Jorgovanka Tabaković: Overview of recent monetary and
macroeconomic trends in Serbia
Introductory speech by Dr Jorgovanka Tabaković, Governor of the National Bank of Serbia,
at the presentation of the Inflation Report - August 2016, Belgrade, 17 August 2016.
* * *
Ladies and gentlemen, dear colleagues,
Welcome to the presentation of the August Inflation Report. As always, we will give you an
overview of monetary and macroeconomic trends for the period since the previous Report
and set out our expectations for 2016 and 2017.
However, before we move on to this, I would like to share with you a few thoughts about a
much longer period, because recently it was four years since my appointment as the
Governor of the National Bank of Serbia. Together with us you were witnesses to the
numerous challenges we faced, particularly from the international environment. Despite the
challenges, the National Bank of Serbia has achieved admirable results - inflation is low and
stable today as it has been for three years straight, which was not the case earlier. Our good
results are not only due to global circumstances and low inflation abroad, because inflation in
the international environment was around 2% rather long, while at the same time it was much
higher and more volatile in Serbia. It was the reduction in Serbia's internal and external
imbalances and the maintaining of relative stability of the exchange rate that were
instrumental to bringing inflation in Serbia to a level comparable to that of other countries. At
the same time, deflation was averted. Expectations of market participants that inflation will
remain low for the next two years represent another indicator of confidence in the National
Bank of Serbia and the measures it implements.
Chart 2
One-year ahead inflation expectations* and target
Chart 1 Consumer prices and target tolerance band
tolerance band
(y-o-y rates, in %)
(y-o-y rates, in %)
16 Corporate sector
22
Financial sector (Ninamedia)
20 Financial sector (Bloomberg)
14
Target tolerance band
18
Targeted inflation
12
16
10
14
12
8
10
6
8
5.5
6
4
4.0
4
2.5
2,8
2
1.2 2 2,0
2,0
0
0
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7
2009 2010 2011 2012 2013 2014 2015 2016
2009 2010 2011 2012 2013 2014 2015 2016
Consumer prices (CPI)
Sources: Strategic, Gallup, Ipsos/Ninamedia, Bloomberg and NBS.
Targeted inflation
Sources: SORS and
* Ninamedia agency since December 2014, and Ipsos and Gallup in the prior period.
Target tolerance band
NBS calculation.
The survey was not conducted in November 2014.
In conditions of relatively high euroisation of the financial system which has grown strong
roots in Serbia and is inherited from the hyperinflation period, we all feel very strongly about
the relative stability of the exchange rate. It is important to us because relative stability of the
exchange rate means lower pressure on the prices of imported products and in turn on
inflation at home. Moreover, it has shown to be the cornerstone of the overall financial
stability and business predictability. I believe that over the past four years we have
demonstrated not only the desire but also the capacity to achieve and maintain relative
stability of the exchange rate, even in difficult times, when many other countries failed to do
so. I use the word "capacity" because the value of the dinar was preserved owing to greater
effectiveness of the National Bank of Serbia's interventions in the foreign exchange market,
whereas overall stability was attained through full coordination of monetary and fiscal policy
measures. You can judge for yourselves whether it truly is so based on the fact that over the
past four years the dinar depreciated by less than 3.5%.
Chart 3 Chart 4 Movements in EUR/RSD exchange rate and NBS FX
Key policy rate and the average rate on dinar
corporate and household loans* interventions
(EUR bln)
(in %) (EUR/RSD)
21
126 5
4
122
18
3
118
15 2
114
1
12
110 0
9 -1
106
9.1
-2
6 102
-3
Weighted average rate on dinar
98
4.0
3 -4
corporate and household loans
Key policy rate, period-average
94 -5
0
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 5 7 10 1 5 8
5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7
2010 2011 2012 2013 2014 2015 2016
2014 2015 2016
NBS interventions, cumulative net (breakpoint: beginning of 2013) (RHS)
Source: NBS.
EUR/RSD (LHS)
* Excluding revolving loans, current account overdrafts and credit card debt. Source: NBS.
Having reduced the key policy rate from 11.75%, where it was in May 2013, to the current
4.0%, which is its lowest since the introduction of the inflation targeting regime, the National
Bank of Serbia, beyond any doubt, has provided critical support to the country's economic
recovery. As a result, interest rates on dinar loans to corporates and households dropped by
more than 10 percentage points. We find it encouraging that the number of your questions
about dinarisation is increasing because this means that you too recognise that dinarisation
is gradually and unquestionably growing in the household sector. Dinar savings have risen
almost threefold since end-2012, which we interpret as growth of confidence in the domestic
currency, as well as in the activities of the NBS. When compared to savings in foreign
currencies, savings in dinars do not measure up, but they are constantly increasing. In the
first half of the year, 75% of new loans to households were denominated in dinars. We are
pleased to see that the results achieved by the National Bank of Serbia - such as low
inflation, relative stability of the exchange rate and halved interest rates in the dinar market -
are encouraging both household saving and borrowing in dinars. Aware of how deep the
roots of euroisation are, it was clear to us that the process of dinarisation would be a long
one, and yet we decided to go ahead with it. It is equally important that the household sector
is not the only one to record an upturn in lending - overall lending activity has been on the
mend since the second half of 2015, and in June domestic lending to corporates and
households recorded growth of 3.5% year-on-year.
Chart 5 Interest rates on dinar corporate and household Chart 6 Dinarisation of household loans and a rise in
loans* dinar savings
(weighted average values, p.a., in %)
(in %)
(RSD bln)
24
60 50
21
50 45
18
40 40
15
12
30 35
9 10.5
20 30
6
6.6
Share of dinar in bank receivables from
10 25
New dinar household loans
3
household sector (RHS)
New dinar corporate loans
Dinar savings (LHS)
0
0 20
1 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5
9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5
2011 2012 2013 2014 2015 2016
2013 2014 2015 2016
Source: NBS.
Source: NBS.
* Excluding revolving loans, current account overdrafts and credit card debt.
I have been serving as Governor during a period marked by anything but certainties. More
than that, it has been a period of unpredictable and turbulent developments. And yet, in such
circumstances, we have managed to achieve and safeguard stability - both price and
financial. We have recently had another opportunity to see for ourselves how important the
role of a central bank is, namely when the United Kingdom voted to leave the European
Union and Brexit caused havoc among investors in the global financial market. However,
owing to our well-timed response, the Serbian foreign exchange market calmed down
promptly and the dinar weakened by 0.1% that day. The following week, appreciation
pressures on the dinar built up and our foreign currency purchases in July outstripped the
sales in the entire second quarter. The result of such an approach by the National Bank of
Serbia was relative stability of the exchange rate and the EUR 85 million inflow to foreign
exchange reserves on account of interventions in the foreign exchange market since the start
of 2015.
Ladies and gentlemen, dear guests,
I am hopeful that the results we have achieved undeniably attest to the National Bank of
Serbia's commitment to preserving low and stable inflation and a sound financial system in
the coming period, as this is the best way for a central bank to support economic recovery
and further strengthening of domestic macroeconomic fundamentals.
In a few moments, my colleagues from the Directorate for Economic Research and Statistics
will inform you about the details of our latest projections, but I too would like to underline that
Serbia's macroeconomic outlook is even more favourable than it was when we last met in
May. We expect economic growth to accelerate to 2.5% this and 3% next year. Strong
improvement of fiscal prospects continued into the second quarter, driven mainly by
sustainable increase in tax revenues. We estimate that budget deficit will be even lower this
year, and that it will equal 2.5% of GDP. Year-on-year inflation was 1.2% in July, and
according to our forecast, it will return within the target tolerance band in the first half of 2017
and remain within the band thereafter. We expect a further reduction in the current account
deficit - from 4.8% in 2015 to 4.2% this year, as well as that it will be fully covered by the
inflow of foreign direct investment.
Internal and external imbalances continue to narrow. Owing to full coordination of monetary
and fiscal policy measures, Serbia is now much more resilient to external shocks - it boasts
much stronger macroeconomic fundamentals and a high level of foreign exchange reserves.
We rarely have an opportunity to repeatedly revise our economic projections upward,
therefore we are particularly pleased that the past 18 months were chiefly marked by such
successive upward revisions.
In the period ahead, the National Bank of Serbia will continue to closely monitor and analyse
developments in the international financial and commodity markets, and make its future
decisions on those grounds with the aim of preserving the stability that it has achieved.
Last but not least, having recognised the importance of communication with the public for the
success of the bank's policy, we are aspiring to improve it further. As the number of central
banks using social networks as a communication channel is increasing, last week the
National Bank of Serbia created profiles on Twitter and Facebook. I am inviting you to join
our Twitter and Facebook pages to keep abreast of our activities by following us on these
networks.
Thank you for your attention.