Bojan Marković: Macroeconomic developments in Serbia
Speech by Mr Bojan Marković, Vice Governor of the National Bank of Serbia, at the
presentation of the November 2011 Inflation Report, Belgrade, 16 November 2011.
* * *
Ladies and gentlemen, esteemed members of the press and fellow economists,
Despite repeated media announcements about the "waves of price hikes", inflation continued
down over the past several months and settled at 8.7% in October. We expect this downward
trend to persist and inflation to retreat within the target tolerance band in the first quarter of
2012. At the same time, pessimism over global growth prospects intensified, particularly in
the euro area prompting us to revise the economic growth forecast for Serbia down to around
2.0% in 2011 and 1.5% in 2012. In response to subsiding inflationary pressures, the National
Bank of Serbia cut the key policy rate during the last six months. The key policy rate currently
stands at 10%, and its further cautious lowering is likely in the coming period.
Chart 1 Inflation projection Chart 2 GDP growth projection
(y-o-y rates, in %) (y-o-y rates, in %)
8
16
14
6
12
4
10
2
8
6
0
4
-2
2
-4
0
III IV I II III IV I II III IV I II III IV I II IV
9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9
2009 2010 2011 2012 2013
2009 2010 2011 2012 2013
Today we will present in more detail our view of past macroeconomic developments and our
expectations for the period ahead.
* * *
Mounting doubts about the sustainability of public debt in advanced economies and
unfavourable growth indicators for the second and third quarters have led to a downward
revision of the global economy growth forecasts, particularly that of the euro area. The third
quarter witnessed a drop in share prices and a rise in interest rates on public debt in a
number of countries. The prices of primary commodities, such as oil, base metals and
agricultural products, also declined in the third quarter. Though financial markets showed
some recovery in October, global economic growth will no doubt be slower than expected
until recently. Also, the governments might not be able to respond with fiscal stimuli as they
did during the first wave of the crisis, primarily due to high public debt.
Turbulences in the global financial market led to an increase in Serbia's risk premium
(measured by EMBI), albeit smaller than those of other countries in the region. As a result,
the dinar was more stable during this period than the currencies of other East European
countries with flexible exchange rate, even without the National Bank of Serbia's
interventions in the foreign exchange market. Together with high demand for the first issue of
the Republic of Serbia's Eurobonds, the prior indicates that Serbia's financial resilience to
external shocks of this kind is greater than in previous years. The stability of the dinar was
underpinned largely by the inflow of foreign direct investments, as well as by the conclusion
of a precautionary arrangement with the International Monetary Fund.
Chart 3 Risk premium indicator - EMBI by country Chart 4 Movements in exchange rates of national currencies
(daily, in basis points)
against the euro*
(September 30, 2010 = 100)
800 112
108
700
104
600
100
500
96
92
400
88
300
84
200
80
100
76
7 8 9 10 11
9 11 12 1 2 3 4 6 7 8 9 10
2011 2011 2011 2011 2011
2010 2011
Hungary Bulgaria
Turkey Czech Republic Romania
Poland Serbia
Poland Hungary Serbia
Croatia EMBI Global Composite
* Growth indicates appreciation.
Turkey
The government's commitment under the arrangement to run a sustainable fiscal policy
lessens the risk of a public debt crisis in Serbia, which is of paramount importance in light of
the forthcoming parliamentary and local elections. In an environment of a global collapse of
confidence in public finance sustainability, the perception of Serbia's risk will depend most on
the sustainability of its budgetary framework.
* * *
The slowing of global growth over the previous two quarters, and notably that of the euro
area, has already reflected on the Serbian economy. According to preliminary estimates, in
the third quarter GDP rose 0.7% year-on-year and fell 0.4% quarter-on-quarter.
The fall in economic activity in the third quarter is for its major part due to the reduced final
consumption of households.
Chart 5 Economic activity indicators
Chart 6 Contributions to quarterly GDP growth
(seasonally-adjusted data, 2008 = 100)
(in p.p.)
101
8
100
6
4.1
99
4
2.4
2
98
1.2
0.5
0.5 0.5
1.4
-0.7
0
97 -1.4
-1.2
-0.5
-0.4
-0.7 -0.7 -0.5
-1.0
-1.0
-2
96
-4
95
-6
94
-8
III IV I II III IV I II III IV I II III IV I II III
III IV I II III IV I II III IV I II III IV I II III
2007 2008 2009 2010 2011*
2007 2008 2009 2010 2011*
Total final consumption Investment
GDP Non-agricultural value added
Net exports GDP (%)
* NBS estimate.
* NBS estimate.
Chart 7 Retail trade
Chart 8 Average net wages
(seasonally-adjusted data, 2008 = 100)
(2008=100)
102
120
98
94 110
90
86
100
82
78
90
74
70
80
III IV I II III IV I II III IV I II III IV I II III
III IV I II III IV I II III IV I II III IV I II III
2007 2008 2009 2010 2011
2007 2008 2009 2010 2011
In real terms
In nominal terms
With exports and imports increasing only modestly in real terms, the contribution of net
exports to GDP growth in the third quarter was neutral. Once again, exports failed to record
stronger growth due to the drop in exports of base metals, caused by weaker export demand,
especially from the euro area countries. On the side of imports, a decrease was registered
for intermediate goods and an increase for equipment and consumer goods.
Chart 10 Imports by key components
Chart 9 Exports and imports
(seasonally-adjusted data, 2008=100)
(in EUR mln)
120
1,600
110
1,400
100
1,200
Imports 90
1,000
80
800
70
600
Exports
60
400
50
200
III IV I II III IV I II III IV I II III IV I II III
9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9
2007 2008 2009 2010 2011
2007 2008 2009 2010 2011
Original data Seasonally-adjusted data
Capital goods Intermediate goods Consumer goods
Trend-cycle
Imports of equipment are the key indicator of an upturn in fixed investment in the third
quarter, fixed investment being the only component with an estimated positive contribution to
GDP growth.
With downward revisions to growth forecasts for our key trading partners, the National Bank
of Serbia revised down its GDP growth projection for Serbia to around 2.0% in 2011 and
around 1.5% in 2012. The National Bank of Serbia's projection is based on the expected
stagnant economic activity in the euro area in 2012 and a decline in some of our important
export partners.
Global growth deceleration, particularly in the EU and CEFTA countries, could feed through
to the Serbian economy along the following channels: (1) lower export demand for our
products, (2) a decline in direct and portfolio investments, (3) higher interest rates due to
rising country risk premium, and (4) more limited access to foreign sources of funding. The
channels of impact of the global slow-down on the Serbian economy are discussed in more
detail in a separate text box of this Inflation Report. However, let me reiterate: despite the
inevitable consequences of the slowdown which we have thoroughly analysed, we see it as
encouraging that risk premium movements so far indicate higher financial resilience of Serbia
to this kind of external shocks than in earlier years.
On the whole, we estimate that in 2011, the greatest contribution to the growth of economic
activity will come from investments. A positive contribution is also expected from net exports,
whereas that of final consumption will be negative this year.
Chart 11 GDP growth projection Chart 12 Contributions to y-o-y GDP growth*
(y-o-y rates, in %) (in p.p.)
8 18
12
6
9.3
5.4
5.4
3.6
6
4.3 3.8
2.5
2.0
4
1.5
1.0
0
2
-3.5
-6
0
-12
-2 -18
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-4
Net exports Investment
III IV I II III IV I II III IV I II III IV I II IV
Final consumption GDP (%)
2009 2010 2011 2012 2013
* NBS estimate for 2011 and 2012.
Although we anticipate slower investment in the coming year, the effects of some
investments already underway, notably those in the automotive and oil industry, will begin to
reflect in output and export figures only next year. However, their impact will however be
lessened by the weakening global demand, including that of our export partners. Given the
still modest growth forecast for the next year, final domestic consumption and, by extension,
imports should also show moderate growth.
We wish to underline again that sustainability of economic growth is more important than its
pace, which assumes further shifting of sources of growth from domestic demand towards
net export demand, with a greater contribution of investments within domestic demand.
* * *
Inflation has been declining steadily since May this year. The third quarter saw deflation of
0.4%, i.e. a drop in year-on-year inflation from 12.7% in June to 9.3% in September,
consistent with our expectations from the August Inflation Report.
Consumer prices in the third quarter were pushed down by seasonal decreases of fruit and
vegetable prices. A sharp decline in these prices since April was due to a more abundant
fruit and vegetable harvest this year.
Chart 14 Core inflation incl. and excl.food prices
Chart 13 Price movements
(y-o-y growth, in %)
(y-o-y growth, in %)
30
16
14 25
12
20
10
15
8.8 12.7
8.7
8
10
8.8
6
5.3
5
5.3
4
0
2
-5
0
10
9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9
9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 10
2007 2008 2009 2010 2011
2007 2008 2009 2010 2011
Core inflation including food
Consumer price inflation
Food prices within core inflation
Core inflation including food
Core inflation excluding food
Core inflation excluding food
Processed food prices grew at a slower rate compared to the quarter before, primarily on
account of a decline in prices of primary agricultural products.
Conversely, market-determined non-food product prices grew faster than in Q2, prompted by
several larger seasonal price increases, rather than reflecting a general tendency in
movement of these prices.
Chart 15 Chart 16
Core inflation by component Contribution to y-o-y inflation
(monthly growth, in %) ( in p.p.)
5 16
14,7
14,1
14
13,412,7
12,6
4
12,1
11,2
12
10,3
10,5
9,6
3 8,9
9,3
10
8,7
2 8
4,1
6
1
0.4 4 1,9
0.2
0
-0.1
2
2,4
0,6
-1 0
-0,3
-2
-2
10 11 12 1 2 3 4 5 6 7 8 9 10
10
9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9
2010 2011
Fruits and vegetables
2007 2008 2009 2010 2011
Food prices within core inflation
Core inflation excluding food
Food prices within core inflation
Administered prices
Core inflation excluding food
Petroleum products
Core inflation including food
CPI
Contrary to the first half of the year, administered prices grew modestly in the third quarter.
The only significant increase was recorded for landline telephony services. The overall
increase in the year to September however came at 9.5%, extending beyond the 7±2%
framework planned for the whole of 2011.
According to last week's data, consumer prices rose in October by 0.4% month-on-month or
8.7% year-on-year, which shows continuation of a downward trend in inflation.
We expect year-on-year inflation to decline further and to return within the target band in the
first quarter of 2012.
Disinflationary pressures stemming from low aggregate demand will be strong in the coming
period reflecting lower growth expectations for Serbia.
The lowering fruit and vegetable prices over the previous two quarters will be factored into
year-on-year inflation rates until the next season. However, being currently at a low level,
these prices could rise faster next year than other prices, even if the 2012 agricultural season
turns average.
Given the developments on the global markets and the lowering of wheat and corn prices, a
rise in processed food prices in the coming period will probably be modest.
Chart 17 Chart 18 One-year ahead expected and targeted inflation
World prices of primary commodities
(in %)
(2010=100)
190
10
170 9
150 8
7.4
7
130
6.7
6
110
5
90
4
70
3
50
2
30
12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11
9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9
10
2010 2011
2007 2008 2009 2010 2011
Financial sector (Gallup and Strategic Agency)
Ural oil prices
Financial sector (Thomson Reuters Agency)
Corn prices
Financial sector (Bloomberg)
Wheat prices Targeted inflation
Copper prices Tolerance band
Declining world prices of other primary commodities, such as oil and base metals will also
work towards the disinflatory effect.
Furthermore, we expect administered price growth to be slower in 2012 than in this and
earlier years, though we may see another departure from the planned level.
The disinflation process will be further fuelled by declining inflation expectations. Inflation
expectations declined from some 8.0% to 6.7% in the last two months, and we expect this
tendency to continue.
A fall in year-on-year inflation will be particularly pronounced until March-April next year as a
result of the base effect. Namely, although monthly inflation rates have decreased over the
last six months to levels consistent with the target, the year-on-year rate remains above the
target as price hikes from late 2010 and early 2011 are still included in its calculation. As
these price hikes phase out of the year-on-year calculation and new, lower monthly inflation
rates are taken in, year-on-year inflation will decline and return within the target band.
Chart 19 Chart 20
Short-term inflation projection Inflation projection
(y-o-y rates, in %) (y-o-y rates, in %)
16 16
14 14
12 12
10 10
Projection
8 8
6 6
4 4
2 2
0 0
12 1 2 3 4 5 6 7 8 9 10 11 12 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9
2010 2011 2009 2010 2011 2012 2013
The key risks to the presented inflation projection are largely associated with movements in
the international environment and fiscal policy at home.
World analysts agree in the assessment that global growth will be slower than expected until
recently, but there is a large difference across individual forecasts. If, contrary to the currently
prevailing expectations, the world economy is swept by a new wave of recession, negative
repercussions for the Serbian economy, and the disinflationary effects arising from aggregate
demand, would be more pronounced than envisaged in our projection.
As regards developments in the international environment, uncertainty remains regarding risk
premium movements, which may affect capital flows and exchange rate trends. Movements
in risk premium will also be largely affected by future compliance with the budgetary
framework. In this regard, conclusion of a precautionary arrangement with the International
Monetary Fund is a step in the right direction as it contributes to macroeconomic stability. If
fiscal policy adheres to the planned framework, there will be scope for monetary policy to
respond more strongly to the disinflationary impact of slackening economic activity.
* * *
Over the last six months, responding to diminishing inflationary pressures, the National Bank
of Serbia lowered the key policy rate, by a total of 2.5 percentage points to its current level of
10.0%.
Based on the inflation projection presented today and its underlying risks, the Executive
Board of the National Bank of Serbia judges that the key policy rate is more likely to be
lowered further in the coming period than raised or kept on hold.
The Executive Board confirms its previously expressed confidence that year-on-year inflation
will continue to fall and that its return within the target tolerance band is likely in the first
quarter of the next year.