NATIONAL BANK OF SERBIA
Introductory address
at the presentation of the Inflation Report -
November 2019
Dr Jorgovanka Tabaković, Governor
Belgrade, 14 November 2019
Ladies and gentlemen, esteemed members of the press, dear colleagues,
Welcome to the presentation of the November Inflation Report.
Since our last gathering in August, inflation has remained low and stable, favourable fiscal trends have
continued, while economic, investment and export activity gathered momentum. Stepped up
investment deserves a special note, as it pushed GDP growth in Q3 beyond our expectations, prompting
an upward revision of the 2019 growth forecast - to 3.6%, instead of the previous 3.5%. Given that
domestic factors successfully compensate for the weaker external demand, favourable macroeconomic
trends are expected to continue in the period ahead.
At this press conference we will present our view of the current and expected macroeconomic
developments.
Inflation is low and stable for the sixth consecutive year and is expected to remain so in the period
ahead.
Same as in the neighbouring countries, lower contributions of unprocessed food and energy prices set
the y-o-y inflation in Serbia on a downward path over the past months. In October, inflation measured
1.0% y-o-y. Since the start of the year, core inflation has hovered between 1.1% and 1.5% y-o-y,
suggesting that low inflationary pressures are of a more permanent nature, despite positive trends in
the labour market.
According to our November projection, inflation will continue to move at low levels in the coming
period, as confirmed by the inflation expectations of financial and corporate sectors for one and two
years ahead.
Chart 1 Chart 2 Inflation projection
Contribution of CPI components to y-o-y inflation
(in pp) (y-o-y rates, in %)
7
6
6
5
5
4
4
3
3
2
2
1
0 1
-1
0
-2
2014 2015 2016 2017 2018 2019
-1
Fruit and vegetable prices
Processed food prices
-2
Nonfood core inflation
9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9
Administered prices
Sources: SORS and 2017 2018 2019 2020 2021
Petroleum product prices
NBS calculation.
Consumer prices (%)
Source: NBS.
As a result of the preserved macroeconomic and financial stability and improved business
environment, investment remains the key factor of economic acceleration.
Economic activity has been on the rise for twenty quarters in a row. In Q3 2019, GDP growth sped up
to 4.7% relative to the same period the year before. Given that external demand slowed down
additionally, such growth acceleration is a signal of the rising contribution of domestic factors. The key
factor of economic acceleration in Q3, on the production side, was the construction sector whose
growth stepped up to around 35% y-o-y owing to intensified works on the transport and energy
infrastructure. Faster economic growth was enabled by the activation of earlier investment, which
helped the manufacturing exports to pick up from 5% in the first half of the year to almost 9% in Q3.
Continued implementation of infrastructure projects, further improvement in the business environment
and favourable terms of financing gave an additional impetus to vigorous economic growth.
Improvement in the business environment is also confirmed by Serbia's progress on the World Bank's
latest Doing Business list, by four notches, to the 44th position among 190 countries.
In view of the results achieved, we have revised our GDP growth forecast for this year from 3.5% to
3.6%, though there is a realistic possibility that growth might turn out even higher. Growth is expected
to pick up further to around 4% in 2020 and maintain similar dynamics in the medium term, driven by
investment, exports and sustainably rising personal consumption.
Consumption growth is also aided by the higher employment, owing to which the unemployment rate
dropped to 10.3%, according to the latest available data. Taking into account the upward trend in labour
market participation, the data on formal employment gains, good agricultural season and robust
construction growth, we estimate that in Q3 the unemployment rate could edge down to a single-digit
level.
Chart 3 Fixed investment Chart 4 Contributions to y-o-y GDP growth rate - expenditure
(y-o-y growth, in pp)
side
(in pp)
20 9
15
6
4.0
4.4
3.6
10
3.3
2.9
1.8
3 2.0
2.0
5
0.7
0
0
-0.7
-2.7
-5 -1.6
-3
-10
-6 Net exports
Investments
-15
Government consumption
Government investment
-9
Household consumption
-20 Private investment
GDP (in %)
Fixed investment (in %)
-12
-25
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* 2020* 2009 2010 2011 2012 2013 2014 2015 2016 2017 20182019.*2020*
Sources: SORS and NBS calculation.
Sources: SORS and NBS calculation.
* NBS estimate. * NBS estimate.
Exports have stepped up, despite slackening external demand. Capital inflows to Serbia remain high.
In the first nine months of 2019, Serbia's goods and services exports went up by 10.9%, аnd those
destined to the EU by 10.6% compared to the same period last year. Thus, the overall export growth
rate stepped up compared to 2018, coming close to the import growth rate (11.6% y-o-y). Import
dynamics is determined primarily by the investment cycle at home and the consequently higher needs
for equipment and intermediate goods, which is connected with the high FDI inflow and partly also
fuelled by the rising consumer demand. On those grounds, the current account deficit will expand in the
Chart 6 FDI structure by sector
Chart 5 Movement of indicators of external demand for
(in %)
Serbian exports
(3M moving avarage, s-a)
(2008 = 100) (long-term average = 100) 100
270 120
90
240 80
110
70
210
60
100
180
50
150 90
40
30
120
80
20
90
Goods exports, 3M average (LHS) 10
70
Core exports*, 3M average (LHS)
60
0
External demand from the euro area (RHS)
2005-2008 2009-2012 2013-2017 2018 - H1 2019
External demand from CESEE (RHS)
30 60
Construction and real estate Other
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Finance Trade
Sources: European Commission, SORS and NBS.
Manufacturing Mining
Tradeable goods and services*
* C l l di f i l l d b l
short run, but given that the imported equipment continuously increases export capacities of the
Serbian economy, it is reasonable to expect that the deficit will decrease in the medium-run. Since the
start of the year FDI inflow has reached EUR 2.9 bn, covering, in net amount, the current account
deficit for the fifth year in a row. Together with reduced internal and external imbalances, FX reserves,
which reached the record EUR 13.5 bn at end-October, have additionally increased the resilience of our
economy to potential adverse developments in the international environment.
Favourable macroeconomic landscape is crowned by the elimination of fiscal imbalances, thanks to
the full coordination of monetary and fiscal policy measures.
As the previous two years, 2019 has seen a fiscal surplus which on consolidated level reached 0.9% of
GDP concluding with September. Central government public debt was reduced additionally, to 52.0%
of GDP at end-September.
It is important to note that these results have been achieved in conditions of significantly higher
government capital expenditure, as well as increased outlays for wages and pensions, which contribute
to economic growth while causing no major inflationary pressures. General government deficit planned
for this year is 0.5% of GDP, which is also a medium-term target that will keep the public debt-to-GDP
ratio on a downward path. No less importantly, the currency and refinancing risks are also reduced,
supported by the last week's successful reissue of the ten-year eurobond in the international financial
market. The bond was sold at the lowest rate of return so far - 1.25%, which are the terms enjoyed by
countries with investment grade rating. The funds raised are intended exclusively for the repayment of
the earlier expensive dollar debt, which means that this issue does not increase public debt, while it
does cut down interest expenses.
Chart 8 Public debt*
Chart 7 General government fiscal and primary budget
balance
(in RSD bn)
(in EUR bn) (in % of GDP)
30 80
200
70.0
67.8
66.2
150
Budget balance 70
25
Primary balance 57.9
100 56.0
60
53.7
52.9
52.0
50 20
50
42.8
39.5
0
15 40
30.9
-50
26.8
30
10
-100
20
-150
5
10
-200
0 0
-250
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sept.
2019
-300
Internal dinar debt (LHS)
2010 2011 2012 2013 2014 2015 2016 2017 2018 I-IX
Internal FX debt (LHS)
2019
Source: Ministry of Finance.
External debt (LHS)
Source: Ministry of Finance. * Central government.
Public debt (RHS)
By lowering the policy rate, we have provided further support to credit and economic activity.
Additionally weakened inflationary pressures, reduced internal and external imbalances and the
consequently strengthened resilience of our economy to potential negative impacts from the
international environment, as well as the favourable macroeconomic outlook, have created room for
further monetary policy easing. In November, the key policy rate was again cut by 25 basis points, to
2.25%. Apart from domestic factors, this decision was also motivated by the monetary policy
accommodation of leading central banks, against the background of a slowdown in global trade and
economic growth. We expect that the NBS's monetary policy easing will, as so far, lead to a fall in
interest rates in the money and credit markets.
Chart 10
Interest rates in the primary market of dinar
Chart 9
Interest rates on new dinar loans
government securities and eurobonds
(weighted average values, p.a., in %)
(p.a., in %)
16
25
Dinar securities, 5Y
Dinar securities, 7Y
14
Dinar securities, 10Y
Eurobonds, USD, 5Y
20
12
Eurobonds, USD, 7Y
Eurobonds, USD, 10Y
Eurobonds, EUR, 10Y
10
15
8
10
6
4
5
Household loans*
Corporate loans*
2
Key policy rate
0
0
2011 2012 2013 2014 2015 2016 2017 2018 2019
2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Ministry of Finance.
Source: NBS.
* Excluding revolving loans, current account overdraftsand credit card debt.
Strong credit growth at favourable conditions gives significant support to economic growth.
Favourable financial conditions in the domestic market are also evidenced by the lending interest
rates, which in the dinar market fully mirrored the NBS's monetary policy easing. As for the
euroindexed loans, favourable terms of financing were supported by the lower interest rates in the
European money market and, to a greater extent, also by the decline in Serbia's risk premium. What I
want to emphasize particularly is that Serbia's risk premium is now among the lowest in the region and
that its sharp fall was largely driven by domestic factors. In the past months, the risk premium dropped
several times, to even below 50 basis points, while on 12 November it touched its lowest value of 34
basis points. I would further like to point out that Serbia is only a step away from investment grade,
characteristic of economies offering high security of investment, which not only confirms the economic
progress and the results achieved, but also contributes to further improvement of financing and
investment conditions in Serbia.
A decrease in interest rates, coupled with economic growth and positive trends in the labour market,
gives rise to lending. The structure of lending is favourable in terms of support to sustainable economic
growth, as evidenced by a significant rise in corporate investment loans and a rebound in household
housing loans, with a mild deceleration in the growth of loans intended for consumption. While lending
has recorded two-digit y-o-y growth rates, loans have a stable share in GDP, posing no risk to either
price or financial stability. The reduction in the share of NPLs in total loans to 4.7% has created room for
further credit growth and at the same time reinforced financial stability.
Chart 12 NPL share in total loans, gross principle
Chart 11
Lending activity and GDP
(y-o-y rates, in %)
(in RSD bn) (in %)
500 25
15
21.5 21.6
450 21.4
19.0
18.6
400 20
10
17.0
16.9
350
15.7
300 15
5
11.3
250
9.9
200 10
0
150
5.7
4.7
Total domestic loans*
100 5
-5
Total domestic loans**
50
0 0
-10
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20182019*
2012 2013 2014 2015 2016 2017 2018 2019
Other sectors
Sources: NBS.
Household sector
* Excluding the exchange rate effect.
Corporate sector
Source: NBS.
** Excluding the effect of NPL w rite-off and sale since early 2016. NPL share in total loans (RHS)
* September 2019.
Ladies and gentlemen, dear colleagues,
Allow me to round off this part of the conference by concluding that the results achieved have been
enabled by the full coordination of monetary and fiscal policy measures, which has strengthened the
credibility of economic policy. This credibility is confirmed by the already mentioned credit rating
upgrade, low risk premium, more favourable position of Serbia in the international financial market, as
well as by the high FDI inflow. Such approach to the conduct of economic policy has ensured an
adequate response to the challenges from the international environment which the country faced in the
past and will surely face going forward. In the period ahead, you can count on our full commitment to
the safeguarding of the achieved stability which, along with further implementation of structural
reforms, will boost the competitiveness of our economy, as well as employment and the living standard
of our citizens.
I will now hand over to my colleagues from the Economic Research and Statistics Department to give
you a detailed account of our latest macroeconomic projections.