Radovan Jelašić: Key challenges for Serbia and the surrounding region
Speech by Mr Radovan Jelašić, Governor of the National Bank of Serbia, at the Conference
of Economist Media Group "Financial Services in the South East Europe", Belgrade,
5 December 2007.
* * *
Ladies and Gentlemen,
As Serbia slowly but finally returns to Europe, the issues we face are becoming more and
more "European" and even "international". Allow me to share with you today my thoughts on
some of the current topics which represent key challenges not only to us in the NBS, but to
almost all neighbouring countries!
Stable and efficient banking sector represents the key prerequisite and a guarantee of
macroeconomic stability in Serbia today. However, no supervisory measure is more efficient
in "levelling off" the margins or "convincing" institutions to cut down credit growth than a crisis
situation in the financial sector. Whereas bank supervisors are constantly vigilant and keep
taking measures to avert a crisis, crises still happen all the time. And they all have something
in common: 1) they are never planned though risk trends are more or less common
knowledge, 2) they come as a result of operations that are almost impossible to predict, 3)
their initial impact is always underestimated, but soon 4) goes into the other extreme, i.e.
becomes overestimated!
For seven years now, namely ever since I began attending Annual Meetings of the IMF and
the World Bank in Washington, G-8 member countries and the IMF staff have been giving
their semi-annual reports on "orderly winding down of global imbalances". Almost everybody
seems convinced that what we have been going through in recent months is actually the
beginning of orderly winding down of global imbalances, though neither the length nor the
depth of the process can be predicted with any precision yet!
Strong financial sector in terms of the volume of its capital and reserves, and/or ownership
structure is more than indispensable against the background of growing external and internal
risks. On the eve of 2008, we are faced with many more challenges and unknowns both in
Serbia and wider. Allow me to name just a few:
• Risk revaluation in the world market - while most of us remained quite unaware,
only a few, like the UK-based Northern Rock Bank, realized that we had stepped
from excess liquidity into the opposite extreme practically overnight. The terms on
which Serbia borrowed in the world financial market only six months ago seem quite
unattainable today even to some countries that recently joined the EU. Besides, the
financial market is expected to be much more critical of some banks which until only
recently managed to quite easily cleanse their balance sheets through securitization!
In all, "seven years of fat cows, i.e. high liquidity" is already long behind us, and
even if it still prevails in some isolated spots, it is exclusively due to massive support
primarily from the central banks in the Euro Zone, England, Switzerland, and more
recently the USA!
• Inflation challenges, primarily in the Euro Zone, seem to be ever more present, and
the ECB is sailing between the Scylla and Haribda. Inflation in Germany has
reached its 13 year high, M3 continues to grow fast - and these are the two main
signals used by the ECB when deciding on the level of its reference rate. On the
other hand, economic growth is losing its momentum, financial sector issues seem
more and more complicated every day, and the currency is getting stronger with all
its positive (e.g. cheaper imports of energy products) and negative effects (loss of
competitiveness, primarily in the USA). It has been long since the money, i.e. cash,
was as expensive as it is in today's market notwithstanding the above injection of
liquidity by central banks!
The issue of home - host supervision comes back as a boomerang with every new
•
crisis in the banking sector. Be it BACAG in Austria or IKB in Germany, the issue
remains the same - distribution of responsibilities is being redesigned, both within
the country (Austria) and at the level of the EU (e.g. Northern Rock bank).
We have been scrutinizing all of the above factors primarily from the aspect of their impact
on Serbia, in which a) relatively easy and cheap borrowing abroad represents the key
prerequisite to financing of the BOP deficit, b) inflationary pressures in the Euro Zone due to
high level of eurization spill over into Serbia relatively quickly, and c) 80% of the banking
sector is in the majority ownership of well ranked strategic owners from EU countries.
Internal factors:
• Inflationary pressures in Serbia are growing under the influence of both external and
internal factors. And while the possibility to influence external factors seems quite
negligible even by much bigger countries than Serbia, I am of the opinion that we
should focus on issues which are exclusively under our control. Pleasant words,
"stunts" from the past or delaying price increases cannot do the trick, not in the
medium run, and even less in the long run. Though we in the NBS are satisfied with
the core inflation result achieved in the course of the current year despite the
untimely elections and the related fiscal expansion, doubling of the price of oil, and
the drought, on the eve of 2008 we are more than concerned and put a question to
ourselves: Should the prevailing tendencies persist, can the NBS reach its
objectives with the instruments at its disposal or must there be new ones added?
One thing is for sure, to achieve our objectives, we shall use all the instruments at
our disposal, both old and new, but that shall not make us popular. That much I can
tell in advance.
• High exposure to foreign currency risk creates additional risks to the financial sector
as confirmed by the developments during last two weeks. If arguments extended by
the NBS on the need to borrow in dinars do not seem plausible enough, I sincerely
hope that recent developments in the market shall force many to reconsider which
currency they should borrow in, namely, how to minimize their exposure to the
foreign currency risk. The role of banks is of the highest importance in terms of
warning against foreign currency risk exposure, if not for the sake of their clients
than for the sake of their own balance sheet results!
In the absence of adequate market competition, price signals are transferred slowly
•
and inaccurately. This is most evident in the case of prolonged and high
appreciation of the dinar which is transferred to retail prices with a significant delay.
World practice points to the rigidity of prices, but it seems that they are practically
"cemented" in Serbia today. I sincerely hope that something shall be done in that
respect, and done exclusively for economic reasons. All in all, from the
macroeconomic point of view, both internal and external challenges require that
banks, unless they have already done so, reassess which way and how to proceed.
In his biography, Alan Greenspan says that market produces constant stress as in order for
someone to gain, someone else has to lose. I fear that many are not yet aware that the
market is not a guarantee, but a chance to make money!
And finally, allow me to go back to where I started from. Strong and stable banking sector,
primarily in terms of high quality and reliable ownership structure, represents a solid
foundation for macroeconomic stability. Despite all the risks, I remain optimistic that we shall
be successful in overcoming all of the above challenges.