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1
Macroeconomic Developments January– September 2005
Radovan Jelasic, Governor
Belgrade, November 3, 2005
• Prices (inflation, interest rates, wages, productivity)
• The dinar exchange rate
Contents
• External position (current account, capital inflow, foreign exchange reserves,
indebtedness)
• Economic growth
• Моnetary policy and developments
• Fiscal policy
• Оther
Measures to be undertaken by the NBS...
• Raising the reserve requirement ratio on enterprises’ foreign exchange deposits and
external borrowing from 29% to 35% as of November 10, 2005;
• Lowering the reserve requirement ratio on dinar deposits from 20% to 18% as of
November 10, 2005;
• Lowering the reserve requirement ratio on citizens’ foreign exchange savings from 41% to
40% as of December 10, 2005;
• Introduction of obligatory 20% deposit and a monthly installment of 30% of overall
household income on all loans, apart from housing loans, for the period of 10 years
instead of the present 5 years – otherwise, a higher provisioning level will be needed;
• As of February 1, 2006, physical persons will be required to obtain a report of the Credit
Bureau when taking a loan or lease - otherwise, a higher provisioning level will be
needed;
• The requirement for leasing companies to report to the Credit Bureau on all transactions
with physical entities;
• The requirement to disclose the unique leasing fee as of February 1, 2006
• Strengthening the role of repo operations.
... and expected effects
• Curbed inflationary pressures as a consequence of reduced domestic demand;
• Decelerated external borrowing;
• Lower euroization level;
• Further strengthening of dinar and foreign exchange savings;
• Strengthening of NBS foreign exchange reserves, which will positively affect the dinar
exchange rate!
During 2005 inflation will shoot past the projected level; it has been on the rise since 2003
• Inflation is not just “one of the indicators” of the efficiency of economic policy, but one of
the most significant indicators;
• From the viewpoint of the NBS, high economic growth does not justify the high inflation
level!
• Out of 13.7% price growth in the first ten months, 6.2% was driven by:
– Petroleum products2.5% - Utilities 2.2%
– Еlectricity 0.5% - Effect of VAT introduction 2.0%
Monthly inflation trends in 2004 and 2005
1.4 1.4
0.6
1.7
0.5
2.7
1.5
0.8
1.1
1.7
1.0
0.40.4
0.9 0.8 0.8
1.1
0.4
0.8
2.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Јаnuary February Маrch Аpril Маy Јune Јuly Аugust September Оctober
у %
13.0
14.0
15.0
16.0
17.0
18.0
19.0
у %
2004 2005 Interannual growth ratesSource: RSO
Inflation in period 2002-2005
13.714.8
7.8
16-17
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
2002 2003 2004 2005
у %
Source: RSO
Rise in core inflation primarily points at aggregate demand growth
• In the first 10 months of 2005, core inflation accounted for almost 50% of overall inflation;
• In the second half of the year, money supply rose substantially mainly in respect of the
conversion of foreign exchange into dinars due to foreign capital inflow, which negatively
affected the inflation rate.
Core inflation and money supply M1 trends
0
5
10
15
20
25
30
1 3 5 7 2004
9 11 1 3 5 7 2005
9
М1 Core inflation
interannual rates, %
Source: RSO and NBS
With a view to increasing sterilization and due to higher inflation rate, the NBS offers a higher interest rate
• The 14-day repo rate will be used as a reference rate by the NBS;
• Sterilization will be stronger albeit it implies higher costs for the NBS and possibly a higher level of interest rates in the short run!
NBS reference weighted interest rates and NBS securities placement in 2005 2005
10.0
12.0
14.0
16.0
18.0
20.0
February Маrch Аpril Маy Јune Јuly Аugust September Оctober0
5000
10000
15000
20000
25000
14 days 30 days 60 days NBS securitiesSource: NBS
% at the annual level CSD mill.
Average wages in Serbia have reached CSD 18,345 (EUR 217), and the rise of real wages stands at 5.9% showing an upward trend
Average real net wages
0
2
4
6
8
10
12
14
16
18
20
12 2002
2 4 6 2003
8 10 12 2 4 6 2004
8 10 12 2 4 6 2005
8
Interannual growthТrend
Source: RSO
у %
Wages in the public sector declined by 0.5% in real terms, reaching CSD 20,677 (EUR 245) with a stable tendency
Average real net wages in the public sector
-10
-5
0
5
10
15
20
25
30
35
40
12 2002
3 6 2003
9 12 3 6 2004
9 12 3 6 2005
9
Interannual growthТrend
Source: RSO
%
Labor costs and productivity grow, but employment is on the decline
• Real gross wages growth in
the industry (10.4% in the first
nine months) is higher than
productivity growth (5.6%), i.e.
unit labor costs in the industry
went up by 4.5%;
• However, at the level of the
overall economy, unit labor
costs have been reduced.
Productivity and real wages trends in industry(2004=100)
60.0
70.0
80.0
90.0
100.0
110.0
120.0
1 3 5 7 2003
9 11 1 3 5 7 2004
9 11 1 3 5 7 2005
9
Productivity Real gross wagesSource: RSO
The NBS pursues an exchange rate policy that balances influences both on inflation and balance of payments
A considerable depreciation
or appreciation would exert
a negative impact on either
inflation or balance of
payments.
** Real effective exchange rate calculated against the currency basket.
Trends of retail prices and the dinar exchange rate** by quarters 2005
3.62.85.1
13.7
-2.3-2.1-2.7
-7.8
-1.5-0.2
-2.2
0.3
-12.0
-8.0
-4.0
0.0
4.0
8.0
12.0
16.0
I II III January-October
%
Retail prices Euro nominal exchange rate Real effective exchange rate*** Negative rate implies depreciation of the dinar, and positive rate implies appreciation of the dinar.Source: NBS and RSO
The role of the market in determining the exchange rate is gradually becoming stronger
• Significant daily
fluctuations reflect
market relations;
• Banks should develop
more efficient risk
management;
• Banks should (if they
wish to advise their
clients in a professional
manner) inform their
clients of the existing
risks.
Trends of the euro nominal exchange rate against the dinar
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
July August September Оctober
82.0
82.5
83.0
83.5
84.0
84.5
85.0
85.5
86.0
Daily changes* Level of exchange rate
у %
* Negative rate implies depreciation of the dinar, and positive rate implies appreciation of the dinar.
Source: NBS
in CSD
The NBS encourages the interbank foreign exchange market (IFEM) development, and its interventions are becoming increasingly less important
Sale of foreign exchange by the NBS at the IFEM session and interbank trade outside the IFEM session
1,373
1,604
1,015
1,7631,607
1,545
192
789
0
250
500
750
1,000
1,250
1,500
1,750
2,000
2002* 2003 2004 Јаn-Oct. 2005
Banks-NBS (IFEM) Bank-bank
Source: NBS
in EUR mill.
* Total since the introduction of the fixing session on May 14 until Dec 12, 2002
462.6
358.0 386.8
577.7
452.7
370.4
0
100
200
300
400
500
600
700
I II III
Banks-NBS (IFEM) Bank-bankSource: NBS.
in EUR mill.
2005
Current account in 2005 is much more favorable mainly owing to export boost
Coverage of import by export of
goods and services in 2004 stood
at 44.6%, whereas in the first nine
months of 2005 it reached 54.6%.
Export and import trends by quarters
0.0
1,000.0
2,000.0
3,000.0
4,000.0
5,000.0
6,000.0
7,000.0
Export Import Export Import Export Import Export Import
2004 2005 I quarter II quarter III quarter Total (I-III)
Source: NBS
in EUR mill.
+29.3%
-8.2%
+38.0%
+6.2%
+15.2%
+15.1%
+26.5%
+4.9%
Current trend of export growth is sustainable in the long run
• Export determinants
– preferential status on EU markets;
– better quality of export supply, especially supply of privatized companies;
– effect of VAT introduction;
– the key factors behind export growth are the following: ferrous metallurgy, non-
ferrous metals, sugar, grain, clothes and footwear (almost 2/3 increment in the nine
months of 2005).
Import determinants
– effect of VAT introduction;
– growth of crude oil prices in the world market;
– the key factors behind import growth are the following: energy, ferrous and non-
ferrous metallurgy (increment higher by around 25%).
Current payments deficit and capital inflow
• Structure of capital inflow has improved – foreign direct investments have for the first time
sufficed for financing the deficit in the first nine months of 2005;
• Determinants of capital inflow: lower risk, high interest spread and high demand for capital;
• The structure of the 2005 current account so far is sustainable in the long term!
-1350 -1362
-2234
-886-1371
901 935
17471116
1619505
1203
780
925
1118
-3000.0
-2000.0
-1000.0
0.0
1000.0
2000.0
3000.0
2002 2003 2004 Jan-Sept. 2005 Projections 2005
in EUR mill.
Source: NBS
Indebtedness
FX reserves
Current account balance
Foreign direct investments
Although external debt balance has been on the rise during 2005, the share of public debt is decreasing
Level and structure of external debt of the Republic of Serbia*
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2002 2003 2004 Jan-Aug. 2005
50.0
52.0
54.0
56.0
58.0
60.0
62.0
Share in GDP (right scale)
in EUR mill.
65.4%64.0%
59.4% 55.0%
25,8% 27,232.2%
37,1%
*In all observed years, the debt towards the London Club has stood at USD 1.08 billion, while the debt towards the Paris Club has been reduced by USD 730 million. The share of debt of Kosovo and Metohija for the previous period has been calculated on the basis of the debt structure in 2005
Source: NBS
%
8.8 9.09.8
11.3
8.8% 8.7% 8.4% 7.9%
Private debt
Public debt
Kosovo and Metohija
The expected GDP growth in 2005 will be around 5%
Real GDP growth by quarters in 2004 and 2005
7.1
4.85.85.3
6.8 6.1
0.0
2.0
4.0
6.0
8.0
10.0
I II Total (I-II)
%
2004 2005Source: RSO
Sectors “responsible” for growth:
• Trade – 7.7% of GDP
• Financial services – 5.9% of
GDP
• Transport – 7.7% of GDP
Role of fiscal policy remains crucial from the viewpoint of inflation
• In 2005, consolidated government revenues rose by around 19.5% compared to
2004 (the planned increase in 2006 is 15.4%);
• In 2005, consolidated government expenditures rose by almost 16.1% compared
to 2004 (planned increase in 2006 is 13.7%);
• A surplus has been recorded, but both revenues and expenditures witnessed a
high rise – the reduction of expenditures is still the main challenge facing the
fiscal policy.
Consolidated public revenues and expenditures
400
450
500
550
600
650
700
750
800
850
2003 2004 2005 2006
CSD billion
Revenues ExpendituresSource: Ministry of Finance
Consolidated public revenues and expenditures
38
39
40
41
42
43
44
45
46
2003 2004 2005 2006
% GDP
Revenues ExpendituresSource: Ministry of Finance
Monetary policy challenges and key instruments
• Lowering of the inflation rate;
• Reduction of the euroization level;
• Growth of dinar savings;
• A more moderate rise in lending to
households.
Challenges Instruments
• Strengthening the influence of
interest rates;
• Open market operations;
• Banking sector liquidity;
• Required reserves;
• Deposit and credit facilities.
The largest change sustained by lending activity was that of its structure, with the share of household lending registering a steep rise
Average monthly growth of household lending in 2005 amounted to CSD 4.6 billion, whereas in 2004 it stood at mere CSD 2.6 billion!
81.2
66.4
37.329.6
20.323.723.6
13.1
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
2004 2005 2004 2005 2004 2005 2004 2005 I quarter II quarter III quarter Total (I-III)
Source: NBS
CSD billion
28.1%
71.9%77.8%
62.6%
37.4%
47.3%
52.7%
22.2%
59.8%
53.9%
46.1%
39.8%
60.2% 46.8%
53.2%
40.1%
legal entities
households