national bank of serbia speech at the presentation of the inflation report – may 2018 dr jorgovanka tabakovic, governor belgrade, 17 may 2018 ladies and gentlemen, representatives of the press, dear colleagues, welcome to the presentation of the may inflation report. we will give you an overview of the current macroeconomic developments, our new projections and monetary policy decisions. low inflationary pressures, with anchored inflation expectations, a sustained fiscal surplus in conditions of high growth of domestic gdp, and credit growth, with an extended fall in the share of non - performing loans to begin with, i would like to share with you our overall assessment that economic developments in the past months of 2018 have been favourable and that the positive trends are expected to continue for the remainder of the year. gdp growth particularly stands out given that, according to the preliminary estimate of the serbian statistical office, it accelerated considerably in the first quarter of 2018, to 4. 5 % year - on - year. the favourable structure of its sources is indicated by stepped - up growth in investment and activity in production sectors, primarily construction and manufacturing. in accordance with our expectations, during the first four months of this year, year - on - year inflation decelerated significantly, largely due to the base effect, that is, the drop - out of early - 2017 one - off price hikes of certain products and services from the calculation. consumer prices rose 1. 1 % year - on - year in april, with core inflation of 0. 8 % year - on - year, which is below our expectations stated in the february inflation report. the reasons for this are primarily lower - than - expected import prices and low costs in food production. coupled with lower inflation expectations, this confirms that inflationary pressures have additionally abated since the beginning of the year. positive fiscal movements continued in the first quarter, with a fiscal surplus of 0. 4 % of gdp recorded in conditions of accelerated growth, higher corporate profitability, positive tendencies in the labour market and more efficient tax collection. by structure, revenues increased mostly on account of excise taxes, allocated social insurance contributions and profit tax, while on the expenditure side, the rise in capital expenditures is assessed as highly positive. also conducive to the favourable fiscal result was the reduction in interest expenses in conditions of the government ’ s subdued need for borrowing, monetary policy easing by the national bank of serbia and a low country risk premium. as regards external economic relations, the current account deficit has

complex structured products and the liquidity in this market under stressed conditions. let me point out three key weaknesses : • first, the ability of investors to assess the extent of concentrations among various types of collateral – including sub - prime – within the structured finance securities has clearly been shown to be less than adequate. indeed, conducting adequate due diligence regarding the nature of underlying investment exposures cannot be replaced by decision - making based almost exclusively on ratings. • second, market participants were not sufficiently alert to the possibility that liquidity could dry up in structured finance markets, even though secondary market liquidity in the various structured finance markets has been traditionally thin. as you know, there are several reasons for this, inter alia : the specificity of these instruments, which are often tailor - made ; the “ buy - and - hold ” strategies followed by a large number of investors ( including, pension funds, insurers, and banks ) ; and the limited comparability of mark - to - model valuations, stemming from the complexity of these instruments. • third, the asset backed commercial paper ( abcp ) structures had intrinsic liquidity risk because they invested the proceeds of short term liabilities into longer maturity structured finance assets. in some cases, certain types of abcp structures such as structured investment vehicles ( sivs ) faced increased pressure resulting from an inability to roll - over. this came both from investor anxiety concerning the underlying collateral and the inability to value adequately the collateral as they were forced to sell assets. there are indications that the liquidity strains associated to these structures are not yet over. three key weaknesses of credit markets whilst it is too early to make a definitive assessment, certain supervisory and regulatory issues can already be identified as warranting further attention or action. initiatives are already underway at the international and eu level to address these various issues, but for our exchange of views here today i would like to focus on three key issues : transparency, valuation of complex structured products, and liquidity risk management practices, including liquidity risk stress - testing. • first, transparency for markets, investors and regulators. adequate transparency is a necessary basis for an efficient functioning of financial markets. recent experience has shown how perceived opaqueness or uncertainty regarding the underlying exposures, in particular of financial institutions, has translated into a loss of confidence with a resulting disruption in the interbank market. there have been recently many calls for enhanced market transparency both from banks ( e. g. enhanced disclosure of banks ’ liquid