Speech at the presentation of
the Annual Financial Stability Report for 2017
Dr Jorgovanka Tabaković, Governor
Belgrade, 30 July 2018
Ladies and gentlemen, members of the press and dear colleagues,
Welcome to the presentation of the Annual Financial Stability Report for 2017. Today we have the
pleasure to present a report about a year marked by exceptionally positive developments, in Serbia
and the international environment alike, as well as by the results we have achieved. Owing to this,
financial stability has not only been maintained, but also reinforced, which is reflected in a financial
system that is to a large degree resilient to any potential future shocks.
Global economic growth stepped up in 2017, which reflected positively on the growth prospects of
Central, Eastern and South-Eastern European countries and pushed their risk premiums down. On the
other hand, risks in the international commodity and financial markets persisted, primarily those
associated with volatile movements in global oil prices and divergent monetary policies of the ECB
and Fed.
Thanks to improved structural characteristics and favourable growth prospects, coupled with the
enactment of well-timed measures and regulations and full coordination between monetary and fiscal
policies, Serbia is now more resilient to potentially adverse effects from the international
environment. This was confirmed in 2017 by credit rating upgrades by all three rating agencies,
successful completion of the three-year stand-by arrangement with the International Monetary Fund
and a decline in the country risk premium to its historic low.
The National Bank of Serbia remained cautious in the conduct of monetary policy in 2017 due to
uncertainties in the international financial and commodity markets. As inflationary pressures were
running low, the key policy rate was cut by 0.25 pp on two occasions, feeding through into lower cost
of borrowing for the government, corporate and household sectors. Favourable interest rates are one
of the key drivers of credit growth, which means that by easing its monetary policy the National Bank
of Serbia encouraged the increase in investment and private consumption and supported sustainable
economic growth.
In 2017 the National Bank of Serbia achieved its key objectives - it ensured monetary and financial
stability. Throughout the year inflation was low and stable, moving within the new target band, which
was lowered from 4%±1.5 pp to 3%±1.5 pp as of early 2017. The fact that inflation stood at the 3.0%
target in December only confirms that the decision to lower the inflation target was correct. At the
same time, inflation expectations of the financial and corporate sectors have been anchored within the
target band for quite some time already, indicating confidence in the National Bank of Serbia's
monetary policy.
Owing to better export performance, high FDI inflows and greater interest of foreign investors in
long-term government securities, the dinar strengthened vis-à-vis the euro by 4.2% in 2017. The
central bank's interventions in the foreign exchange market aimed at preventing excessive
appreciation of the dinar provided an additional boost to the country's foreign exchange reserves,
whose level, judging by all relevant indicators, is more than adequate.
Last year was also very successful in terms of fiscal policy results. For the first time since 2005 a
fiscal surplus was recorded (around 1.2% of GDP), while the share of public debt in GDP was slashed
by more than 10 pp in 2017 alone. NBS's monetary policy easing, better positioning of the country in
the international financial market, stronger investor confidence, credit rating upgrades and a sharp fall
in the country risk premium ensure cheaper sources of funding and reinforce Serbia's fiscal position.
Against the backdrop of GDP recovery, low and stable inflation, a relatively stable exchange rate and
vigorous fiscal consolidation, positive tendencies were recorded both in the corporate and household
sectors. A fall in the unemployment rate and rising wages were accompanied with growth in
household loans and rising savings. The volume of new household loans increased by 21.7%
compared to 2016, with almost 71% concerning dinar loans, which reflects households' confidence in
the domestic currency. Households were also offered a new form of safe investment after the
Republic of Serbia issued a new financial instrument - savings bonds. The issuance of savings bonds
enables citizens to invest in the safest financing instruments and encourages further development of
the government securities market.
The financial position of corporates improved, as reflected in their almost two and a half times higher
positive net financial result compared to 2016. In addition, the lowering of interest rates led to
acceleration of credit activity in the corporate sector. Excluding the exchange rate effect, total
corporate loans (domestic and foreign) went up by 5.7%, despite considerable clean-ups of bank
balance sheets owing to NPL write-offs, assignment and restructuring.
The Serbian financial sector remained stable in 2017 as well, as signalled by all key indicators. Given
the bank-centric nature of the financial sector, banks' financial soundness and ability to perform their
main, financial intermediation function is key to maintaining financial stability. Banks operating in
Serbia rely predominantly on domestic, stable sources of funding, which reduces their exposure to
risks from the international environment. The banking sector remained adequately capitalised, highly
liquid and profitable in 2017. Our quarterly macroprudential stress tests show that the domestic
banking sector, as a whole, would remain resilient to shocks even if the worst-case scenario
materialised.
I wish to particularly highlight the exceptional results achieved in reducing NPLs owing to measures
undertaken in the context of the NPL Resolution Strategy and other regulatory measures of the
National Bank of Serbia. After the National Bank of Serbia passed the Decision on the Accounting
Write-off of Bank Balance Sheet Assets in August 2017, gross NPLs worth RSD 100 bn were written
off in 2017, much more than in the earlier years, while RSD 24.5 bn was assigned to non-banking
sector entities. The NPL share in total loans declined sharply, by almost 14 pp from the start of
implementation of the Strategy. In May 2018, this share stood at 8.6%, meaning that NPLs fell below
their pre-crisis level. Such a significant reduction in NPLs is indicative of considerable efforts
invested in their resolution and the success achieved. It also reflects the great commitment of the
National Bank of Serbia, Government and market participants. At the same time, this will further
support future credit and economic activity.
In 2017, the National Bank of Serbia also adopted a set of regulations transposing the International
Financial Reporting Standard 9. These regulations reflect the National Bank of Serbia's commitment
to encouraging adequate implementation of international standards, increasing the transparency of
financial reports in terms of the manner of valuation of balance sheet items, and strengthening
confidence in the banks' financial position.
By regulating the banking area in the way it is done in the European Union and upgrading the
regulatory framework, the National Bank of Serbia strengthened further the already high resilience of
the banking sector. In accordance with the Strategy for Implementation of Basel III Standards in the
Republic of Serbia, in December 2016 a set of regulations were adopted, in effect as of 30 June 2017.
Among other things, Basel III standards introduce new capital buffers, which are some of the most
important macroprudential policy tools. This helps increase the quality of capital and improve the
resilience of the domestic banking sector to systemic risks, contributing to the preservation and
strengthening of financial stability in the Republic of Serbia.
Ladies and gentlemen, members of the press and dear colleagues,
Behind us is a very successful year, as we can see in the results achieved, as well as in attained and
improved macroeconomic stability. As so far, the National Bank of Serbia will remain committed to
achieving its objectives, contributing to the resilience and stability of the domestic financial system.
Thank you for your attention. I now pass the floor to Vice Governor Diana Dragutinović.