NATIONAL BANK OF SERBIA
Introductory speech
Inflation Report - November 2022
Jorgovanka
Dr Tabaković, Governor
Belgrade, 15 November 2022
Ladies and gentlemen, esteemed members of the press, dear colleagues,
Welcome to the presentation of the November Inflation Report.
As is our practice, during our presentation today we shall present our estimates of
economic developments in the international environment and at home, as well as our
latest macroeconomic projections for Serbia.
At the very start I would like to underline that the main difference between the
projections we present today and the projections from August pertains to the
materialisation of risks to which we pointed at the time, though hoping that it would
not occur.
The first risk that has materialised relates to developments in the international
environment. Geopolitical tensions have deepened further, the gas supply from
Russia to Europe has contracted by as much as 80% compared to the previous year,
global inflation continued on the upward path, and the degree of monetary policy
restrictiveness of many central banks has increased significantly. All of this has
- -
resulted in a less favourable global growth outlook and most importantly for us it
has reflected on growth in the euro area, our key economic partner.
Chart 1 Movement of benchmark prices of natural gas and
Chart 2 European gas imports
electricity for Europe (w eekly data, in million m3)
(end-of-quarter, in EUR/MWh)
10,000
400
Start of Ukraine conflict
Natural gas spot price, Dutch TTF hub
9,000
350
Electricity spot price, Germany Baseload*
Electricity spot price, Hungary Baseload 8,000
300
7,000
250
6,000
200
5,000
150
4,000
100
3,000
2,000
50
1,000
0
0
-50
1/2021 4/2021 7/2021 10/2021 1/2022 4/2022 7/2022
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Russia Norway Algeria LNG Other
Sources: Refinitiv and World Bank.
*As at 30/09/2022 electricity price w as 82 EUR/MWh.
Source: Bruegel.
Prices in the international environment are still the main generator of inflationary
pressures in Serbia. In the period since our previous Report, we have seen that
global inflationary pressures are stronger and more persistent than
anticipated, although almost all central banks tightened their monetary policies more
than expected, and energy prices decreased. Global inflation at such a high level has
- according to Eurostat's
not been recorded for decades preliminary flash estimates,
in the euro area in October it touched the historic maximum of 10.7%, with Germany
recording inflation of 11.6%. It would seem that the higher global inflation is largely
attributable to bigger than expected indirect effects of the prices of energy, primary
commodities and industrial and agricultural raw materials. In addition, inflation is
driven up by the still pronounced imbalances between supply and demand, higher
inflation expectations and pronounced uncertainty in commodity and financial
markets. To this we should also add the tight labour markets in many countries, as
well as the still relatively high transport costs and bottlenecks in global supply chains
which, though easing, still generate significant cost-push pressures. The leading
central banks and international institutions forecast that inflation will trend above the
long-term average and above the target level during 2023 and even 2024, while its
return to the usual inflation level across the world is expected in 2025.
Chart 3 Inflation forecasts for emerging market and Chart 4 Inflation forecasts for euro area
developing economiese
(y-o-y rates, in %)
(y-o-y rates, in %)
10
12
November 2022
Oct 2022
9 August 2022
11
July 2022
May 2022
Apr 2022
10 8
February 2022
Jan 2022
November 2021
9 Oct 2021
7
Аugust 2021
July 2021
8 May 2021
6
7
5
6
4
5
3
4
2
3
1
2
0
1
-1
0
2020 2021 2022 2023 2024
2020 2021 2022 2023
Sources: IMF, WEO.
Source: NBS calculation based on relevant institutions' projections..
High inflation has led to the tightening of global financial conditions not only
because of higher interest rates, but also due to the fall in asset prices and the
global financial
strengthening of the US dollar. According to Goldman Sachs'
conditions index, the availability of financial assets in the international market has
deteriorated and is at the same level as during the global economic crisis of 2009.
Following suit, the IMF estimated that financial conditions for the majority of countries
are already similar to the ones that prevailed in early 2009 or in the first phase of the
pandemic, in April 2020. Due to the worsening of financial conditions, emerging
countries' presence in the international financial market has almost halved, as has
the borrowing in hard currency during 2022 relative to the previous year.
Concurrently, financial conditions in the local currency have tightened. One of our
text boxes in the Inflation Report covers this issue and shows that financing
conditions have been tightened not only for Serbia, as some analysts and politicians
often want to interpret, but for all countries, especially emerging ones, including
-
Central European countries Hungary, the Czech Republic, Poland, Romania and
others. Efforts to ensure the best possible financing conditions for Serbia in the
coming period have driven us to request a Stand-By Arrangement with the IMF,
whose planned funds of around EUR 2.4 billion would provide additional support to
financing in the challenging international environment, as well as the implementation
of structural reforms, with a particular emphasis on the energy sector.
Chart 6 Yields on sovereign local currency bonds (roughly
Chart 5 Financial conditions in selected regions
(standard deviation from the mean)
10-year maturity)
(daily data, in %)
7
United States
12
Poland
Euro area
6
Emerging market economies, exc. China
Hungary
Europe, Middle East and Africa
Romania
10
5
Czech Republic
Serbia
4
8
Tightening
3
2
6
1
0 4
-1
2
Easing
-2
-3
0
2006 2008 2010 2012 2014 2016 2018 2020 2022
7/ 2021 10/ 2021 1/ 2022 4/ 2022 7/ 2022 10/ 2022
Source: IMF, Global Financial Stability Report, October 2022.
Source: Refinitiv, data for Serbia based on secondary trading.
The tightening of global financial conditions will result in lower global economic
growth. Global growth is already slowing almost everywhere, with concerns over the
effects of the energy crisis, as well as geopolitical tensions and the crisis in Ukraine.
Risks that the effects of the Ukraine crisis will spill over are still high, especially in
terms of gas delivery, which is primarily reflected on the euro area economic activity,
notably that of Germany, which is among our key trade partners and is forecast to go
into recession the next year.
Such headwinds in the international environment considerably affected our domestic
and the National Bank of Serbia's monetary policy
macroeconomic movements
decisions.
The second risk that has materialised since August to date pertains to the
agricultural season in Serbia and, certainly, the wider region. The drought in the
summer months and most likely the lower amount of used fertilisers than optimal,
which is a result of their prices going up several times, had a bigger adverse effect on
this year's agricultural season than
what we assumed in August. Back in August, we
assumed that this year's be similar to last year's, whereas
agricultural season would
now we estimate that it will be weaker than last year's by around 8%, and the
preliminary data of the Serbian Statistical Office on contracted output of wheat and
some autumn cultures substantiate our estimates. With the prices of mineral
fertilisers still trending very high, for the first time we have assumed that the next
season will also be below average.
Chart 7 Revisions of euro area GDP growth projections Chart 8 Global mineral fertiliser prices
for 2023
(in %) (end-of-quarter, in USD per tonne) (index, 2010=100)
1,000 250
2.5 TSP
Previous projection New projection
Urea
Potassium chloride
2.1
800 Price of fertilisers (rhs) 200
2.0
600 150
1.4
1.5
1.2
400 100
0.9
1.0
0.5
200 50
0.5
0.0
0 0
0.0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
IMF ECB Consensus Forecasts
Source: World Bank.
Source: Consensus Forecasts.
The materialisation of these risks, which we underlined in our previous reports,
reflects on our projections of key macroeconomic indicators for Serbia, which are
now closer to the alternative scenario from the August projection.
In the remainder of the conference, we will present our latest projections and the
underlying assumptions.
***
In the third quarter, inflation in Serbia moved in line with our expectations presented
in August. Almost two-thirds of the contribution to y-o-y inflation continues to come
from elevated food and energy prices. However, in our August projection we
expected inflation to peak in September this year. Still, due to the surge in global
energy prices in the past months and their continued spillover to imported inflation,
together with the effects of the drought at home and in most of Europe, domestic
inflation continued to climb past our expectations to 15.0% y-o-y in October, reflecting
the materialisation of the abovementioned risks. All central banks, including the NBS,
base their projections on similar assumptions of movement in the global prices of
energy and other primary commodities, relying on the assessments of relevant
international institutions and the movement in market futures for the coming period.
Since it is precisely the global prices of energy and primary commodities that
departed significantly up from what international institutions and futures expected
under the impact of several intertwined shocks during last and this year, inflation in all
countries proved to be stronger and more durable than anticipated. One of our text
boxes from the November Inflation Report deals with this matter and suggests that
the above factors have resulted in similar departures of inflation outturns from
inflation projections of other inflation-targeting central banks in the region, as well as
the European Central Bank.
Elevated imported inflation has also fuelled a rise in core inflation, i.e. inflation
excluding food, energy, alcohol and cigarette prices, which measured 9.5% y-o-y in
October. It is, however, important to note that core inflation remains well below
headline inflation, but also lower than core inflation in some countries of the region
pursuing the same monetary policy regime. A powerful deterrent of stronger core
inflation growth is the preserved relative stability of the dinar exchange rate even in
the conditions of globally heightened uncertainty in the international financial market.
Chart 9 CPI movements in selected CESEE countries
(y-o-y rates, in %)
22
20.7
Hungary
Romania Poland Serbia
Czech Republic
20
20.1
18.0
17.2
18
15.9
16
14.7
14.0
14
11.8
12
10.7
10
8.6
8
6
4
2
0
9 101112 1 2 3 4 5 6 7 8 9 9 101112 1 2 3 4 5 6 7 8 9 9 101112 1 2 3 4 5 6 7 8 9 9 101112 1 2 3 4 5 6 7 8 9 9 101112 1 2 3 4 5 6 7 8 9
2022 2022 2022 2022 2022
Headline inflation Core inflation Inflation target Tolerance band
Source: central banks.
Under the November medium-term projection, headline inflation will remain elevated
until late this and early next year, but it will strike a downward trajectory thereafter.
Inflation is expected to decline more sharply in the second half of 2023, and retreat
within the bounds of the target tolerance band in the second half of 2024. Inflationary
pressures will be soothed by past monetary policy tightening, anticipated waning of
the effects of global factors underpinning energy and food price growth in the past
period, and subdued external demand amid unfavourable global growth prospects.
Though they remain volatile and much higher than a year ago, the global prices of oil
and other primary commodities as well as industrial raw materials have been drifting
down over the past months in the face of stronger recessionary pressures worldwide,
while supply chain disruptions are easing as well. In September and October, the
global prices of natural gas, coal and electricity also subsided, helped by favourable
weather conditions and higher than anticipated storage levels in Europe.
Chart 10 Inflation projection
Chart 11 Movement in the key policy rate and average repo
(y-o-y rates, in %)
rate
(daily data, p.a., in %)
18
5.5
Key policy rate
5.0
16
Lending facilities rate
4.5
Deposit facilities rate
14
Average repo rate
4.0
12
3.5
10
3.0
8
2.5
6 2.0
1.5
4
1.0
2
0.5
0
0.0
9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9
1 '20 4 '20 7 '20 10 '20 1 '21 4 '21 7 '21 10 '21 1 '22 4 '22 7 '22 10 '22
2021 2022 2023 2024
Source: NBS.
Source: NBS.
Our decision to continue tightening monetary conditions at home was due to lingering
global cost-push pressures and the persistent rise in imported inflation. We have
been tightening monetary conditions continually but gradually since October last
year, taking into account the fact that inflation in Serbia is mostly determined by cost-
push pressures from the international environment, which are entirely or for the most
part beyond the influence of the NBS's monetary policy measures. Since April this
year, we raised the key policy rate by 350 basis points to 4.5%. Interest rates on
deposit and lending facilities were increased likewise to 3.5% and 5.5%, respectively.
By raising its interest rates further, the NBS is seeking to contain the second-round
effects of rising global food and energy prices on other prices in the domestic market
through inflation expectations, as well as to ensure that inflation strikes a downward
path and retreats within the bounds of the tolerance band until the end of the
projection horizon.
Chart 12 Dinar exchange rate and NBS transactions in the
Chart 13 Interest rates on new loans
(weighted average values, p.a., in %)
FX market
(EUR/RSD)** (in EUR mn)
26
NBS transactions in the FX market, monthly (RHS)*
140 750
24 Dinar household loans*
EUR/RSD, monthly average (LHS)**
135 600 Dinar corporate loans*
22
Key policy rate
130
450
20 Household loans in euro terms*
125
300
Corporate loans in euro terms*
18
120
EURIBOR 3M
150
16
115
0
14
110
-150
12
105
-300
100 10
-450
95 8
-600
90
-750
85
-900
80
-1,050
75
6420
70 -1,200
-2
2010 2012 2014 2016 2018 2020 2022
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: NBS.
* + net purchase; - net sale. Source: NBS and European Banking Federation.
** EUR 1 in RSD.
* Excluding revolving loans, current account overdraftsand credit card debt.
The NBS's monetary policy tightening has spilled over to interest rates in the markets
of money, loans and savings, confirming the efficiency of the monetary policy
transmission mechanism through the interest rate channel. The normalisation of the
ECB's monetary policy and the resulting rise in money market rates in the euro area
has reflected on higher interest rates on euro-denominated loans in the domestic
market.
By maintaining the relative stability of the dinar exchange rate against the euro, the
NBS has greatly helped contain the effects of the spillover of higher import prices to
prices at home in the conditions of elevated global uncertainty. In the year to end-
October, the dinar gained 0.2% against the euro in nominal terms. Since May to date,
the NBS intervened in the interbank FX market by buying EUR 2,705 mn, net. In that
way, we offset the entire amount of foreign exchange sold in the first several months.
As a result, since the start of the year, FX purchases exceeded FX sales by EUR 435
mn. Financial and overall macroeconomic stability is also underpinned by the NBS
FX reserves which stood at EUR 16.9 bn at end-October, their highest level to date,
despite a multidimensional global crisis. This created an additional buffer against the
external shocks to which we have been exposed for almost three years now.
Chart 15 NPL share in total loans, gross principle
Chart 14 Lending activity to the non-monetary sector
(in RSD bn) (in %)
(y-o-y growth rates in %, excluding the exchange rate effect)
500 25
20
15
400 20
10
300 15
5
200 10
0
-5
100 5
Enterprises
-10
Households
0 0
Total
2010 2012 2014 2016 2018 2020 Sept
-15
2022
Household sector
2010 2012 2014 2016 2018 2020 2022
Corporate sector
Other sectors
Source: NBS.
Source: NBS. NPL share in total loans (RHS)
Though the cost of borrowing has gone up, the approval of corporate and household
loans continued in Q3 at a similar pace as in previous quarters. The 11.7% y-o-y rise
in bank lending in September continued to be supported more by corporate loans,
which gained 14%, while household loans growth slowed to 8.3%. The share of NPLs
in total loans fell to a new record low of below 3.2%, 1 pp lower than before the
pandemic. Such developments indicate that bank asset quality has not deteriorated
even after the government economic support measures were unwound, and does not
pose an obstacle to further lending growth.
After posting relatively high growth of around 4.1% y-o-y in the first half of the year,
economic activity slowed down in Q3. According to the preliminary estimate of the
Serbia's
Serbian Statistical Office, third-quarter GDP growth equalled 1.1% y-o-y.
slowdown reflected this year's agricultural season which
The economic was much
worse than assumed judging by the first estimates, dented external demand and the
continued rise in corporate costs, weighing primarily on lower activity in construction
and manufacturing. Also, activity in the energy sector continued down due to low river
water levels. Taking into account the sharper than expected economic slowdown in
Q3, the Serbian GDP projection for 2022 was adjusted down relative to what we
expected in August, to the range 2.0-3.0%. As already pointed out, the growth rate
was revised in the light of the materialised risks we identified in August, i.e. the
interruption in Russia's gas
underperformance of the agricultural season and the
supply to the EU. In the new GDP projection, domestic demand is still expected to
provide a positive contribution, while the contribution of net exports will be negative
due to the high energy imports, primarily in the first half of the year. As economic
activity in the euro area and other countries which are our important trade partners is
expected to weaken notably next year, while the carry over effect from this year will
Serbia's GDP growth projection for 2023 to the
be smaller, we have also revised
range of 2.0-3.0%. Assuming a considerable reduction of geopolitical tensions and a
recovery of external demand, as well as the planned implementation of investment
projects, notably in road, railway, energy and utility infrastructure, economic growth is
expected to pick up as of 2024, first to around 3.5%, and then to return to its pre-
pandemic growth path of around 4% per annum in the medium term.
Chart 16 GDP growth projection
Chart 17 Contributions to real GDP growth, expenditure side
(y-o-y rates, in %)
(in pp)
16
10
14 7.5
8
12
6
4.5
4.3
10
3.5
3.3
4 2.9
2.5 2.5
8 2.0 2.1
1.8
2
6
0
4
-0.7
-2
-0.9
2
-1.6
Change in inventories
0 -4 Net exports
Government consumption
Gross fixed capital formation
-2 -6
Household consumption
GDP (in %)
-4
-8
III IV I II III IV I II III IV I II III IV I II III
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 current account deficit to GDP ratio is expected to measure around 9% both in
this and the next year. This year's higher current account deficit
mainly reflects
elevated energy imports, largely because of the price upswing in the global market.
On the other hand, though external demand slackened, goods and services exports
reached high growth rates (32.2% y-o-y during nine months), mostly owing to past
investments, which resulted in a positive contribution of all manufacturing and metal
ore export sectors, as well as owing to higher export prices. According to our
estimate, balance of payment trends next year are likely to reflect not only energy
imports which will certainly remain high, but also a contraction in external demand
due to the expected slowing of economic growth in our key trade partners. In the
medium term, a continued rise in export capacities, along with the expected wearing
off of negative effects of external demand and unfavourable terms of trade, should
contribute to a gradual decline in the current account deficit and preservation of
external sustainability. External sustainability will also benefit from the continued
relatively high inflow of FDI to Serbia, projected at around EUR 3.8 bn this year,
which is more than we previously anticipated. It is important to note that, according to
the first estimates, FDI inflow in the year to October reached almost EUR 3.5 bn,
exceeding the level from the same period of 2021, which was a record year in terms
of FDI. The FDI inflow remained geographically dispersed and mainly channelled to
tradeable sectors.
Chart 18 FDI structure by sector
Chart 19 Current account projection
(in EUR bn)
(in % of GDP)
Other
4.5
15
Construction and real estate
3.9
3.8
3.8
4.0 Financial and insurance activities
10
3.5
Trade
3.5
Manufacturing
Thousands
3.0
5
Tradable goods sector
3.0
2.5
0
Total inflows:
2.5
2.1
2.1
-5
2.0
1.5
1.5
1.5
-10
1.0
1.0
-15
0.5
-20
0.0
-25
-0.5
2019. 2020. 2021 2022.* 2023.* 2024.*
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Secondary income Primary income
Sources: SORS and NBS.
Sources: SORS and NBS.
Services Goods
* Industry, agriculture, transport, warehousing and catering.
* NBS projection. Current account
Ladies and gentlemen, dear colleagues,
Uncertainty surrounding the inflation and GDP projection we have just presented is
still largely associated with factors from the international environment, primarily the
impact of the Ukraine conflict on the availability and world prices of energy products,
as well as the global growth outlook, which will largely influence international prices
of primary commodities. At home, the risks to the projection are mainly associated
with the outcome of the next agricultural season, which we assumed to be below
average for the first time. The achievement of the projections will also depend on the
speed of recovery of the energy sector, FDI inflow and any additional measures the
Government might take in order to safeguard the living standard of the most
vulnerable population categories in the period ahead. Overall, the risks to the GDP
growth projection for this and the following year are judged to be pronounced, but
symmetric, while the risks to the inflation projection are also pronounced, but tilted to
the upside.
Depending on geopolitical developments and movement in key inflation factors both
from the domestic and international environment going forward, the NBS will estimate
if there is a need to tighten monetary conditions further and to what degree, taking
into account the effects of past monetary policy tightening and the time needed for
NBS's
these effects to play out fully. The monetary policy priority will remain to
deliver price and financial stability in the medium term, since in that way it also
contributes to sustainable economic growth, and, by extension, to a further rise in
employment and favourable investment environment. We believe that sound
macroeconomic fundamentals and ample FX reserves will help us counter the effects
of the current energy crisis and globally tightened financial conditions. We also hope
that, thanks to the responsible conduct of economic policy, the risk of a prolonged
inflation, such as the one the world faced during the previous energy crisis of the
1970s, will be avoided, though the current energy shock is probably even stronger.
In the remainder of the conference we welcome your questions.