NATIONAL BANK OF SERBIA
Introductory speech
Inflation Report - May 2023
Željko Jović, Vice
Dr Governor
Belgrade, 17 May 2023
Ladies and gentlemen, esteemed members of the press, dear colleagues,
Welcome to the presentation of the May Inflation Report, where we shall present
current macroeconomic developments, our new macroeconomic projections and 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.
-
First, the data on y-o-y inflation in Serbia measuring 15.1% in April confirm
that inflation peak is behind us and that the monetary policy measures
undertaken so far have yielded results. We are past the peak of not only
headline but also core inflation. That our measures are yielding results is
indicated also by the stabilised one-year ahead inflation expectations, as well as
by medium-term inflation expectations of the financial sector that are kept within
the bounds of the target. Our view of future inflation path has not changed since
February. In the coming months, inflation should continue down, ending the year
Inflation's return within
twice lower than what it measured in Q1. the bounds of
3±1.5% target is still expected in mid-2024.
-
Second, despite a somewhat weaker result in Q1, we have not changed the
projected GDP growth rate for this year, of 2.0-3.0%. The main reasons are
foreign trade movements outperforming all expectations and the continued high
inflow of FDI. The structure of projected growth is somewhat different and
more favourable from the aspect of growth sustainability. We now expect a
positive contribution of net exports and a positive contribution of private
investment, which was not the case in our February projection.
-
Third, owing to the already mentioned robust improvement in the foreign
trade balance and a higher surplus in services trade, the overall balance of
payments trends since the start of this year turned out much more
favourable than expected. The current account deficit, seasonally peaking in
Q1, this time reached only 0.7% of GDP. The current account deficit contracted
owing to the lower imports of energy, primarily gas, and also the sustained high
growth rate of goods and services exports, thanks to the effects of past
investment and the recovery of production in the energy sector. Considering a
much lower than expected current account deficit in Q1, we now project its share
in GDP this year at around 4.5% p.a., which is more favourable than our
February expectations. We also deem there is a great probability that this share
might turn out even lower.
-
Further, the preserved and strengthened stability of the domestic banking
sector, confirmed by the high capital adequacy of 20.5% and an NPL ratio
brought down to a new historical low of 3% at end-March, indicate that, in
our case, there is no trade-off between price and financial stability. In other
words, our measures account for the fact that Serbian inflation is mainly driven by
supply-side shocks from the international environment and are calibrated so that
the cost of loan repayment does not affect the quality of bank assets and NPL
growth, while still containing an excessive expansion of loan demand.
-
Finally, and perhaps most importantly,
we have demonstrated high resilience
to the shocks of a multidimensional crisis we have been facing for more
than three years, as frequently underlined by all relevant international
Тhis
institutions and rating agencies. is confirmed by the movement of key
macroeconomic indicators. Apart from the record-high FDI inflow of close to 7%
of GDP annually, continuing into this year as well, the most important indicators
of our resilience are also high and production-diversified growth in goods and
services exports, which despite reduced external demand reached EUR 38 bn
last year and will likely exceed EUR 42 bn this year. The resilience is also
confirmed by the ensured public finance sustainability and the record level of FX
reserves of EUR 21.6 bn in April. This is a result of the responsible economic
policy of the Serbian Government and the National Bank of Serbia, full
coordination of monetary and fiscal policies and the implemented structural
reforms.
In the remainder of the conference we will present detailed macroeconomic trends
and our new projections.
***
As so far, we will begin by introducing international developments, as they largely
determine both domestic macroeconomic movements and our monetary policy
decisions.
Although the optimism prevailing early in the year regarding more favourable global
growth prospects and the possibility of faster containing of global inflation somewhat
dissipated after the recent problems in banking groups in advanced world economies,
the risks can still be assessed as less pronounced than last year. The mentioned
problems in international banking sectors resulted in a mild downward revision to
global economic growth for this year, to 2.8% as estimated by the International
Monetary Fund. Speaking of risks, it is important to note that they are much lower
regarding energy supply to Europe, with the concurrent easing of global cost-push
pressures, resolving of disruptions in global supply chains and the lowering of the
risks of a global recession. Apart from this, the growth outlook of the euro area, our
most important trade partner, improved since the last Report, primarily due to the
demonstrated higher resilience to the energy crisis than expected. According to the
Consensus Economics estimate from April, euro area economic growth for this year
is projected at 0.7%. This assumption is embedded also in our new projection and
represents an upward revision relative to the stagnation anticipated in the February
projection. A faster than initially expected growth in the euro area should also reflect
positively on our exports and private investment.
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)
12,000 5
12
2022 2023 2024 Global price of contrainer transport, LHS
9.8
4
10 GSPI, RHS
10,000
8.7
8.6
8.4
3
8
7.3
7.0 8,000
6.5
2
6 5.3
4.9
4.7 6,000
1
4
2.9
2.6
4,000
0
2
2,000
-1
0
Global inflation Advanced Euro Area Emerging and
economies developing 0 -2
economies
2018 2019 2020 2021 2022 2023
Source: IMF.
Source: Federal Reserve Bank of New York, Freightos.
A further decline in world gas and electricity prices and the unwinding of supply
bottlenecks resulted in headline inflation's slowdown
from multi-decade highs in an
increasing number of countries. However, it is still early for central banks to
announce a final victory over inflation, as the indirect effects of elevated prices of
energy and industrial raw materials in the past period, coupled with a strong labour
market, are still driving up core inflation in a number of countries, including the euro
area. For this reason, both the European Central Bank and the Fed continued to
raise their policy rates, tightening global financial conditions. The pace of policy rate
hikes is gradually decreasing, however, and central banks assess that future
decisions will be data-dependent. Most countries do not expect inflation to return
within the target band before 2025. In the context of the impact of imported inflation
on inflation in Serbia, it is important to note that it is stronger than the euro area
inflation figure indicates, because even within the euro area, there is a certain degree
of divergence, with inflation higher precisely in those countries with which we have
-
the strongest ties Germany and Italy. Inflation is also high in non-euro area EU
countries which are our important trade partners as well, such as Hungary, the Czech
Republic and Romania.
Chart 3 CPI movements in selected CESEE countries
(y-o-y rates, in %)
24.8
Hungary
26 Poland
Romania Czech Republic Serbia
24
24.0
22
20
18
15.1
16 14.7
14.0
12.7
14
12.2
11.1
12
11.2
10
10.0
8
6
4
2
0
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 1 2 3 4
'22 2023 '22 2023 '22 2023 '22 2023 '22 2023
Headline inflation Core inflation Inflation target Tolerance band
Source: central banks of selected countries.
***
Y-o-y inflation in Serbia edged down to 15.1% in April, which is consistent with our
expectations. Core inflation also slowed to 11.1%. The contribution to headline
inflation's decline came from all its key components, but mostly from food and energy
as the main drivers of inflation in the past months. Close to two-thirds of the
contribution to inflation still comes from food and energy prices, as the indirect effects
of elevated production costs and high energy prices from the past period still persist.
The completion of their pass-through, the anticipated further slide in primary
commodity prices and easing of global cost-push pressures ought to support the
continuation of the disinflation process.
With this in mind, we estimate that inflation will continue on a downward path
until the end of the projection horizon, fall more sharply in the second half of
the year and return within the bounds of the target band in mid-2024, the same
Inflation's decline will be supported
as we expected in our February projection.
also by the past tightening of monetary conditions, slowing of imported inflation and
lower external demand amid the expected global growth slowdown.
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
8.0
7.5
Key policy rate
16
7.0
Lending facilities rate
6.5
14 Deposit facilities rate
6.0 Average repo rate
12
5.5
5.0
10
4.5
8
4.0
3.5
6
3.0
4
2.5
2.0
2
1.5
1.0
0
0.5
-2
0.0
3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3
1 '20 5 '20 9 '20 1 '21 5 '21 9 '21 1 '22 5 '22 9 '22 1 '23 5 '23
2021 2022 2023 2024 2025
Source: NBS. Source: NBS.
At its March and April meetings, the NBS lifted further its key policy rate, to 6.00%.
The aim was to contain the second-round effects of elevated cost-push pressures
from the international environment in the past period on rising prices at home through
inflation expectations, and to support inflation's return within the target tolerance
band by mid-2024. Given that global cost-push pressures have abated further, at the
meeting in May, we decided to keep the policy rate on hold. The NBS retains the
option to increase the rate further, but also signals room for a further increase in the
weighted average repo rate up to the level of the key policy rate, owing to the flexible
monetary policy framework in place since December 2012.
At the same time, by maintaining the relative stability of the exchange rate of the
dinar against the euro, the NBS helps preserve high business and investment
confidence, contains the effects of the spillover of rising imported prices onto prices
at home, and contributes to overall macroeconomic stability amid elevated global
uncertainty. Appreciation pressures, which have been recorded since May last year
and were briefly interrupted in January, have prevailed again as a result of favourable
foreign trade movements and high inflow of FDIs, prompting the NBS to intervene in
the IFEM by buying over EUR 1 bn net in the first four months. The NBS FX reserves
hit a new record high of EUR 21.6 bn in late April, which is well above benchmark
values of all reserve adequacy metrics. At such level, FX reserves are an important
buffer against a wide range of risks which may come from the international
environment.
Chart 7 Value and structure of NBS FX reserves
Chart 6 Dinar exchange rate and NBS transactions in the FX
(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
16,000 Gold
125
300
120
150 14,000
115
0
12,000
110
-150
105
10,000
-300
100
-450
8,000
95
-600
90
6,000
-750
85
NBS transactions in the FX market, monthly (RHS)*
4,000
-900
80
EUR/RSD, monthly average (LHS)**
-1,050
75
2,000
70 -1,200
0
2011 2013 2015 2017 2019 2021 2023
2009. 2011. 2013. 2015. 2017. 2019. 2021.
Source: NBS.
* + net purchase; - net sale.
** EUR 1 in RSD. Source: NBS.
monetary tightening
The NBS's drove interest rates in the interbank money market
further up and induced a rise in rates on dinar loans, indicating the efficiency of the
transmission mechanism through the interest rate channel. Interest rates on euro-
denominated loans also went up as financing conditions in the euro area were
tightened further. Lending to the non-monetary sector continued to slow to 3.7% y-o-y
in March, partly as a result of the maturing of guarantee scheme loans. It is important
to note that the share of NPLs in total loans fell to a new low of 3%, indicating
that the increase in loan repayment costs did not affect the quality of bank
assets and that financial stability has been preserved even during the
multidimensional crisis we have faced in 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
2011 2013 2015 2017 2019 2021 2023 2011 2013 2015 2017 2019 2021 March
2023
Source: NBS.
Source: NBS.
The NBS's gradual approach to hitherto monetary policy tightening reflects the fact
factors so far and the NBS's
that inflation has been led mainly by supply-side
intention to affect economic activity to the least extent possible, while at the same
time leaving room for its further growth.
According to the initial SORS estimates, GDP rose by 0.7% y-o-y in Q1, guided by
activity growth in the industry sector, primarily thanks to a rebound in electric energy
system production. A positive contribution also came from the service sectors, though
it was lower than in 2022. GDP growth is estimated to speed up in the remainder of
the year, on account of expected acceleration of activity in the euro area and our
other important trade partners.
As I highlighted at the beginning, GDP is expected to grow by 2.0% to 3.0% this
year, the same as expected in February, but its growth structure is more
As euro area's growth
favourable in terms of sustainability than in February.
projection for this year has been revised up and foreign trade movements in Q1 were
much more favourable than anticipated, we now expect net export to provide a
positive, instead of a negative contribution. Growth will continue to be led by
domestic demand, notably private consumption, thanks to rising employment and
wages, but private investment is also expected to make a slight positive contribution
(instead of neutral). Total fixed investment will thus maintain its pre-crisis share in
GDP of close to 23%. Assuming a rebound of the global economy and, by extension,
external demand as of H2 2023, and the planned implementation of investment
projects, mostly in road, railway, energy and utility infrastructure, we expect GDP
growth to pick up as of 2024 to the range of 3.0-4.0% and resume its pre-pandemic
growth trajectory of around 4% per annum 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
2.1
2.0
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 %)
-8
-4
2011 2013 2015 2017 2019 2021 2023* 2025*
I II III IV I II III IV I II III IV I II III IV I
2021 2022 2023 2024 2025
Sources: SORS and NBS.
Source: NBS. * NBS estimate.
The current account deficit in Q1 measured a mere EUR 112 mn or 0.7% of
GDP, down by over EUR 1.4 bn from the same period in 2022. Such outturn was
supported by lower energy imports, largely because of reduced global energy prices,
but also by continued growth in goods and services export at high nominal and real
rates. Almost all key manufacturing branches recorded export growth (with the
exception of production of oil, chemicals and chemical products, and base metals),
confirming our economy's resilience to weaker external demand. In addition, Serbia
was a net exporter of electricity in Q1, which had previously not been the case in this
part of the year, thanks to a rebound in production and a mild winter. Since the first-
quarter current account deficit was much lower than expected, we now project the
annual share of the current account deficit in GDP this year to be considerably lower
as well, measuring 4.5%. It will then continue to decline gradually to around 4% in the
medium term, reflecting higher export supply on account of earlier investment and the
rebound of external demand. Based on preliminary data, in the first four months FDI
inflow amounted to EUR 1,259 mn, up by 66% y-o-y. According to our estimate, net
FDI inflow will continue to fully cover the current account deficit, as in the past eight
years, contributing to sustainability of our external position. We expect FDIs to remain
highly geographically and project-diversified and mostly directed to tradable sectors.
Chart 12 FDI structure by sector
Chart 13 Current account projection
(in EUR bn) (in % of GDP)
6 25
Secondary income Primary income
Services Goods
4.4 20
5
4.0 Current account
3.9 3.9 3.9
3.8
15
Thousands
3.5
4 3.0
10
Укупни приливи:
2.5
2.1 5
2.1
3
1.5
1.5
0
2 1.0
-5
1
-10
-15
-1
2012 2014 2016 2018 2020 2022 2024**
-20
Sources: SORS and NBS. Other
-25
Construction and real estate
* Industry, agriculture, transport and
Financial and insurance activities
2019 2020 2021 2022 2023* 2024* 2025*
w arehousing, catering, mining, electricity
Trade
supply. Sources: SORS and NBS.
Manufacturing
** NBS projection.
Tradable goods sector
* NBS projection.
Responsible fiscal policy plays an important role in ensuring price stability and
sustainable economic growth. Fiscal policy in Serbia has been planned so as to
ensure a continued narrowing of the fiscal deficit and a downward public debt
trajectory in the medium run, while maintaining government capital investment
at around 6-7% of GDP and without generating further inflationary pressures.
This should be supported by the adoption of new fiscal rules, applied since early this
year, limiting the share of public sector wages and pensions in GDP to around 10%.
A lower than anticipated general government deficit in 2022 and sound fiscal
-
performance that continued into Q1 2023 with a primary balance surplus of RSD 23
-
bn enable stronger growth in government capital expenditures and ensure a
decline in public debt that is even faster than forecast by the Revised Fiscal Strategy
for 2023 with Projections for 2024 and 2025.
Ladies and gentlemen, dear colleagues,
There is no doubt that the multidimensional crisis we have faced for more than three
years now is probably the most turbulent period in recent world economic history,
with strong scarring effects on the global economy. Still, it should be emphasised that
our economy has so far demonstrated exceptional resilience to the unfavourable
developments, with negative effects reduced to a minimum. As the main risks to
inflation and other economic movements continue to emanate from the international
environment, the NBS will continue to monitor and analyse trends in the international
commodity and financial markets and estimate their effect on our economy. Monetary
policy decisions will depend on the incoming data about the key inflation factors from
the domestic and international environment, taking into account the effects of past
monetary tightening and the time needed for them to play out fully.
Finally, I wish to underscore that the NBS will remain committed to ensuring the
welfare of the country as a whole, by guiding inflation's return within the target band
and leaving as much room as possible for economic growth, a rise in employment
and the standard of living of all our citizens.