radovan jelasic : development of the municipal bond market in serbia speech by mr radovan jelasic, governor of the national bank of serbia, at naled – national alliance for local economic development, belgrade, 13 may 2009. * * * it gives me great pleasure to welcome you all on behalf of the national bank of serbia. we in the national bank have long been advocating the development of bond markets by not only the government and local government bodies, but by other issuers as well. it is the crisis period that shows best that bankcentric systems – elsewhere and in europe, but more poignantly in serbia where banks account for over 90 % of the financial sector – face significant challenges, such as : a ) how to refinance loans due for repayment, b ) how to obtain fresh capital in the market, and c ) how to preserve public trust in the banking system. of course, one should also think in terms of catering for the needs of our clients since a bank is not an end in itself but represents a transmission mechanism between those who save and those who need the money. inefficacy of the banking sector necessarily affects the overall economy, and bank debtors are no exception. allow me to illustrate this idea by the following example : even if the european central bank cuts its policy rate ( which, at the moment, measures 1. 0 % only ), that does not necessarily mean that banks will automatically have access to cheaper funding especially if the risk premium for banks is increased. bank clients would in such a situation have two options : a ) to take more expensive loans from banks, or b ) to bypass banks altogether and borrow directly in the capital market by issuing own securities. as the nbs is also entrusted with the supervision of insurance companies and voluntary pension funds, urgent development of the securities market, including securities issued by local government bodies, is of our utmost interest. such development is also in the interest of commercial banks since securities operations are a typical segment of investment banking operations – issuing securities without undertaking credit risk. for that particular reason, the nbs is of the opinion that amid numerous projects and proposals relating to the development of the capital market, it is high time a concrete project was finally undertaken. some of the major prerequisites for the successful implementation of such a project are as follows : 1. local government bodies should have their own sources of income instead of relying on the “ transfer of funds ” which can be

beneficial to everybody, including exports sector, and such beneficial effect has two aspects. first, it increases efficiency of operations of economic entities. when inflation is low, changes in prices give an important signal to producers when taking decisions on what to produce, what to buy, how much to put aside for savings, etc. because changes in prices represent something concrete, a change in either demand or supply. on the other hand, when inflation is high, it is difficult to interpret changes in prices – we cannot know whether demand for such product is increasing or a change in price is actually a result of the general increase in prices. investment decisions taken in the environment of low inflation are almost always better than those taken in the environment of high and variable inflation. for that particular reason, most economists believe that economies operating at a lower level of inflation have a higher average growth rate than those in which the rate of inflation is higher. second, low inflation is beneficial to the exports sector as well as to the economy in general as it induces lowering of interest rates. i can safely say today that, despite all the shocks to which our economy ( and not only ours ) is exposed, inflation is under control. many may ask : if inflation is under control, why are interest rates still high in real terms? there is not much enthusiasm in serbia today for saving money even though interest rates are quite high, but people are very enthusiastic when it comes to borrowing at such rates. thus, regardless of the fact that we assess current interest rates as high in real terms, we borrow more and save less. therefore, my second message reads as follows : the best option for the nbs is to persist in its attempts to attain low and stable rate of inflation in order to ensure low interest rates in real terms. but what about the exchange rate? is it true that appreciation of the exchange rate keeps inflation under control by putting an enormous burden on the exports sector? i wish to underline that the monetary policy implemented by the nbs aimed to accomplish only the main objective which is defined by the law – „ to achieve and maintain price stability “. during the period when we were raising the key policy rate because of increased inflationary pressures at end - august, we managed to strengthen the dinar. tight monetary policy was indispensable in order to keep inflation within the announced target range, which in this year is closer to the lower bound of the projected range, and at the same time, making sure that we will