projection
(in EUR bn) (in % of GDP)
Other
5.0
25
Construction and real estate Secondary income Primary income
4.4
4.5
Financial and insurance activities
Services Goods
20
3.9
Trade 3.8
Current account
4.0
Manufacturing
15
3.5
Thousands
Tradable goods sector
3.5
3.0
10
3.0
2.5
Total inflows:
5
2.5
2.1 2.1
0
2.0
1.5
1.5
-5
1.5
1.0
1.0
-10
0.5
-15
0.0
-20
-0.5
-25
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
2019 2020 2021 2022 2023* 2024* 2025*
Sources: SORS and NBS.
Sources: SORS and NBS.
* Industry, agriculture, transport, warehousing and catering.
* NBS projection.
A responsible fiscal policy plays an important role in the fight against external shocks
and high inflation. In 2022, the consolidated fiscal deficit came at 3.1% of GDP,
outperforming the expectations from the Revised Fiscal Strategy for 2023 with
Projections for 2024 and
2025, thanks to higher revenue and lower expenditure than
initially projected. According to the estimates of the Ministry of Finance, deficit share
should remain at a similar level this year, and turn downward thereafter, with public
debt being kept below 60% of GDP, which ensures the sustainability of public
finances.
Ladies and gentlemen, dear colleagues,
Given that the global growth outlook is more favourable than three months ago and
that global cost-push pressures are slackening, in our latest estimates, the risks to
inflation and GDP projections are symmetric and less pronounced, with the key risks
continuing to stem from factors in the international environment. Having this in mind,
apart from the baseline, this time we decided to present two additional projection
-
scenarios in the Report a downside one, but turning out so after a longer period,
and an upside scenario compared to the baseline, featuring lower inflation and higher
economic growth compared to the baseline.
Our successful coping with global turbulences and several intertwined crises over the
past years confirms that the Government and the NBS were able to respond to the
shocks we were facing and that the Serbian economy has become more resilient and
managed to adjust to the changed landscape.
There is no doubt that macroeconomic environment will remain challenging this year
too. The NBS will continue to monitor and analyse trends in the international
commodity and financial markets and to assess if further tightening of monetary
conditions is necessary and to what extent. We will also keep in mind that it takes
time for the effects of past monetary tightening to come to full fruition, in order to
ensure an optimal mix of all economic policy instruments, in such a way as to bring
inflation down and preserve price stability, while also ensuring the continuity of
economic growth.
In the remainder of the conference, we welcome your questions.