NATIONAL BANK OF SERBIA
Speech at the presentation of the Annual Financial Stability
Report for 2018
Dr Jorgovanka Tabaković, Governor
Belgrade, 31 July 2019
Ladies and gentlemen, esteemed members of the press, dear colleagues,
Welcome to the presentation of the Annual Financial Stability Report for 2018. Before you is
a report for the year in which Serbia achieved the highest growth rate in the last ten years,
maintained low and stable inflation and additionally strengthened the domestic financial
system. The year in which long-term investment in our country increased and the share of
public debt in GDP contracted further. I have to say that such results were achieved in the
face of challenges from the international environment we have all been witnesses to - such as
global protectionism, geopolitical tensions, or uncertainties surrounding the UK's exit from
the European Union.
The Financial Stability Report starts with the ever important conditions in the
international environment, because they have a significant bearing on the conditions at
At the global level, 2018 was marked by an economic slowdown experienced in
home too.
the second half of the year by advanced and, consequently, emerging economies. This put an
upward pressure on the risk premia of countries in the region and prompted revisions to the
growth outlook. Trade tensions between major world economies also fuelled uncertainty in
international commodity and financial markets. In such an environment, the pace of
normalisation of monetary policies of leading central banks, the European Central Bank and
Federal Reserve System, was uncertain.
What is the best response of policy makers to growing uncertainties in the external
environment? The best, and in fact the only response, is to strengthen the domestic economy.
In coordination with other economic policy makers, the National Bank of Serbia has worked
continuously towards further narrowing of internal and external imbalances. More stable
conditions of doing business reflected in price and financial stability, sound public finance
and better prospects were also "sealed" by the Standard & Poor's upgrade of Serbia's outlook
from "stable" to "positive". As the reasons for its decision, the rating agency cited the
country's strong economic growth, as well as the results of the National Bank of Serbia in
maintaining price and financial stability.

We have kept inflation under control for six consecutive years.
Inflation
Over the past six years inflation in Serbia has been kept firmly under control.
averaged around 2% in 2018, while medium-term inflation expectations of the financial and
corporate sectors remained anchored.
Against the background of low inflationary pressures, but also risks from the international
environment, we maintained a cautious monetary policy stance and lowered our key policy
rate in two 25 bp steps to the level of 3%. This way, we continued to support economic
growth that reached 4.3% last year.
In July this year, we trimmed the key policy rate by
another 25 bp, to 2.75%, which is its lowest level in the inflation targeting regime yet.
We expect that this impulse will soon pass through to all segments of the market, thereby
extending our support to economic growth going forward.
CPI developments (in %)
Two year ahead inflation expectations
16
(in %)
8
14 5y average inflation = 1.9%
12
5y average core inflation = 1.6%
6
10
8
6
4
3.0
4
2 2.8
2
1.5
0
1.4
1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
0
3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6
CPI Inflation Core Inflation* 2014 2015 2016 2017 2018 2019
Financial Sector Corporate Sector
*CPI excl. Food, Energy, Alcohol and Tobacco
Source: SORS, NBS and NBS caluculation.
Surce: Ipsos/Ninamedia and NBS.

The cost of financing declined, while disposable income of corporates and households
increased.
Continued monetary policy easing contributed to a further reduction in the cost of financing
for households and corporates, as well as for the government. This is evident from the fact
that compared to May 2013 when we embarked on a monetary policy easing cycle,
interest
rates on dinar loans for households are now twice lower, while those for corporates are
In the case of the government, an evident example is that of
even three times lower. seven-
where the interest rate fell
year dinar securities from 13% at end-2013 to 3.59% this July.
And this is exactly where the effect of full coordination of our policies and the progress
Serbia made on the macroeconomic front is best seen.
Considerably lower interest rates and the consequently higher disposable income, as well as
economic growth accompanied with a rise in wages and the lowest unemployment rate, were
the key drivers of lending activity. The y-o-y growth in loans to the private sector was almost
two-digit in 2018, measuring 9.9%, and the loan structure was favourable.
In 2018 alone,
over RSD 240 bn worth of new investment loans was disbursed, which is the highest
This supported the profitability of corporates, which has been on a constant rise
level so far.
since 2015. The corporate sector ended 2018 with a net profit of RSD 500 bn, which is by
If we look at company size, we
RSD 126 bn or by one third more than the year before.
-
will see that profitability was in the positive zone in all categories from micro to large
enterprises.
Lending activity movements
Dinar interest rates movements
(excluding the exchange rate effect, y-o-y rates, in %)
(p.a., in %)
35 35
22
20
30 30
18
25 25
16
20.2
20 20
14
15 15
12
10.3 9.7
10
10 10
8
9.4
5 5
5.6
6
8.9
3.6 0 0
4
-5 -5
2
2.75
0
-10 -10
2010 2011 2012 2013 2014 2015 2016 2017 2018
Corporates loans - outstanding amounts*
-15 -15
Households loans - outstanding amounts*
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
7 years government securities**
Total (LHS) Enterprises (LHS)
Key Policy Rate**
Households (LHS) Investment loans (RHS)
Source:NBS, Ministry of Finance.
* as of June 2019 ** as of July 2019
Source: NBS.
Positive fiscal trends extended into 2018 - Serbia recorded a fiscal surplus of around 0.6% of
GDP. The share of public debt in GDP dropped by 4.1 pp y-o-y to 53.8% in 2018, and went
further down to 51.8% in May 2019.
particularly important is the
In the context of financial stability, reduction in the dollar
in the previous two and a half years,
share of public debt from around one third to around
one fifth of total public debt in June this year.
Also, the country's external position is sustainable. For four years in a row the current account
deficit was fully covered by the inflow of foreign direct investment, which in 2018 reached
EUR 3.5 bn or 8.2% of GDP. Full coverage of the current account deficit continues in 2019.

We have preserved financial stability.
In such an environment, appreciation pressures prevailed in 2018 as well. The dinar
strengthened against the euro owing to good macroeconomic indicators, greater interest in
long-term investment in Serbia and rising exports of goods and services. To prevent excessive
short-term volatility of the dinar exchange rate, we intervened in the interbank foreign
-
exchange market on both sides by buying and selling foreign currency. We bought EUR
This also gave an additional boost to the country's FX
1.58 bn net. reserves which at end-
December 2018 came at EUR 11.3 bn. reached
At end-June this year, FX reserves EUR
or which is on
12.1 bn in gross terms, over EUR 10 bn in net terms, the highest level
record. Such a high level of FX reserves ensures security not only in conditions of stability,
but also in case of potential external shocks.
Serbia's banking sector was adequately capitalised, highly liquid and profitable throughout
2018 as well, with indicators standing high above the regulatory minimums. The dominant
role among the sources of funding was that of domestic deposits, which reduces banks'
dependence on external sources of funding and their exposure to risks from the international
environment. In addition, the results of macroprudential stress tests, which we continued to
regularly conduct in 2018, confirm that banking sector capitalisation and liquidity would not
be jeopardised even in case of extremely negative developments.
Expected capital adequacy ratio by stress scenario* Expected liquidity ratio for the banking sector by stress
(%)
scenario*
30 2.5
2.10
24
2.0
18 1.65
1.52
Basel II
Basel III
1.5
12
1.25
Regulatory
Regulatory
6 minimum
minimum
1.0
0
I III I III I III I III I III I III I III I III I III I III I III
0.5
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
0.0
Baseline Moderate scenario Worst case scenario
Initial state Déjà vu Spillover Worst case
scenario
* NBS estimation.
* NBS estimation.
Source: NBS.
Source: NBS.
At our previous presentations of the Annual Financial Stability Report, we underscored the
-
share of non-performing loans as a systemic risk.
This is also how we tackled the issue in
a systemic way. As a result, the share of non-performing loans in total banking sector loans
was lowered to 5.7% at end-2018 and to 5.21% in June this year. The ratio of non-performing
loans is smaller by around 17 pp and their stock by around 70% compared to the period when
the Serbian Government and the National Bank of Serbia adopted the NPL Resolution
Strategy. At the same time, the current ratio of non-performing loans is the lowest on record.
Being proactive, last year we also adopted regulatory measures to curb risks potentially
arising from unsecured non-purpose lending to households at unreasonably long maturities.
NPL ratio (in %) Gross NPL (RSD bn)
450
25
400 2.7
78.8
0.7
20
350
4.6
300
140.8
15
250
7.2
427.3
200
22.2
10
74.3
150
4.2
5.7
100
5
Stock at end of period
0.3 125.0
Stock at end of period
50
5.4
Reduction during period
Reduction during period
0
0
Aug 31 2015 2016 2017 2018 Jan - May May 31
Aug 31 2015 2016 2017 2018 Jan - May May 31
2015 2019 2019
2015 2019 2019
Source: NBS. Source: NBS.
Late last year, we signed with the Serbian Government the new Memorandum on the
Dinarisation Strategy, outlining additional measures and activities which aim to encourage
further dinarisation and reduce FX risk in the financial system. We are particularly happy
about the which are today
rise in dinar savings, almost four times higher than at end-
bn in July this year. This truly reflects citizens' increased
2012, exceeding RSD 70 trust
in the domestic currency.
Interest rates and dinar savings
Interest rates and FX savings
(lhs, in %, p.a, s-a, RSD bn) (lhs, in %, p.a, s-a, EUR bn)
12 80 6 12
70
10 5 10
60
8 4 8
50
6 40
3 6
30
4
2 4
20
2
1 2
10
0 0
0 0
2013 2014 2015 2016 2017 2018 2019
2013 2014 2015 2016 2017 2018 2019
Dinar savings (rhs)
FX savings (rhs)
NBS key policy rate
ECB key policy rate
Weighted average rate on term dinar deposits
Weighted average rate on term euro deposits
Source: NBS.
Source NBS.

In following the latest trends, we strive to meet consumer needs.
Last year as well, we showed that besides being traditional, we always support the
development of cutting-edge technologies, while ensuring safety and protecting financial
service consumers. In this regard, one of the key projects of the National Bank of Serbia in
2018 was the launch of the instant payments system in the Republic of Serbia. The system is
an important step towards the digitalisation of payment services, enabling instant payments 24
hours a day, seven days a week, 365 days a year.
Ladies and gentlemen, esteemed members of the press, dear colleagues,
Low and stable inflation, a cautious monetary policy stance, a stable banking system and
favourable fiscal trends have provided a positive contribution to maintaining and
strengthening the resilience of the domestic financial system and macroeconomic stability of
the country in 2018 as well.
Despite all challenges from the international environment, which were not few, last year saw
the lowest unemployment rate on record and an increase in employment and wages, which
shows that sound economic policy was pursued in Serbia and that the resilience of the
domestic economy to potential risks was strengthened.
By consistent implementation of monetary policy and full coordination with fiscal policy, the
National Bank of Serbia significantly contributed to the country's solid economic
performance, which strengthened the basis for sustainable growth. We are therefore able to
talk today about the lowest risk premium, which in July, for the first time since records
are available for our country, fell below 60 bp.
Risk premium indicator - EMBI
(daily data, in bp)
800
700
600
500
400
300
200
100
59
0
2012 2013 2014 2015 2016 2017 2018 2019
EMBI Global Composite
EMBI Europe
Serbia
Source: JP Morgan.
Thank you for your attention. Please allow me now to pass the floor to General Manager of
Mr Darko Kovačević.
the Financial Stability Department