NATIONAL BANK OF SERBIA
Introductory speech at the presentation of the
Inflation Report - August 2021
Dr Jorgovanka Tabaković, Governor
Belgrade, 18 August 2021
Ladies and gentlemen, esteemed members of the press, dear colleagues,
Allow me to bid you welcome to the live presentation of the August Inflation Report after more than
a year, with a sincere wish that in the coming period we continue to hold press conferences in this
manner.
Apart from monetary policy decisions and our estimates about inflation movements, one of the
spotlight topics in the world, I believe that the fact that we have revised our most important
macroeconomic projections will be of special interest and importance to you. I am sure that you all
know very well that when the National Bank of Serbia revises its projections and communicates that
to the public, such revisions are always based on serious and detailed analyses and firm arguments.
This is the reason why we stand before you today, in a good mood and ready to answer any
questions you may have.
Though the risks emanating from the international environment still persist, the Serbian economy
continues to grow, even faster than initially expected. Such movements were largely supported by a
comprehensive package of measures adopted already at the start of the pandemic. I have
emphasized that publicly several times before and I will do so again - timely and well-calibrated
measures of monetary and fiscal policies minimised the economic consequences of the pandemic,
accelerating the recovery of our economy. We reacted timely and adequately, and that way, at the
time of greatest uncertainty, we prevented the spillover of the pandemic-induced crisis on the fall in
business and consumer confidence. At the same time, we managed to preserve the labour market
and production capacities of the economy. Illustrative of this is the fact that we ended the year 2020
with one of the best economic results in Europe, and this year we expect to maintain the leading
economic performance.
Chart 2 GDP growth projection
Chart 1
Revisions of Serbia's GDP growth projections for
(y-o-y rates, in %)
2021 and the medium term
(in %)
16
7
6.5
6.0
12
6
5 8
4.5
4.0
4
4
3
0
2
-4
1
-8
0
II III IV I II III IV I II III IV I II III IV I II
2021 Medium term
2019 2020 2021 2022
Old projection New projection
Source: NBS. Source: NBS.
The pre-crisis GDP level was exceeded already in Q1 - one quarter earlier compared to the initial
estimates, and the recovery extended in Q2, when GDP rose 13.4% in y-o-y terms. Such outcome
reflects in part the low base, but also favourable trends since mid-last year. Based on the indicators
in the first six months and the expected movements in the key sectors of the Serbian economy by
the end of the year, we revised our economic growth projection for 2021 upward, from 6.0% to
6.5%. As always, we remain cautious, having accounted for all the risks associated with the further
course of the pandemic. We incorporated in our projection the possibility of a new pandemic wave in
autumn, but if such wave turns out to be milder and without any major consequences on the
economy, our growth this year could even exceed the projected 6.5%.
At the same time, starting from the analysis of planned capital projects in road, railway, energy and
utility infrastructure in the next ten years and their direct and indirect effects on other parts of the
economy, we revised the medium-term economic growth projection - from 4% to the range of 4-
5%. The central projection of GDP growth over the medium term now stands at 4.5%, while overall
risks to the projection are judged to be symmetric.
According to our new projection, taking into account the estimated effects of planned infrastructure
projects, the share of construction in GDP in the medium term, instead of the previously expected
6%, should reach around 7%, and this sector's growth should positively reflect on growth in industry,
trade, transport, tourism, catering, as well as the sectors of finance and real estate. At the same time,
the share of total fixed investment in nominal GDP in the next few years should reach and go beyond
26%, hovering at high levels for a longer period thereafter. The improved quality of infrastructure will
positively reflect on the productivity of the overall economy and continued strong inflow of FDIs,
thus creating conditions for the sustainability of the projected growth in the medium term.
Chart 3
Share of construction in nominal GDP (new and Chart 4
Share of investment in nominal GDP
(in %)
previous projection)
(in %)
27 26.4
8.0
26.2
26.0
26.0
7.4
7.3 26
7.5 7.2 7.2
24.8
6.8 25
7.0
24.2
6.4
24
6.5
24.2 24.2
24.1
23.8
23.6
23 22.5
23.5
6.0
5.7
6.1
5.3 22 21.5
22.5
5.5
5.7
21
21.5
5.3
5.0
20.0
Previous projection
4.5
Previous projection
20
4.5
New projection
20.0
New projection
4.5
19
4.0
2018 2019 2020 2021 * 2022 * 2023 * 2024 * 2025 * 2026 *
2018 2019 2020 2021 * 2022 * 2023 * 2024 * 2025 * 2026 *
Sources: SORS and NBS calculation
Sources: SORS and NBS calculation
* NBS estimate.
* NBS estimate.
High economic growth rates are also recorded by some advanced countries - some European
countries, but above all the United States and China, whose rising demand brings many specificities,
but also leaves consequences on the movement of prices and other macroeconomic indicators
globally.
Expectedly, the faster global economic recovery reflected on inflation movements in almost all
countries. The news on the invention and distribution of the vaccine spurred optimism as to the
global economic recovery, leading to a sudden rise in demand, to which the supply could not adjust
in the short term, given the still present restrictions and halts in global supply chains. This led to a
sudden hike in the global oil price, as well as in the prices of primary agricultural commodities, metals
and different materials used in industry and construction. As a consequence, inflation rose to 5.4% in
the United States, to 6.5% in Russia, to 2.2% in the euro area, while in Germany y-o-y inflation
climbed to 3.8% in July, its highest level in almost three decades.
Chart 5 Chart 6
Primary Commodity Price Index CPI for selected countries
(2010 = 100) (y-o-y rates, in %)
160
6
Non-Energy Price Index
5.4
Agriculture
140
5
Energy*
Metals and minerals**
120
4 3.8
3
100
2.2
2
1.9
80
1
60
Germany
0
USA
40
Euro area*
-1
Italy
20
-2
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: World Bank.
Source: Eurostat, FED, Destatis, Istat
* Crude oil, natural gas and coal.
*HICP
** Copper, aluminium, iron ore, lead, nickel, zinc and tin.
Speaking of Serbia, despite the fact that some market segments have witnessed price increases,
mostly as a consequence of the globally rising cost-push pressures, headline inflation continues to
move around the target midpoint. Though higher than early in the year, inflation in Serbia is lower
than in the majority of countries of the region running the same monetary policy regime. This is
primarily owed to the preserved exchange rate stability and anchored inflation expectations of the
financial and corporate sectors.
Chart 7 CPI movements in selected CESEE countries in the previous year
(y-o-y rates, in %)
6
5,0
5,0
5
4,6
3,8
4
3,5
3,4
3,3
3,0
3,5
3
2
1,9
1
Romania Hungary Czech Republic Poland Serbia
0
8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6
2020 2021 2020 2021 2020 2021 2020 2021 2020 2021
Inflation target Tolerance band Inflation Core inflation
Sources: Central banks of selected countries.
After reaching 3.6% in May, partly also due to the low base effect from May last year, y-o-y inflation
slowed down over the following two months, consistent with NBS expectations, and measured 3.3%.
Chart 8
Inflation projection
(y-o-y rates, in %)
7
6
5
4
3
2
1
0
-1
-2
6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6
2019 2020 2021 2022
Source: NBS.
Certain deviations from our expectations have been recorded only in unprocessed food prices, which
have been higher than seasonally expected over the past few months. The absence of higher
inflationary pressures on the demand side, i.e. our estimate that inflation is driven by temporary
factors, is also confirmed by the core inflation which has continued to move around 2% over the
last few months. Тhis indicates that in Serbia, unlike in some other countries of the region, no
significant pressures are stemming from domestic factors.
Speaking of inflation in Serbia going forward, according to our projection, y-o-y inflation will
remain within the bounds of the National Bank of Serbia's target (3±1.5%) throughout the whole
projection horizon, moving in the upper half of the target band most probably until the end of the
current year and in the first quarter of the next year. Its decline is expected as of the second quarter
of 2022, so that from the second half of next year, until the end of the projection horizon, inflation
should again move in the lower part of the band, i.e. from 1.5% to 3%.
By estimating the current higher inflation as temporary and taking into account the fact that inflation
projection over the monetary policy horizon, i.e. one-year ahead, is below the target midpoint, the
NBS, unlike some central banks in the region, did not raise its key policy rate and continued to
pursue an accommodative monetary policy stance. Thus, we remained an equal partner to the
Serbian Government in encouraging economic growth and providing support to corporates and
Chart 9 Policy rates across selected countries
Chart 10 Interest rates on new dinar loans and deposits
(p.a., in %)
(w eighted average values, p.a., in %)
4
24
3
Household loans*
Corporate loans*
20
Key policy rate
2
16
1.3
1.2
1 12
1.0
0.5
8.4
8
0.1
0
4
3.2
-1
1.0
2018 2019 2020 2021
0
5
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Czech Republic Poland Hungary Serbia Romania
Source: NBS.
* Excluding revolving loans, current account overdrafts and credit card debt.
Sources: Central banks of selected countries.
households through favourable financial conditions.
In the period since the previous Report, the key policy rate was kept at 1%, which is its lowest level
in the inflation targeting regime and also 1.25 pp lower than pre-pandemic. Thanks to the effects of
past monetary policy easing, borrowing conditions in the domestic market remained favourable,
which continued to encourage lending, with further growth in the share of dinar in total loans. The
rising lending activity is indicated by the amount of new loans to corporates and households which,
during the six months of this year, stood at the level from the same period in 2019, while relative to
the first half of 2020, it was higher by a quarter.
Since the start of the year, the Serbian economy also saw a significant improvement in external
imbalances. After it went down by more than a third last year, the current account deficit began to
decline since the start of 2021 and equalled only 1.8% of GDP in the first half of the year. A
contribution to this came from almost all key components of the current account, with the export of
goods and services particularly standing out. After last year's reduction of only 4.9%, we expect the
goods and services export to increase by more than 20% this year, whereby it would reach the
level of around EUR 27 bn. Aware of such movements, the NBS revised its current account deficit
projection for this year from 4.6% to 4.0% of GDP, though the result achieved in the first half of this
year indicates that the outcome might be even better.
Chart 11
Current account
Chart 12
Current account deficit and net FDI inflow
(in EUR mn)
(in % of GDP)
3,000
8
7.8
7.4
2,000
1,974.9
7
1,525.0
6.2
1,000 6.2
6.9
817.4
6
482.9
0
5.3 5.3
5.2
5.1
5
-1,000 5.2
4.8
-2,520.3
-2,603.0 4
-2,000
4.3 4.3
4.0
-703.9
-3,000 -692.2
3.5
3
2.9
Deficit: - EUR 1.3 bn Deficit: - EUR 432 mn
-4,000
2
January - June January - June
2015 2016 2017 2018 2019 2020 2021* 2022*
2020 2021
Goods Services
CAD
Source: NBS.
Primary income Secondary income
Source: NBS. Net FDI
* NBS projection.
Current account
At the same time, a strong inflow of FDI continued. In the first six months, it equalled EUR 1.73 bn,
and if we add the operational data for July and the first ten days of August, FDI inflow since the start
of the year equalled EUR 2.2 bn. For the sake of comparison with the previous year, FDI inflow in the
first seven months is 30% higher, which confirms that intensive inflow of investments from abroad
has continued.
FX reserves, which are also the result of overall balance of payment movements and constitute an
important element of the domestic economy's resilience to external shocks, increased even during
the pandemic year of 2020. Since the start of 2021, we have been faced with prevailing upward
pressures on the dinar, which we mitigated through interventions in the interbank FX market by
purchasing foreign exchange, whereby we further increased FX reserves. At end-July, their level was
a record high EUR 14.6 bn and it covered more than six months' worth of goods and services import,
which is double the standard that determines the adequacy of FX reserves. Of this, EUR 1.8 bn
pertains to 36.7 tonnes of gold in our vaults. And I underline - in our vaults - because over the past
months we managed to bring the last amounts of gold from abroad to Serbia.
Chart 14
Chart 13 Dinar exchange rate and NBS transactions in the
FX reserves
(in EUR bn ) FX market
(EUR/RSD)** (in EUR mn)
16
NBS transactions in the FX market, monthly (RHS)*
14.6
140 800
EUR/RSD, monthly average (LHS)**
135 700
14
12.2
130 600
12
125 500
120 400
10
115 300
110 200
8
105 100
100
6
95 0-100
4 90 -200
85 -300
2
80 -400
75 -500
0
70 -600
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 July
2009 2011 2013 2015 2017 2019 2021
2021
Source: NBS.
Gross FX reserves Net FX reserves
* + net purchase; - net sale.
Source: NBS.
** EUR 1 in RSD.
Developments more favourable than anticipated were also recorded in public finance, where the
fiscal deficit in the first half of the year, amid a high increase in tax revenues, was significantly lower
than projected and measured 1.4% of GDP. Such result leaves room for growth in government capital
investments which increased by almost 15% in the first six months, while their projected annual level
could exceed 7% of GDP. In addition, such movements in the budget show that it is quite certain that
public debt will remain below the Maastricht criterion of 60%, as noted by international institutions
and rating agencies.
Chart 15
General government public debt Chart 16
Yield curve in the secondary government securities
(in % of GDP)
market
(average values, p.a., in %)
80
4.0
3.7
70
71.2 3.5
68.7 60
3.5
67.5
60
3.3
60.0
59.3
58.6
58.2 3.0
57.5 57.6
55.5
54.6
50 54.4
52.9
2.5
40
2.0
30
1.5
20
1.0
Decembеr 2020
10
Jun 2021
0.5
July 2021
0
2012 2014 2016 2018 2020 2022* 2024*
0.0
1 2 3 4 5 6 7 8 9 10 11 12
General government public debt Maastricht public debt criterion
Remaining maturity (in years)
Source: Ministry of Finance.
Source: Central Securities Depository and Clearing House.
* Projection from the Fiscal Strategy for 2022 w ith Projections for 2023 and 2024.
That Serbia's image is perceived as positive in the international environment is also indicated by the
fact that our years-long work to include dinar government bonds in the renowned J.P. Morgan
index has produced results and our dinar bonds were included in this index on 30 June. What does
this mean specifically for our country and our citizens? After the inclusion in this index, thanks to the
expansion of the base of foreign investors investing in dinar government bonds, the yields on seven,
ten and twelve-year dinar bonds of the Republic of Serbia in the secondary market declined during
July by around 30 bp. On this account, going forward we can expect an additional decline of the costs
of public debt servicing and, in turn, lower costs of private sector borrowing.
Lastly, I would like to stress that in the past period we also remained successful in the achievement
of our second objective - financial stability. By ensuring dinar and FX liquidity in a timely manner,
trimming the key policy rate and introducing a moratorium, we simultaneously contributed to the
preservation of favourable financial conditions for corporates and households and their higher
disposable income, as well as to the preservation of all financial stability indicators. Not only that the
share of NPLs in total loans did not increase during the pandemic, it went down further and currently
stands at 3.6%. At the same time, thanks to price and financial stability, the basis of which is also
made up of the relative stability of the exchange rate, we have maintained confidence in the
domestic financial system, as attested by dinar savings of households, which have been posting new
records month after month, and have exceeded RSD 100 bn, whereby we provide an additional
contribution to the dinarisation process in Serbia.
Chart 17
NPL share in total loans, gross principle Chart 18
Dinar savings
(in RSD bn) (in %) (in RSD bn)
500 25
120
21.5 21.6
21.4
19.0
18.6
400 20
100
17.0
16.9 100.5
15.7
93.1
80
300 15
79.6
9.9
60
61.1
200 10
51.1
50.2
5.7
40 46.0
4.1
3.7 38.6
3.6
100 5
34.0
20
19.7
17.9
13.8
0 0 12.5
2009 2011 2013 2015 2017 2019 June 0
2009 2011 2013 2015 2017 2019 July
2021
Household sector Corporate sector 2021
Other sectors NPL share in total loans (RHS)
Source: NBS.
Source: NBS.
***************************************************
Ladies and gentlemen from the press, dear colleagues,
Allow me to conclude today's speech with the following words - everything in terms of Serbia's
economy that we have achieved in the years leading up to the pandemic - price, financial and fiscal
stability, increased efficiency of monetary policy, anchored inflation expectations, narrowed external
imbalance, economic diversification, a robust inflow of investments and increase in FX reserves - all
of this has given us room to mount a more successful response to economic consequences of the
pandemic than we had been able during previous crises. The fight with the pandemic is not over yet,
and it is certain that we are headed into another wave, but the end is slowly coming into sight. Our
monetary policy priority in the coming period will certainly remain the same - the safeguarding of
the achieved price and financial stability, with support to faster economic growth and creation of a
favourable investment climate. As so far, we will continue to carefully monitor factors at home and
abroad, and their potential impact on inflation, the banking system and further pace of economic
growth, and if needed, we will adjust our measures in the interest of our citizens and corporates.