Radovan Jelašić: Development of the municipal bond market in Serbia
Speech by Mr Radovan Jelašić, Governor of the National Bank of Serbia, at NALED -
National Alliance for Local Economic Development, Belgrade, 13 May 2009.
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It gives me great pleasure to welcome you all on behalf of the National Bank of Serbia.
We in the National Bank have long been advocating the development of bond markets by not
only the government and local government bodies, but by other issuers as well. It is the crisis
period that shows best that bankcentric systems - elsewhere and in Europe, but more
poignantly in Serbia where banks account for over 90% of the financial sector - face
significant challenges, such as: a) how to refinance loans due for repayment, b) how to
obtain fresh capital in the market, and c) how to preserve public trust in the banking system.
Of course, one should also think in terms of catering for the needs of our clients since a bank
is not an end in itself but represents a transmission mechanism between those who save and
those who need the money.
Inefficacy of the banking sector necessarily affects the overall economy, and bank debtors
are no exception. Allow me to illustrate this idea by the following example: Even if the
European Central Bank cuts its policy rate (which, at the moment, measures 1.0% only), that
does not necessarily mean that banks will automatically have access to cheaper funding
especially if the risk premium for banks is increased. Bank clients would in such a situation
have two options: a) to take more expensive loans from banks, or b) to bypass banks
altogether and borrow directly in the capital market by issuing own securities.
As the NBS is also entrusted with the supervision of insurance companies and voluntary
pension funds, urgent development of the securities market, including securities issued by
local government bodies, is of our utmost interest. Such development is also in the interest of
commercial banks since securities operations are a typical segment of investment banking
operations - issuing securities without undertaking credit risk. For that particular reason, the
NBS is of the opinion that amid numerous projects and proposals relating to the development
of the capital market, it is high time a concrete project was finally undertaken.
Some of the major prerequisites for the successful implementation of such a project are as
follows:
1. Local government bodies should have their own sources of income instead of
relying on the "transfer of funds" which can be received exclusively from state
bodies; the laws need to be amended as "states will be states" and our government
can easily change its stance at one time or another, i.e. the amount of money it
decides to transfer to local government bodies;
2. Local government bodies should have stable sources of income and not depend on
the current supply-demand situation. However, the sources of income are specified
by the state and governed by its legislation. For example: "remuneration for building
plot development" would bring RSD 13.8 billion versus "income tax" which would
bring RSD 2.7 billion into the state coffers so the state needs to amend its laws and
local government bodies to specify a different source of income as their main source
of revenue;
3. Audited annual financial reports - transparency of operations - within the sole
authority of the city;
4. Efficient market of government securities should be within the sole authority of the
state.
But let me to prove to you that this issue is equally important to the NBS as it is to the local
government bodies by saying that the NBS shall take all necessary measures within its
sphere of competence to achieve maximum results to this effect. Potential investors in these
securities, i.e. voluntary pension funds and insurance companies have been eagerly awaiting
the placement of such securities on the market.
And money is plentiful! RSD 91 billion has been invested by banks in NBS securities and
RSD 22.4 billion in government bonds. Hence, it is not always necessary to think in terms of
borrowing in foreign financial markets as we are awash with dinar liquidity which could be
invested in high quality dinar securities at market interest rates. But before we can set up and
develop the market and begin investing in securities, everybody concerned needs to do their
homework and do it well.
Thank you for your attention!