NATIONAL BANK OF SERBIA
Introductory speech at the presentation of the
Inflation Report - February 2024
Tabaković, Governor
Dr Jorgovanka
Belgrade, 14 February 2024
Ladies and gentlemen, esteemed members of the press, dear colleagues,
Welcome to the presentation of the February Inflation Report.
As usual, in today's conference we will present our new projections and expectations
for the coming period. Before that, however, I would like to look back at the year
behind us, a year fraught with challenges and new geopolitical uncertainties that
seem to have become characteristic of modern times. Even in such circumstances
we were successful in achieving our objectives and projections from a year ago.
Before I elaborate in detail on current macroeconomic developments and our new
projections, allow me to present several facts and figures relating to our projections
presented here one year ago. Specifically:
•
Already in February last year, when inflation was just shy of its peak, I pointed
out that it would be halved in late 2023. This has materialised, with end-2023
y-o-y inflation at 7.6%. Back then, as now, we expected inflation to retreat
within the target band by mid-2024.
•
Consistent with our expectations, GDP growth picked up speed in H2 2023
and real growth measured 2.5% in the year as a whole. Let me remind you
that, a year ago, we projected economic growth in the range of 2-3%, with
central projection at 2.5%. At the time, we projected that, due to the planned
implementation of investment projects, growth would accelerate to the range
of 3-4% this year, with central projection at 3.5%, the same as in our current
forecast. We expected economic activity to gather further momentum in the
coming years and have now revised up our GDP growth projection for 2025
and 2026 to the range of 4-5%.
•
Thanks to a powerful improvement in the external position in 2023, the current
account deficit was much lower than projected a year ago. It measured only
2.6% of GDP, reflecting an improved energy balance and robust growth in
manufacturing and services exports. FDI inflow climbed to a new all-time high
of EUR 4.5 bn. As a result, FX reserves rose to a new record high of close to
EUR 25 bn at end-2023, topping all reserve adequacy metrics. It is equally
important that FDI inflow fully covered the current account deficit for the ninth
consecutive year, and even exceeded it multiple times in 2023.
Later in the conference, we will present recent macroeconomic developments and
our new projections in more detail.
***
As I highlighted at the start, inflation continued to slow in the final quarter of 2023 to
7.6% at year end. This is half its level a year ago and somewhat less than we
anticipated in our November projection. Inflation's continued slowdown was propped
up by the dissipation of cost-push pressures and the base effect from food prices, as
well as by the effects of past monetary tightening which also supported core
inflation's decline to 6.5% y-o-y in December.
Chart 2 Inflation at the end of 2022 and 2023
Chart 1 Change in contribution of main CPI components to
(in %)
y-o-y inflation - relative to March 2023*
(in pp)
1
16
0 Headline inflation
14
-1
Core inflation
12
-2
10
-3
-4 8
15.1
-5
6
10.1
-6
Unprocessed food
4
7.6
Processed food
-7 6.5
Energy
2
-8 Industrial products excluding food and energy
Services
-9 0
Apr. May June July Aug. Sept. Oct. Nov. Dec. December 2022 December 2023
Sources: SORS and NBS calculation.
Sources: SORS and NBS calculation.
* Y-o-y inflation peaked in March.
Inflation is expected to slow further in 2024. Under our new projection, it will most
probably retreat within the target band of 3±1.5% by mid-2024, approach the target
midpoint late in the year and hover around that level over the medium term. Such
inflation movements will mostly reflect the effects of past monetary tightening, softer
global cost-push pressures, slowing imported inflation, still subdued external demand
and the expected continued slide in inflation expectations. The new inflation
projection is slightly lower than the November projection due to lower global prices of
primary commodities and a faster decline in inflation expectations than we projected
in November. It is important to note that not only medium-term but also short-term
inflation expectations of the financial sector are now within the target band, and that
corporate sector expectations are on a decline as well, confirming the credibility of
our monetary policy.
Chart 4 Current inflation and one-year ahead inflation
Chart 3 Inflation projection
(y-o-y rates, in %) expectations
(y-o-y rates, in %)
18 16
Current inflation
16
Financial sector*
14
Corporate sector*
14
Financial sector - Bloomberg
12
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12
Sources: Gallup, Ipsos/Ninamedia, Bloomberg and NBS.
2021 2022 2023 2024 2025
* Ipsos and Gallup until December 2014, Ninamedia since December 2014, and
Source: NBS. Ipsos since January 2018.
Our decision to keep the key policy rate unchanged at 6.5% in the period since the
Report
previous was underpinned by the projected inflation movements and the
transmission of the effects of past monetary tightening to interest rates in the money,
lending and savings markets, as well as to inflation expectations. From this time
distance, taking into account movements in key macroeconomic indicators, we may
freely say that it is thanks to our monetary policy, which we tightened at a continuous,
but moderate and measured pace, that a concurrent reduction of inflationary
pressures and inflation's return within the target band over the monetary policy
horizon were achieved. The negative effects on economic growth were minimised
and the financial stability fully preserved. This is confirmed by the fact that the share
of NPLs in total loans has remained at its historical low of around 3%, underpinned
by a robust regulatory framework and a carefully designed mix of monetary and
macroprudential policy measures. A good example of such policy is our September
decision to cap the interest rate on variable-rate housing loans at 4.08% for first-time
home buyers. This decision has had no major impact on the banks' financial result
and does not fuel inflationary pressures, but it has helped alleviate the credit risk and
preserve financial stability, and, to an extent, supported the recovery of personal
consumption.
Chart 6 NPL level and share in total loans, gross principle
Chart 5 Movement in the key policy rate and average repo
(in RSD bn) (in %)
rate
(daily data, p.a., in %)
Household sector
500 25
9
Corporate sector
Key policy rate
Other sectors
Lending facilities rate
NPL share in total loans (RHS)
8
Deposit facilities rate
400 20
Average repo rate
7
6
300 15
5
4
200 10
3
2 100 5
1
0 0
0
2011 2013 2015 2017 2019 2021 2023
1/2020 7/2020 1/2021 7/2021 1/2022 7/2022 1/2023 7/2023 1/2024
Source: NBS. Source: NBS.
That we have managed to achieve the so-called "soft landing" by pursuing an
appropriate monetary policy is also confirmed by GDP growth which measured 3.8%
y-o-y in Q4 2023 or around 1% s-a relative to the previous quarter, according to our
estimates.
Such GDP movements are consistent with the SORS preliminary estimate which
places 2023 GDP growth at 2.5%, and with our November projection. Economic
growth was led by elevated activity in all production and most service sectors. An
almost equal impetus came from industry, construction and agriculture. On the
expenditure side, the key impulse is estimated to have come from net exports due to
the real growth in goods and services exports and a fall in imports in H1 2023, as well
as from fixed investment. To a lesser extent, growth was also supported by personal
consumption which rallied in H2 2023, mostly reflecting real wage growth due to
inflation's slowdown and fiscal incentives.
The acceleration of economic activity in H2 2023 will make it easier to achieve the
economic growth rate projected for this year, and the carry-over effect from 2023 is
estimated at 1.5 pp. Taking into account this and the accelerated investment cycle
implementation, we expect GDP growth to pick up to the range of 3-4% this year,
with central projection at 3.5%. We revised up our growth projection for the next two
years to the range of 4-5%, having in mind investments planned in the lead-up to
hosting Expo 2027. In our estimate, personal consumption will remain an important
growth factor this year, reflecting the preserved labour market and the continued rise
in households' employment and income, but not to an extent that could fuel any
major inflationary pressures. Another important growth factor are investments, private
and government, which raise the potential output. Private investment growth will be
supported by reduced inflationary pressures, preserved investment confidence,
increased corporate profitability and the expected high FDI inflows. Substantial
government investment in transport, energy and utility infrastructure has been
by President Vučić as part of the
planned, as have other projects recently presented
-
"Leap into the future Serbia Expo 2027" programme.
Chart 8 Contributions to real GDP growth, expenditure side
Chart 7 Contributions to y-o-y GDP growth rate,
(in pp)
expenditure side
(in pp)
10
Net exports
21
Change in inventories
8
Gross fixed capital formation
18
Government spending
15 Household consumption 6
GDP (in %)
12
4
9
2
6
0
3
-2
0
Change in inventories
-3
-4
Net exports
Government consumption
-6
Gross fixed capital formation
-6
Household consumption
-9
GDP (in %)
-8
-12
2011 2013 2015 2017 2019 2021 2023* 2025*
2017 2018 2019 2020 2021 2022 2023
Sources: SORS and NBS.
Sources: SORS and NBS calculation.
* NBS estimate.
Note: NBS estimate for Q4 2023.
As a result of increased export capacities, ensured energy security and lower global
energy prices, the current account deficit declined to a mere EUR 1.8 bn in 2023,
measuring 2.6% of GDP at the annual level, this being the lowest deficit on record.
According to our projection, the anticipated pick-up in the investment cycle and the
associated import of equipment and intermediate goods, which will greatly be offset
by the rise in export capacities and recovery of the euro area's external demand, will
result in the current account deficit trending at around 4-5% of GDP this year and in
the medium term, which is sufficient to ensure the country's external sustainability.
We are still projecting its full coverage by net inflows from FDI, and we expect that in
nominal terms, inflows to Serbia over the following years will maintain last year's
record level that exceeded EUR 4.5 bn.
Goods Services 25
12 Secondary income Primary income
Primary income, net Secondary income, net
Services Goods
10
20
Current account deficit Current account FDI
8
15
6
5.6
5.9
10
4
5
2
3.0
2.3
0
0
-1.8
-2
-5
-4.2
-4
-6.6 -10
-6
-15
-8
-9.4 -3.9
-10 -20
-3.0
-12
-25
Source: NBS.
2019 2020 2021 2022 2023* 2024* 2025* 2026*
-14
2022 2023
Sources: SORS and NBS.
Source: NBS. * NBS projection.
As for FDI, I would like to underline that year after year, their inflow remained
diversified both in terms of project and geography and was mostly channelled to
tradable sectors. For nine consecutive years, it covered the current account deficit,
thus contributing to stronger appreciation pressures and driving FX reserves further
up, to around EUR 25 bn at end-2023, whereby they ensured the coverage of more
than 6.7 months' worth of goods and services import.
-
In addition to capital inflows on account of the most desirable investments FDI,
and lower country risk premium, another confirmation of foreign investors'
confidence in Serbia's macroeconomic prospects is the high demand of foreign
investors for the eight-year dinar government bond, issued this January and sold in
the record amount of more than RSD 63 bn. Investor demand was also high in
early February, when additional eight-year dinar securities were sold in the amount
of RSD 41.5 bn.
Against the backdrop of prevailing appreciation pressures and in order to maintain
the dinar's relative stability to the euro as a key pillar of financial stability, business
certainty, and investment and consumer confidence, this was the sixth of the seven
past years that we ended up as a net FX buyer in the IFEM. In 2023 alone we
bought nearly EUR 4 bn net, and more than EUR 9 bn since 2017.
Chart 12 Value and structure of NBS FX reserves
Chart 11 Dinar exchange rate and NBS transactions in the
(in EUR mn)
FX market
(EUR/RSD)** (in EUR mn)
30,000
140
Securities
750
Foreign cash and deposits abroad
135
600
SDRs
24,909
130
Gold
25,000
450
Nominal FX reserves
125
300
120
150
20,000
115
0
110
-150
105
15,000
-300
100
10,915
-450
95
10,000
-600
90
-750
85
NBS transactions in the FX market, monthly (RHS)*
-900
80
5,000
EUR/RSD, monthly average (LHS)**
75 -1,050
70 -1,200
0
2011 2013 2015 2017 2019 2021 2023
2009 2011 2013 2015 2017 2019 2021 2023
Source: NBS.
* + net purchase; - net sale.
** EUR 1 in RSD.
Source: NBS.
I believe that these results achieved in a turbulent time, where adverse political and
economic developments are intertwined on the global scene, are a clear proof that
measures and activities undertaken in the past period by the NBS and the
Government are producing results and confirming that we are steering our economy
in the right direction. We have not only preserved our macroeconomic stability and
shown resilience to the negative effects of external shocks, but also secured
favourable growth prospects in the long-term, as well as Serbia's status as an
attractive investment destination.
Our economy's resilience is also underscored by the relevant international
institutions that monitor and assess economic policies in other countries, as well as
by rating agencies that have kept our credit rating at a step away from investment
grade.
Ladies and gentlemen, dear colleagues,
In the remainder, I shall give a more detailed overview of the factors from the
international environment which will dictate inflation and economic movements going
forward, and by extension affect our future decision-making.
Firstly, it is important to note that global inflation is retreating faster than anticipated
and is approaching pre-pandemic levels, thanks to the effects of past monetary policy
tightening by the majority of central banks. As a result of lower inflation, we can
expect leading central banks to start trimming their interest rates, and some inflation-
targeting banks in the region have already started this cycle.
Still, the IMF and other relevant international institutions have warned that central
banks should take a cautious approach when deciding to start trimming their rates so
as not to give rise to renewed inflationary pressures. We still see pronounced risks
that may result in inflation in many countries trending higher than expected and slow
down its return to the target.
At present, the biggest source of uncertainty is geopolitical tension, which was
exacerbated early this year, when the transport of oil and other commodities through
the Red Sea and the Suez Canal was brought into question. So far, this has not had
a major effect on the price of oil and other primary commodities which were lowered
due to dampened demand from China, but it did reflect on the cost of overseas
transport. Due to uncertainty, we did not base the movements in global oil prices
solely on oil futures, which indicate a lower level this and the following year than the
one currently held. When formulating the assumptions to our projection, we took into
account the projections of relevant international institutions which expect the global
oil price to move between USD 80 and USD 83 per barrel. We note that our new
assumptions on the global price of oil are lower than the ones stated in the November
projection.
Adjustments to the euro area's GDP growth
Chart 13
Chart 14 Revision of the euro area inflation projection for
projection for 2024 and 2025
2024 and 2025
(in %)
(in %)
2.5
9
Estimate for 2023
Estimate for 2023
New projection for 2024 New projection for 2024
8
New projection for 2025 New projection for 2025
Previous projection for 2024
2.0 Previous projection for 2024
7
Previous projection for 2025 Previous projection for 2025
6
1.5
5
4
1.0
3
0.5
2
1
0.0
0
ECB Consensus World Bank IMF
World Advanced economies Emerging and
Economics
developing economies
Sources: ECB (September and December), Consensus Economics (October and
January), World Bank (June and January) and IMF (October and January).
Source: ECB (December 2023).
Other risks from the international environment seem to be lower than last year. Also
encouraging is the fact that the IMF has revised up its global growth projection for
this year, by 0.2 pp to 3.1%, and that it now estimates global risks to be balanced,
instead of skewed to the downside. As for the economic activity in the euro area, our
key trade partner, it practically stagnated in H2 last year, which is why the growth
forecast for this year is somewhat lower than three months ago, though still higher
than in 2023. According to the ECB's projection, the euro area's economic growth will
measure 0.8% this year, which is similar to the IMF's forecast.
In view of all of the above, the NBS will continue to monitor and analyse trends in the
international commodity and financial markets, and make future monetary policy
decisions in relation to the pace of inflation slowdown and movement of its key
factors, as well as the assessment of risks which are for the time being assessed as
symmetric for both inflation and GDP projection. We will maintain caution in our
decision-making to ensure sustainable movement of inflation within the bounds of the
target tolerance band. We will monitor and assess developments in the international
environment, as well as central bank decisions, and monitor their effects on our
economy, but we will not look up to anyone or copy someone else's solutions. We
are aware that there are no shortcuts to success, and as so far, we will be prepared
for different surprises that might arise from the international environment and we will
make decisions in the general interest. This is the only way to ensure that our
economy thrives in optimal conditions for efficient functioning, competitiveness and
profitability, further rise of employment and wages and, by extension, continued and
accelerated progress of Serbia and better lives of all our citizens.
We remain open to your questions in the remainder of the conference.