02.03.2020.
Honourable members of the Government, respected representatives of the diplomatic corps, esteemed fellow economists, respected representatives of the business community, ladies and gentlemen, dear friends,
I will start by saying that we learn from the past and are committed to the future! Not only is this in the spirit of the Kopaonik Business Forum, but it depicts the very task of our generation – to leave a stronger country for the future generations!
It obliges us in the National bank of Serbia to continue our work in the period ahead impartially, to the benefit of all citizens of Serbia, regardless of whether they are consumers, employers, depositors or investors. We will do this by providing stability, since it is the point where everyone’s interests meet – like bridges. In the words of great Andrić: “They belong to all and treat all alike; they are useful, always built for a purpose, at a spot where most human needs entwine; they are more durable than other buildings and serve no secret or evil purpose.”
Inflation in Serbia is rarely talked about today. But it is easier to plan and to do business. However, this does not mean that the work for the central bank, or for anyone, stops here. Today, when we have successfully implemented stabilisation, there is a sound basis to talk about further structural reforms, as well as a reason for justified optimism as to their successful implementation.
Of course, challenges will come up again, in different forms and of different intensity, which requires us to continue working on strengthening our economy. To work, not just in any way, but together and decisively, no matter what our positions are, to the same end. The economic policy we have implemented for almost eight years now has created a favourable environment for investment. Policy coordination and team approach, support to the same goal – to improve Serbia and leave a stronger country to future generations, is the only way to go. And the results are those that are measured and that confirm or challenge whether those measures were the right ones. Today we are talking about Serbia with low inflation, significantly more favourable financing conditions, relatively stable dinar exchange rate, single-digit unemployment rate; Serbia with regulated public finances and less regional differences, with restored and better infrastructure, Serbia that introduces modern services facilitating faster, easier and cheaper transactions. Let us preserve that and keep going. I can promise you that the NBS will change neither its direction nor pace of work – we continue to be the guardian of stability, to work proactively and to be one of the leaders in innovation.
(slide 2) We adopted and implemented many measures in the past almost eight years. When you know what the state of our economy was – it is clear that the key task was to set the economy on a sound footing. Today we are talking about making it stronger. We are discussing whether Serbia will grow at the rate of 4%, 5%, 6%... while there is consensus that growth will certainly be dynamic and driven by investments, exports and consumption. An important precondition for such growth dynamics and structure is overall stability – monetary, financial, fiscal, political. Here I cannot but mention Aleksandar Vučić who was the only one who understood the totality of the economic system, and who pledged his entire human and political capital in the future of Serbia. It was neither easy nor popular, as our economy was deep in structural problems. We adopted measures which were harmonised and we worked as a team. We have worked because of people, for people and with people.
That a lot has been done is confirmed by the fact that topics such as digital economy, creative industries, smart specialisation, fourth industrial revolution are in the focus of this gathering... This shows that the country has stabilised. Not so long ago in these fora we analysed the causes and consequences of the dinar depreciation of 8% annually and the pronounced dinar instability at the time, we were addressing the factors of double-digit inflation, the absence of fiscal discipline, rising unemployment rate of over 23%.
The imbalances were huge and that was our reality. Today, after less than a decade, we are talking about Serbia with low inflation, significantly more favourable financing conditions, relatively stable dinar exchange rate, single-digit unemployment rate. We are talking about a country with sound public finance as no one before Aleksandar Vučić had the courage, personal or political strength, nor did understood the necessity of fiscal consolidation measures. No matter how politically unpopular, these measures were indispensable, and he understood this very well and put the future of Serbia before everything else. Who can object to the opening of new factories in all parts of Serbia? I believe no one. No one should not mind the fact that new factories are being opened and that formal employment in the private sector rose by 230 000 people within the new investment cycle. They should not have a problem with the fact that employment differences across regions are reduced, that road infrastructure and clinics are refurbished and built, that residential building is on the rise. Our economy is more and more present in the global market and we cooperate with an increasing number of countries. These are all the necessary preconditions for competitive and sustainable growth, which is and must be the focus of responsible economic policy makers.
(slide 3) We returned stability to Serbia – in every sense of the word and we created a more stimulating business and investment climate. We improved the economy’s structural competitiveness; those who want to work have the conditions to do so, and our businessmen are capable and have good business ideas. Of course, there will always be areas which require further improvements imposed by modern conditions of running a business, or they are simply a necessity if you want to keep the competitive advantage. We are all aware that there are also areas in which reforms take longer and require huge resources, including human, as well as excellent strategies. This is where your contribution can play an important role.
(slide 4) I would like to single out a few results of the National Bank of Serbia which contributed to the overall environment and are important going forward:
These are just a few areas which are indispensable in the context of this Forum, and they are worthy of a more detailed discussion. When talking about trends I will use two milestones. The first one is August 2012, when we started to change the approach to monetary policy conduct and provided stability, and the second one is 2015, when the new investment cycle began in Serbia.
(slide 5) Let me start from the beginning. Today inflation in Serbia is not discussed in the same way as before, since inflation has been low and stable for the seventh year in a row, averaging around 2%. This is a fact, and everyone can judge for themselves whether this is good or not. However, this also bothers some people, though to be truthful, they are rare, and they say that the reason for low inflation lies in the global circumstances. Let me remind you that, when inflation in the euro area averaged 2%, and it was at that level in the period from 2007 until 2013, average inflation in Serbia was 8.5%. What was behind the 8.5% inflation? The exchange rate of the dinar, unanchored inflation expectations and bad fiscal policy. This means that such a situation could have been avoided. Is 8.5% inflation better than low and stable inflation at around 2%? I think that the answer is clear! For that reason you can count on the National Bank of Serbia to have a clear direction and course of action in the coming period, because we have not adjusted our goals to circumstances, nor shall we do so in the future! You are familiar with our inflation target, 3±1.5 pp. It is set at that level until end-2022. We agreed on it with the Serbian Government, honouring the fact that convergence towards the European Union is ahead of us. Inflation may diverge temporarily from the set target if returning inflation to the target in the short run would require such changes in the monetary policy which could cause disruption to macroeconomic processes.
(slide 6) By putting inflation under control, we have restored the confidence in monetary policy, which now makes it easier for us to achieve results. The decomposition of core inflation also points to the same conclusion – anchored inflation expectations were one of the factors of reducing core inflation to the desired level. It is up to us to continue to justify the trust in our measures, and I say we will, because the trust binds us.
(slide 7) In conditions of inherited high euroisation and high pass-through effect of the exchange rate on prices, putting inflation under control would not have been possible without the stabilisation of the FX market. The impact of individual components on the movement of import prices in dinars – clearly shows that relative stability of the dinar exchange rate has reduced the volatility and effects of imported inflation, and hence its influence on domestic inflation and inflation expectations. Those who are particularly interested in this topic can have a look at Text box 1 – Significance of import prices for inflation in Serbia, in the February 2018 Inflation Report.
We have been improving the inflation targeting regime over time. We have done this, just as other countries in the inflation targeting regime have. I invite everyone interested in the topic to study the regime’s evolution and practice worldwide. We talked about this a lot, we wrote about this, we worked a lot and we have done a lot. Results are measurable and they confirm or dispute the appropriateness of measures. At the beginning of the year, based on the votes of my colleagues - central bank governors, I was given the award for contribution to economic growth and stabilisation. I have already said this and I will repeat it: even though this is a personal award, I consider it a recognition of the changes we have implemented in Serbia since the second half of 2012, the changes which the President of Serbia and his associates have worked on, the changes I and my associates have worked on, but the recognition belongs first and foremost to Serbia and its citizens. This means that the people who are responsible for stability in their own countries judged that we do our work best and in the interest of all. And this gives me the right to ask everyone that when they advise, they do not forget that our professional and human honor obliges us to put the interests of the society and country to which we belong first. Not to say, "it is true, economic results are better BUT ..." always some hopeless BUT that often looks across, into someone else's yard, that tacitly gives young people the right to pack their bags and leave their families, friends, and their country.
(slide 8) Many of you here have had an opportunity to pass measures in different domains. Therefore, you know first-hand that nothing gets resolved on its own. I know that today, tomorrow or in ten years I can stand behind and defend each decision I have made, signed, and not merely say that my intentions were good or that this was what a “model” was telling us to do. I’ll share with you a quote by Isidora Sekulić about the meaning of words and of what is being said. “How strange and mighty is the word, in its illusiveness and immateriality. One says something, but it is not true, one promises something, but that does not happen. And still, the word binds, releases, cuts, ties, burns, extinguishes. And it stands!” It gives you immense pleasure when you are able to stand behind what you said, did and achieved to enable a better life for the people of Serbia. And I can do that.
One of the changes introduced in 2012 was also a proactive approach – we do not let things just “happen” to us. We have also changed the manner in which the National Bank of Serbia participates in the FX and dinar market. Our guiding principles in the FX market are known to all: the exchange rate is not tailored to the needs of individuals or interest groups. Our goal is everyone – exporters and importers, those who borrow and those who can save... This is what I call – stability as the meeting point of everyone’s interests.
We measure our work according to results, and not consequences. Since August 2012 until today, we purchased around EUR 4 bn net in the FX market, and we still have the RSD/EUR exchange rate of around 117.5, which is a change of less than 1%. In this period, we almost doubled the net FX reserves. There are some – again, only few of them – who criticise us that we “keep the dinar strong artificially”, and to them I say – without our interventions, the dinar would be even stronger, and the data I just provided confirm this. We reacted to short-term external shocks, without affecting the exchange rate, and the interventions were rarer than in the previous period!
In December, J.P. Morgan, one of the most renowned financial institutions in the world, in its report on anticipated macroeconomic and financial developments in emerging countries for 2020, assessed that the Serbian dinar is realistically valued. Of the 25 currencies of emerging countries, whose value was analysed, the dinar is one of the two currencies assessed as being completely realistically valued, two currencies deviate mildly from the so-called fair value, while 21 currency was estimated as overvalued or undervalued. The assessment was made based on a model factoring in movements in the real effective exchange rate, productivity, trade conditions, interest rate differences, indicators of external and fiscal balance... I’ll say it one more time, the dinar was assessed as realistically valued, neither over nor underestimated.
(slide 9) Confidence in Serbia’s economic climate is rising, as confirmed by the economic expectations indicator for Serbia, compiled by the European Commission. We have created an environment where the relative stability of the dinar exchange rate stimulates growth of investment in tradable sectors by boosting the predictability of the business environment. This has a feedback effect on growth in export inflows and FX market stabilisation. Expressed in data – the export of Serbian goods and services from 2013 has been rising at the average annual rate of around 11% and its value has doubled – from EUR 11.5 bn to EUR 23.4 bn. The share of the goods and services export in GDP increased from 34% to 51%, and the export-to-import ratio rose from 67% to 84%.
(slide 10) The export of our goods and services maintained a strong pace in 2019 as well, despite a slowdown in global demand. Moreover, rising at the rate of 10.5% in 2019, its growth accelerated compared to the 9.6% from 2018.
In our latest meeting of the Council of the Governor, my colleagues and I analysed the factors of growth and concluded that effects from the international environment cannot be underestimated. Therefore, this result is neither small, nor insignificant. Our economy is quite open, which makes it exposed to influences. This is why the answer to these changing global conditions is the strengthening of domestic sources of growth. This is exactly what we do. Also, one of the factors of greater resilience of export to changes in external demand is the reduced concentration of Serbian export both by country and by product, on which we have worked systematically by fortifying relations with all who see Serbia as a good partner for cooperation and business.
(slide 11) Import is also increasing, with around three-quarters of its growth since the beginning of the investment cycle pertaining to intermediate goods and equipment. Import growth is partly attributable to consumer demand in conditions of improved living standard of citizens. The structure of imports is carefully monitored and analysed, because without true information and analyses we cannot have adequate measures either. In our view, imported equipment increases our economy’s export capacity, which is why in the medium term we expect export to continue to grow at high rates.
(slide 12) In terms of export, if the tendencies from the previous years continue, we expect the share of our export in GDP to reach 60% over the next several years, with manufacturing as the main driver of export growth, as anticipated. The value of manufacturing export in 2019 of EUR 16.1 bn was 60% higher than the value of its export at the beginning of the investment cycle (2015), and more than double relative to the beginning of 2012. Growth in our industry’s export capacity was under the favourable impact of the high inflow of FDI, which reached 8.2% of GDP in the past two years and was channelled mostly to tradable sectors.
(slide 13) I already said that we have changed the approach to monetary policy conduct, and that we have achieved much more at much lower expenses. This year as well, we will transfer 70% of our revenue to the Serbian budget, which means that there will be more funds for new investments and employment growth. Although the National Bank of Serbia is a non-profit institution, we are accountable to citizens and businesses on a daily basis – through low inflation, with the value of the exchange rate, better quality of services, more favourable loans... Also, the cost of conducting monetary policy to keep inflation under control is now more than four times lower than in 2013. At the same time, with more than four times lower costs, we achieved the result and inflation in Serbia now hovers around 2% for the seventh year in a row.
What certainly contributed to this is the modified model of repo auctions at end-2012, when we also changed the way we act in the dinar money market. We encouraged competition, and now we are the ones setting auction terms, instead of simply accepting them, as was the case in the past. The effect of competitive bids has led to more favourable financing conditions in the credit market, and the result of this approach is boosted lending to private sector. At the same time, by implementing this model, we also introduced an additional channel of responding to temporary shocks, which complements the necessary monetary policy flexibility in periods of more volatile capital flows. I will say one more time that this was another issue that we talked about a lot, we published papers about it as well, but most importantly – we have achieved results reflected in monetary and financial stability for the eight year.
(slide 14) As a result of our measures, the financial conditions in Serbia have been constantly improving. The key rate policy cuts have spilled over directly to interest rates on dinar loans to corporates and households, which are by 12 pp lower than in May 2013, when the cycle of rate cuts began.
Financing conditions for euro-indexed loans are also considerably more favourable, to a lesser degree owing to low interest rates in the euro area money market, and to a greater degree owing to the sharp fall in Serbia’s risk premium. The fall in Serbia’s risk premium reflects mainly the positive impact of domestic factors, which is also confirmed by our analysis presented in the February Inflation Report. These factors include reducing inflation and maintaining it at a low level, a sharp fall in NPLs, a decline in the share of public debt, as well as other indicators of the soundness of our economy.
(slide 15) Here, I would like to emphasise the importance of the key policy rate reduction by the NBS, which was one of the channels through which we contributed to the growth of economic activity and gradual closing of the negative output gap. Other central banks did the same thing – there were 71 policy rate cuts by 49 central banks globally. It was the most synchronised monetary policy action worldwide. According to the IMF’s assessment, central bank measures added 0.5 pp to global growth, whereas in Serbia the effect of such measure taken by the NBS was even higher.
(slide 16) That too is one of the channels that help us contribute to the common results of economic policy, because results would not be possible without full coordination. These are the results that are visible in Serbia’s progress in competitiveness lists, its improved credit rating and lower risk premium. More importantly, they are visible in the growth in economic activity, investments, exports, employment and wages, which is our common goal. As a reminder, during the new investment cycle, formal employment in the private sector rose by more than 230,000. It is that many people that were employed, with the highest growth recorded in manufacturing.
(slide 17) In 2015, Serbia started a new investment cycle, which is the other milestone I mentioned in the beginning. Since then, fixed investments accelerated growth, which came at around 50% in the period 2015–2019. Cumulative growth rate of private investments in the past five years came at over 40% and of government investments over 100%. In that period, investment grew at an average annual rate of 10%, accounting for over 60% of GDP growth. In the last two years alone, investments determined three quarters of growth. In this context, during the investment cycle, i.e. in the period 2015–2019, fixed investments increased their share in GDP from 17.5% to 24%. This year, we expect their share to grow further to 24.5%.
In terms of the sources of investment financing, private investment growth was financed, inter alia, by FDI inflow and investment loans. The FDI inflow during the new investment cycle averaged around 7% of GDP annually (in 2018 and 2019, it averaged 8.2% of GDP). An important source of private investment financing also includes investment loans at considerably more favourable terms. As regards the structure of corporate loans in 2019, the overall growth came from investment loans, with their balance higher by RSD 115 bn. As at end-2019, their share in total loans exceeded 45%, giving full support to economic growth.
(slide 18) Of course, the future always brings uncertainty, which is particularly pronounced at the global level and should not be underestimated. Therefore, our task, as economic policy makers, is to be prepared to respond in a timely manner with all instruments at hand. And that is what the National Bank of Serbia does!
(slide 19) I will repeat – we will respond with all available instruments to maintain stability. One of the proofs that concrete activities stand behind our intentions are also two-week FX swap auctions, which we have organised since end-January 2019, using thereby one of the regular instruments from our arsenal. In doing so, we have ensured stability in the interbank money market and sent a clear signal that we will not allow any market segmentation and that we will prevent unjustified and non-market influences on movements in the money market. Anyone particularly interested in the subject can have a look at a detailed analysis in the latest special issue of the journal Ekonomika preduzeća.
(slide 20) I cannot but mention the resolution of NPLs. The roots of the problem date back to the pre-crisis period, when many countries in the region were faced with strong credit expansion and inadequate collateral assessment. The decline in economic activity during the crisis and movements in the labour market lowered both loan supply and demand, and one of the consequences was the build-up in NPLs. When and how did we go about solving the problem? We ensured the key assumptions by stabilising the overall environment and, I will repeat, especially the FX market. The NPL Resolution Strategy followed as a logical step forward. Since the Strategy was adopted, their share in total loans was cut to below 4.1% in December 2019. If I say their share was lowered by around 80% in less than four and a half years, you can judge for yourself whether this is good, very good or excellent.
(slide 21) In addition to low inflation, a relatively stable dinar exchange rate and such a sharp decline in the share of NPLs, the NBS has become a synonym also for safer, faster and cheaper transactions. I am proud to say that the DinaCard project has been on an upward path. Having a DinaCard in your wallet today means that you have the benefit of using a domestic payment card, where the NBS is both the initiator and operator. We revived DinaCard as a project and enabled its use for payments on eGovernment portals as well. Any serious payment system, in the modern business environment with a rising number of payments in the card system, must take into account the risks of all kinds when someone else manages that system. If we already have a domestic system, then we need to strengthen our domestic payment card. This does not mean that other cards cannot and should not be issued, but it is our obligation to ensure that as much income as possible is left in our budget from transactions executed in Serbia.
When it comes to innovation and digital economy, I can freely say that this is also an area in which the NBS is one of the leaders. Our innovations were sometimes one step ahead of the ECB’s – we introduced the instant payment system in which payments are executed in less than 1 second. This service is further modernised by introducing instant payments and QR code at points-of-sale, i.e. at small merchants. We are making it possible to go to the store without a wallet, only carrying a mobile phone, and to pay bills by mobile phone in two seconds. Our goal is for our citizens to have the best services at the lowest fees and we have no right to be guided by any principle other than safety and quality, at the lowest expenses and never at the cost of stability.
(slide 22) Finally, I would like to thank all who trust our dinar and our financial system, and there are more and more of them. Dinar savings increased by 30% in 2019, and today their level is five times higher than in 2012, when we introduced the dinarisation strategy. At end-2019, dinar savings stood at RSD 79.6 bn and, according to the latest data, more than RSD 83 bn. Today, Serbia also has a 12-year dinar bond and we will work actively on lengthening the dinar yield curve. A 3.4% interest rate on 12-year dinar bonds is three and a half times lower compared to the interest rate on one-year government bonds from 2012. In the secondary market, due to high demand, the rate on 12-year bonds is even lower. I am emphasising this because it is precisely this great difference between interest rates and the fact that Serbia today has 12-year dinar bonds that confirm confidence in the dinar and reflect the results from the previous period. The results achieved through the coordination of monetary and fiscal policies that Serbia did not have before 2012, and many around us do not have it today.
Because of all that, and the future of Serbia, we need to continue working, not just in any way, but together and decisively, no matter what our positions are, to the same end.
In the next few days, as well as on other occasions, I expect from all of us to talk impartially about progress, and about the key tasks that lie ahead. There is no shortage of progress or tasks, as we have already created expectations that Serbia will always raise the bar higher.
Thank you. I wish you have a successful 27th Kopaonik Bussines Forum.
Governor’s Office
