NATIONAL BANK OF SERBIA
Governor's opening remarks at the presentation of
the Inflation Report - August 2017
Dr Jorgovanka Tabaković, Governor
Belgrade, 16 August 2017
Ladies and gentlemen, dear colleagues,
Welcome to the presentation of the August Inflation Report. As always, we will give you an overview
of monetary and macroeconomic trends for the period since the previous Report and set out our
expectations for 2017 and 2018. However, before we move on to this, allow me to briefly venture
outside the usual timeframe covered by this Report and look back at the results which the National
Bank of Serbia achieved in the past five years, that is, in the period since my appointment as
Governor. This period is long enough to allow us to take stock of what we have accomplished and of
the challenges that are still ahead of us.
The presence of strong challenges emanating from the international environment, which heightened
uncertainties in all markets, did not work in our favour, but also did not prevent us from achieving
and maintaining price and financial stability in the five years behind us.
I would like to use this opportunity to highlight some of our key achievements as well as their
significance for all of us.
Inflation has been low, stable and predictable for four years in a row.
From nearly 13% in autumn 2012, inflation was brought down to 2.2% in less than one year. After
that, we have kept it at a low level. Low inflationary pressures from 2013 onwards were partly
attributable to low cost-push pressures from the international environment; however, they are
mostly a result of the effects of domestic factors - relative stability of the exchange rate, more
anchored inflation expectations and the effects of fiscal consolidation. With the price stability it has
achieved, Serbia is now comparable to other European countries - since the start of the year,
inflation has moved within the new, lower target tolerance band and measured 3.2% y-o-y in July.
Core inflation moved at around 2% during the year and equalled 1.7% y-o-y in July. This is also a
confirmation of the adequacy of the monetary policy that we conducted in the prior period, as well
as of the legitimacy of our decision to lower the inflation target by 1 percentage point to 3±1.5%.
According to our latest projection, we expect inflation to remain within the new, lower target
tolerance band for the following two years.
Chart 1 Price movements Chart 2 One-year ahead inflation expectations
(y-o-y rates, in %) (y-o-y rates, in %)
Consumer prices (CPI) 20
18
CPI excluding energy, food, alcohol and cigarettes
Corporate sector
Targeted inflation
Financial sector - Ninamedia
16
Target tolerance band
Financial sector - Bloomberg
Targeted inflation
14
15
Target tolerance band
12
10
10
8
6
5
4
2
0 0
1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5
1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5
2009 2010 2011 2012 2013 2014 2015 2016 2017 2011 2012 2013 2014 2015 2016 2017
Source: SORS and NBS calculation. Source: Gallup, Ipsos/Ninamedia, Bloomberg and NBS.
Over the past four years, interest rates on corporate, household and government borrowing have
decreased considerably. This is reflected in higher disposable income, a rise in lending and
economic activity and more successful fiscal consolidation.
Inflation was first lowered and then maintained at a low level, thereby enabling significant monetary
policy easing through the key policy rate, which we initiated in May 2013. By July 2016, through 17
iterations, the key policy rate was lowered by a total of 7.75 percentage points to 4%. Owing to this,
interest rates on new dinar loans to corporates and households were lowered during the past four
years by more than 10 percentage points.
Within four years, interest rates on euro-indexed loans were also decreased - by 3.5 percentage
points for corporates and 3.8 percentage points for households. The decline was partly a result of
lower interest rates in the euro money market and partly attributable to the country's lower risk
premium and interbank competition. Our efforts to create a more stable business environment, as
well as the significant fall in the country's risk premium and Serbia's improved credit rating, were the
dominant factors leading to the lowering of interest rates on euro-indexed loans and the greater
availability of cross-border borrowing at lower costs.
The fall in rates on private sector borrowing provided an impetus to the rise in disposable income on
account of lower interest rates on current and new loans, with the possibility of refinancing under
more favourable terms.
Chart 4 Interest rates in the primary market of government
Chart 3
Interest rates on new dinar and euro-indexed loans to
securities
corporates and households*
(p.a., in %)
(3m moving averages, in %)
16
3M 6M
24 12
14
12M 2Y*
20 3Y 5Y
10 12
7Y
16
10
8
8
12
6
6
8
Dinar household loans (lhs)
4 4
4 Dinar corporate loans (lhs)
Euro-indexed household loans** (rhs)
Euroindexed corporate loans** (rhs)
2
0 2
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4
2011 2012 2013 2014 2015 2016 2017
2011 2012 2013 2014 2015 2016 2017
Source: Ministry of Finance.
Source: NBS.
* Excluding coupon securities with the rate linked to the NBS key policy rate.
* Excluding revolving loans, current account overdrafts and credit card debt.
Fiscal policy was also immensely helpful in preserving price and financial stability, however, it caused
some feedback effect as well. As monetary policy was eased, interest rates on dinar government
bonds were lowered by more than 7 percentage points, depending on maturity. This significantly
lowered the costs of dinar government borrowing, which, together with a more favourable economic
environment and in conditions of low inflation and a relatively stable exchange rate of the dinar to
the euro, rendered fiscal consolidation more successful.
Lower interest rates meant lower costs for everyone - the corporate sector, citizens and the
government.
Significantly lower interest rates, accelerated economic activity and labour market recovery led to a
rise in loan demand. On this account, lending recorded positive y-o-y growth rates since the second
half of 2015, despite the maturing of considerable amounts of subsidised loans and increased efforts
of banks to resolve the issue of non-performing loans. Since the start of 2015, new investment loans
were approved at a significantly faster pace, their total volume over the past two years equalling the
level of total new investment loans in the four years before that. Investment loans were one of the
sources for funding investment in the new investment cycle, thereby contributing to a pick-up in
economic growth. During 2017, the y-o-y rise in loans accelerated and arrived at 4.5% in June, or
6.7% excluding the effect of NPL write-offs.
In the prior period, financial stability has been preserved, the share of NPLs in total loans dropped
significantly and the regulatory framework has been improved.
Owing to the appropriate combination of measures of monetary and fiscal policies, Serbia arrived at
a more favourable macroeconomic position which, coupled with the NBS's regulatory policy, also
contributed to the stability of the financial system - our system is more stable than before!
One of the key results in this area is the resolution of NPLs, an issue that accompanied Serbia into the
financial crisis, after which it only deepened further. To resolve the NPL issue in a systemic way, in
cooperation with the Government, the NBS prepared the NPL Resolution Strategy and the
accompanying Action Plans, and adopted them in August 2015. The NBS carried out all the activities
within the deadline set by its Action Plan and, as a result, since the adoption of the Strategy - which
means within a period of less than two years - the NPL share has decreased by close to 7
percentage points. Moreover, corporate NPLs are now at their lowest level in nine years.
Chart 6
Chart 5 Capitalisation of the Serbian banking sector
Share of NPLs in total loans, gross principle
(in %)
(in %)
24
30 Corporate
22.4
Households 22
20.3
Total
20
25
18
20 16
14
15 12
10
10 8
6
Balance sheet capital vs. balance sheet assets
5 Strategy 4 CAR
implementation Regulatory minimum
2
Basel standard
0
0
I III I III I III I III I III I III I III I III I I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II
2009 2010 2011 2012 2013 2014 2015 2016 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: NBS. Source: NBS.
As a result of numerous measures and activities that were undertaken in the area of macro and
microprudential policy, the Serbian banking sector features a high degree of capitalisation and
liquidity, which are above regulatory requirements, and resilience to various macroeconomic shocks.
High capital adequacy has been confirmed by special diagnostic studies of the quality of banks' assets
which, until then, had never been conducted in the domestic banking system. The stability of the
sector is further substantiated by the fact that banks operating in Serbia mostly rely on domestic
sources of funding, which increased in the previous period. This reduces banks' exposure to risks
stemming from the international environment, as well as to the risk of sudden withdrawal of funds
by the parent bank, which was one of the challenges countries in the region faced during the crisis.
Additional contribution to the sector's stability came from our strategic commitment to continuously
improve the legal framework, in accordance with international standards and EU regulations, taking
into account the specificities of the domestic market. Let me remind you that we have composed and
adopted a set of secondary legislation introducing Basel III in Serbia as one of the important reforms
aligning Serbia's regulatory framework in this area almost entirely with the applicable framework in
EU countries.
Since August 2012, we have ensured the relative stability of the exchange rate, which is one of the
factors of overall stability.
The international environment in the prior period was marked by uncertainty arising from the
diverging monetary policies of leading central banks, but also from the so-called Greek crisis, the
Asian stock market crisis, shifting outlooks for global and Chinese growth, the effects of Brexit,
geopolitical tensions, etc. To these challenges we responded adequately, owing to greater
resilience of the Serbian economy and the financial system, cautious monetary policy, as well as
interventions in the foreign exchange market which were timely, fine-tuned and well-balanced in
terms of the reaction to short-term pressures towards both the depreciation and appreciation of
the dinar. Expressed in numbers, in the last five years until July, the NBS intervened in the foreign
exchange market by net selling EUR 765 million, with the nominal depreciation of the dinar against
the euro of 1.5%. This is significantly less than the net sale of EUR 5.7 billion in the five years before
that, when the nominal depreciation of the dinar was 33.2%.
Bracing for the coming pressures by preparing a defence system at peaceful times and investing in
stability during turmoil, the country's gross foreign exchange reserves were preserved at an
adequate level, measured by all criteria, while in net terms, they increased from EUR 6.6 billion at
end-2012 to EUR 8.4 billion at end-2016.
Chart 7 Dinar exchange rate
Chart 8 Level of foreign exchange reserves
(in EUR bn)
(EUR/RSD) (in %)
15
NBS foreign exchange reserves, gross
140 25
NBS foreign exchange reserves, net
Period
130
20
1.1.2008 - 6.8.2012 12
120
12.1
15
11.2
Period 10.9
110
10.6
9
9.9 10.4
10.2
6.8.2012 until today*
10.0
100 10
8.2
6
90
5
80
3
0
70
5.9 6.5 5.1 6.7 6.6 7.8 7.7 8.4 8.4
60 -5
0
1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 6
2008 2009 2010 2011 2012 2013 2014 2015 2016
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
EUR/RSD (LHS)
Source: NBS.
Exchange rate daily volatility (RHS)
Source: NBS.
*As at 31/07/2017.
Confidence in the dinar is also returning slowly, as evidenced by the rising degree of dinarisation.
Macroeconomic stabilisation, significantly lower dinar loan rates and measures promoting saving and
borrowing in dinars provided a contribution to the increase in the degree of dinarisation.
Consequently, the share of dinar loans of households rose from 35% at end-2012 to almost 50%,
where it now stands, while at the same time the share of dinar deposits in total deposits also rose
from less than 20% to around 30%. As of last year, banks introduced dinar housing loans approved at
interest rates below 5% and for the period of up to 30 years. Last year, a top-rated international
financial organisation issued the first dinar securities and the proceeds were used for dinar lending.
Bearing in mind how deep the roots of euroisation go, we are aware that dinarisation will be a
gradual process, but the important thing is that it has begun and that it will remain one of our
strategic priorities.
Chart 9 Chart 10 Share of dinar in total bank receivables from
Dinar share in total bank deposits of corporates and
households corporate and household sectors
(in %) (in %)
60
18 60
Household sector, stock (LHS)
Household sector
Corporate sector, stock (RHS)
Corporate sector
50
16 55
Total dinar receivables
14 50 40
12 45
30
10 40
20
8 35
10
6 30
0
1 3579111 3579111 3579111 3579111 3579111 3579111 3579111 35
I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II
2010 2011 2012 2013 2014 2015 2016 2017
2010 2011 2012 2013 2014 2015 2016 2017
Source: NBS.
Source: NBS.
The business and investment environment is more stable.
Over the past five years, the NBS managed to achieve and maintain price and financial stability,
thereby meeting its statutory objectives and contributing to the creation of a more encouraging
business environment, a fall in the risk premium to its lowest level and improvement in the country's
credit rating, progress on the Doing Business list and prospects for the coming period. The practical
Chart 11 Chart 12 Financial result of the corporate sector
Current account deficit and FDI
(in RSD bn)
(in % of GDP)
25
500
Exchange rate losses
CAD FDI, net
Interest expenses
400
20 Financial result of the corporate sector
300
15
200
9.9
2.4
10
100
6.7
7.4
5.5
3.8 5.4
4.8
4.5
0
3.8 3.7
5
-100
21.2 6.6 6.8 10.9 11.6 6.1 6.0 4.7 4.0 4.0 3.8
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* 2018*
-200
2014 2015 2016
Source: NBS
* NBS projection. Source: Business Registers Agency.
importance of this is substantiated by the inflow of foreign direct investment, which measured 5.5%
of GDP in each of the past two years, and was more than sufficient to cover the current account
deficit. Moreover, better business results, supported by lower costs of corporate borrowing and
relative stability of the dinar, provided the funds that pushed investment growth up. Owing to this,
private investment - directed mainly to export projects - has become one of the pillars of economic
growth and we expect it to remain so in the coming years.
Ladies and gentlemen, dear colleagues,
I would like to reiterate that these are only some of the key results we have achieved over the past
five years. I must point out that this is a pleasant though rare opportunity to look back into the past
in order to learn lessons for the future - the future which we create by overcoming challenges,
armed with knowledge and a sense of responsibility about the importance of what we do. In the
period ahead, you may count on the National Bank of Serbia to use all of its available instruments to
maintain the achieved price and financial stability and give its contribution to economic growth and
the preservation of the standard of living.
Thank you for your attention. I now give the floor to my colleagues.