NATIONAL BANK OF SERBIA
Governor's opening remarks at the presentation of
the Inflation Report - May 2017
Dr Jorgovanka Tabaković, Governor
Belgrade, 19 May 2017
Ladies and gentlemen, dear colleagues,
Welcome to the presentation of the May Inflation Report. As always, we will give an overview of the
current monetary and macroeconomic developments and our expectations for this and the following
year.
Inflation within the target tolerance band
First, I would like to underline that since the beginning of 2017, inflation has moved within the
bounds of the new, lower target tolerance band. We anticipated that inflation would move within
the target tolerance band this year and announced this trend at presentations of the Inflation Report
last year as well as at the previous, February presentation. As in other countries, inflation in this
period was affected by the recovery in global oil prices in the latter half of 2016 as was expected;
however, adverse weather conditions early this year resulted in a higher than expected increase in
the prices of fruit, vegetables and firewood. That this is an impact of one-off factors on inflation is
suggested by low and relatively stable core inflation, which hovered at around 2% year-on-year.
According to our latest projection, over the two-year horizon covered by the projection we expect
inflation to move within the bounds of the target tolerance band of 3±1.5%.
You will hear a more detailed elaboration on the projection of inflation and its factors later on in the
conference. I would like to take a look at developments in the international environment which for
quite a while have posed a challenge to Serbia, as well as to all small and open economies, which is
why it is important that we preserve macroeconomic stability and improve our business ambience.
In the prior period, the international environment was marked by uncertainty - uncertainty
regarding the pace of global recovery, uncertainty regarding the character of monetary policies of
the leading central banks and uncertainty in terms of movements in the prices of primary
commodities, notably oil.
The uncertainty in the international financial market originates primarily from the diverging
monetary policies pursued by the Fed and the European Central Bank. Taking stock of the US
economy, the Fed continued to raise its fed funds rate in 2017. By contrast, the European Central
Bank's decision to extend the quantitative easing programme at least until the end of 2017 will
mitigate the negative effects of the Fed's monetary policy normalisation. These decisions affect not
only their economies, but also global markets and capital flows to emerging economies, which in turn
inevitably affects the pace of Serbia's trade growth and financial cooperation with the rest of the
world.
The recovery in the global market of primary commodities is largely attributable to the favourable
outlook for global economic growth which is gaining speed and showing signs of sustainability,
whereas volatile prices of these commodities are under the impact of specific factors - from weather
conditions, through compliance with agreements of oil producers to geopolitical tensions.
It appears that the uncertainty on this account will persist in the period ahead. However, the results
we achieve and anticipate when it comes to the narrowing in internal and external imbalances and
implementation of structural reforms will determine the extent to which this uncertainty will reflect
on us. Therefore I would like to particularly emphasise that owing to reduced macroeconomic
imbalances Serbia is now much more resilient to potential adverse impacts from the international
environment.
Lower fiscal deficit and stronger external position are our response to external shocks
Thanks to consolidation, the fiscal deficit was reduced to 1.3% of GDP in 2016, while positive
movements continue into the current year. I wish to remind you that in the first quarter, the general
government recorded a surplus of 1.2% of GDP, and the share of public debt in GDP was reduced
further. At the same time, the current account deficit was reduced further in 2016 to 4.0% of GDP
and was fully covered by foreign direct investment, which is likely to continue in the coming period.
This is helpful for strengthening the country's external position, thereby increasing our resilience to
external shocks.
The National Bank of Serbia's contribution to faster and sustainable economic growth and increase
in employment will continue through price stability and relative stability of the exchange rate, with
lower costs of private sector financing
A key fact regarding economic growth is that the current account deficit was reduced owing to
outstanding export results of the Serbian economy, which was also facilitated by the activation of
earlier investment and the recovery of external demand. Also, greater product and geographical
diversification of exports reduces the dependence on developments in individual markets and in turn
makes Serbia's exports and economic growth sustainable. The sustainability of growth is also
confirmed by positive financial results of the economy over the past two years, which the National
Bank of Serbia supported by ensuring price stability and relative stability of the exchange rate, with
lower costs of private sector financing. Such results, coupled with further improvement in the
business and investment ambience and continued structural reforms, create conditions conducive to
faster economic growth. This year we expect GDP growth to step up to around 3% and then further
up to 3.5% the following year, supported by continued favourable movements in the labour market.
Reduction in interest expenses and negative exchange rate differences - factor of the economy's
success
Based on data of the Business Registers Agency, in 2016 the financial result of our economy
improved by over RSD 360 bln compared to 2014.1 In the same period, as a result of monetary policy
easing by the National Bank of Serbia, a reduction in the country risk premium (resulting from more
favourable macroeconomic performances of our economy) and monetary accommodation by the
1
The difference between the net loss of RSD 131.8 bln in 2014 and net gain of RSD 229.3 bln in 2016. Net gain
of RSD 67.2 bln was achieved in 2015.
European Central Bank, interest expenses declined from RSD 145 bln in 2014 to RSD 99.3 bln in 2016.
This means that the corporate sector paid to creditors RSD 45.8 bln less in 2016 than in 2014. At the
same time, owing to the stability of the dinar, which is the result of successful implementation of
macroeconomic policies, and thus the National Bank of Serbia's policy as well, negative exchange
rate differences fell by RSD 157.6 bln - from RSD 246.3 bln in 2014 to RSD 88.8 bln in 2016. In total,
in respect of both these factors, the income statement of the corporate sector improved by RSD
203.4 bln in 2016 relative to 2014.
Given that the corporate sector has interest-bearing receivables, calculating positive exchange rate
differences on FX receivables, the effect of savings in these two items on the profitability of the
corporate sector equals RSD 148.4 bln in this period.
This makes us satisfied not only because of the volume of savings, but primarily because of the fact
that this opens room for the corporate sector to engage in its regular business activities and to plan
its development in more predictable circumstances. Of course, we are satisfied also because this
confirms the soundness of the National Bank of Serbia's policy and gives us an incentive to continue
with its implementation.
Ladies and gentlemen, dear colleagues,
Serbia's improved macroeconomic outlook and the results achieved in terms of the narrowing in
internal imbalances and implementation of structural reforms have for quite some time been
positively assessed by international financial institutions and rating agencies. Let me remind you that
recently - in March to be precise - Moody's raised Serbia's credit rating. During the assessment, the
agency took into account all of the results achieved in terms of reducing imbalances and achieving
macroeconomic stabilisation, as well as the results of implementation of the dinarisation strategy
and the resolution of non-performing loans. The risk premium, which since the start of the year has
fallen in Serbia more than in the neighbouring countries, touching its ten-year low, also reflects the
growing confidence in the Serbian economy.
In addition, the projections of key macroeconomic indicators for Serbia prepared by relevant
institutions run close to our forecasts. They also assess that inflation will move within the target
tolerance band both this and the next year, and expect further acceleration of GDP growth similar to
our projections.
All the above factors indicate that our economy is now much more capable to respond to challenges
- which is an additional incentive to us to preserve the stability we have ensured and to continue
with structural reforms and improvements in the investment ambience.
You may rest assured that the National Bank of Serbia will continue to closely monitor and assess the
developments and tendencies in the domestic market and the international environment. As so far,
we will continue to apply all available instruments in order to maintain low and stable inflation in the
medium run, which, combined with the preservation of financial stability, will contribute to economic
growth on sustainable grounds.
Thank you for your attention. I now give the floor to my colleagues.