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National Bank of Serbia : Speech by Savo Jakovljević, General Manager of the Economic Research and Statistics Department, at the Presentation of the Inflation Report – August 2019

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08/14/2019 | 05:27am EDT

NATIONAL BANK OF SERBIA

Speech at the presentation of the Inflation Report -

August 2019

Savo Jakovljević, General Manager of the

Economic Research and Statistics Department

Belgrade, 14 August 2019

Ladies and gentlemen, esteemed members of the press, dear colleagues,

We shall now present the current macroeconomic developments in the domestic and international environment, our new inflation and economic activity projections, as well as monetary policy decisions.

* * *

I would like to begin with an overview of developments in the international environment, as they are still one of the more relevant challenges to the monetary policy of the National Bank of Serbia, as well as to that of other central banks in emerging market economies. Concerns over global growth, which emerged in mid-2018, turned out to be justified - trade, investment and industrial production at the global level slowed down since the start of the year, and trade tensions remain the main risk going forward. Recently, the International Monetary Fund again revised its global growth projection down, anticipating a slowdown to 3.2% this year and a pick-up to 3.5% next year. Presently, support to the global economy is coming in the form of a shift in the monetary policies of leading central banks, which should ensure more favourable financial conditions and give an incentive to global investment activity.

For the euro area, our key trade partner, we expect a slower growth dynamics for the remainder of the year, while the positive impact of domestic macroeconomic fundamentals will prevail in the medium term, supported by the ECB's announced monetary stimulus. As for countries in our region, which are also our important trade partners, expectations are more favourable than three months ago owing to domestic demand, though their growth in this and the following year is estimated to be lower than in 2018.

Chart 1 IMF global growth projections for 2018 and 2019

Chart 2 Movements in euro area GDP and economic activity

(in %)

indicators

(quarterly rates)

4.0

(in %)

(in index points)

2

60

3.9

3.8

1

55

3.7

3.6

0

50

3.5

3.4

WEO April 2018

-1

45

3.3

WEO July 2018

GDP, s-a (LHS)*

WEO October 2018

3.2

EuroCoin (LHS)

WEO January 2019

Euro area composite PMI (RHS)

3.1

WEO April 2019

-2

Eurozone Economic Sentiment Indicator (RHS)

40

WEO July 2019

2012

2013

2014

2015

2016

2017

2018

2019

3.0

2016

2017

2018

2019

Sources: Eurostat, Markit Group, Banca d'Italia and European Commission.

Source: IMF WEO.

* Eurostat preliminary estimate for Q2 2019.

** ESI is standardised relative to PMI.

Against the backdrop of global slowdown and low inflation, the expected trajectories of leading central banks' policy rates have been revised down. The Federal Reserve System trimmed its policy rate at end- July, offering no clear explanations as to whether this is a one-off adjustment or whether the rate will be trimmed further. The European Central Bank announced an unchanged or even lower level of its key interest rates at least through mid-2020, with a new programme of longer-term financing as of September. This should have a positive effect on conditions in the international financial market and capital flows towards emerging countries. Even so, it remains to be seen to which degree such moves of leading central banks will deviate from market expectations, which requires caution because of the possible impact on global capital flows.

1

Chart 3 Expected Fed funds rate* (p.a, in %)

5.0

FOMC projection in December 2017

4.5

Market expectations at end-January 2018

FOMC projection in June 2018

4.0

Market expectations at end-July 2018

FOMC projection in December 2018

3.5

Market expectations at end-January 2019

FOMC projection in June 2019

3.0

Market expectations at end-July 2019

2.5

2.0

1.5

1.0

0.5

0.0

2015

2016

2017

2018

2019

2020

2021

Sources: Fed and Bloomberg.

* Market expectations based on futures.

Chart 4 Expected ECB key interest rate* and futures for three- month EURIBOR

(p.a., in %)

1.4

Key interest rate January SPF 2018

3M EURIBOR, January futures 2018

1.2

Key interest rate July SPF 2018

3M EURIBOR July futures 2018

1.0

Key interest rate January SPF 2019

3M EURIBOR January futures 2019

0.8

Key interest rate July SPF 2019

3M EURIBOR July futures 2019

0.6

Actual rate

0.4

0.2

0.0

-0.2

-0.4

-0.6

-0.8

2015

2016

2017

2018

2019

2020

2021

Sources: ECB and Bloomberg.

* ECB Survey of Professional Forecasters (SPF).

Uncertainty with regard to the future developments in the international environment is also associated with the global prices of primary commodities. There is uncertainty regarding the global oil price, which reached USD 74 per barrel in May and then declined to around USD 60 per barrel amid dampened global demand and stepped-up production in the USA. According to futures, no major changes in the global oil price are expected until the end of the year, or in the two years beyond. As suggested by futures, no significant changes in the prices of primary agricultural commodities in the world market are expected either.

Chart 5 Assumption for Brent oil prices

(USD/barrel)

140

Historical data

120

May projection

August projection

100

80

60

40

20

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: Bloomberg.

Chart 6 Assumption for international prices of primary agricultural commodities

(Q4 2013 = 100)

130

Historical data

120

May projection

August projection

110

100

90

80

70

60

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Sources: CBOT, Euronext and NBS calculation.

In contrast to uncertainties in the international environment, the domestic macroeconomic conditions of monetary policy conduct remain favourable. The trend of good fiscal results was maintained in the first half of the year, with the fiscal surplus of 0.7% of GDP. The favourable fiscal developments are underpinned by the rising economic activity and profitability of corporates, as well as positive labour market developments. The significant increase in government capital expenditures and higher public sector wages and pensions represent sources of financing investment and consumption, though not to the extent that would cause major inflationary pressures and disrupt the downward trajectory of the share of public debt in GDP, which declined to 51.4% at end-June. At the same time, the currency and refinancing risks were lowered, given that the dinar share of public debt increased to 27%, and the dollar share declined to 22%, owing to the early repayment of a portion of the debt on account of the eurobond maturing within the next two years.

The share of external debt in GDP is also declining - coupled with the FDI inflow which is among the highest in the region, this contributes to the sustainability of the country's external position. With a 9% share in GDP in the first six months of the year, FDI continues to fully cover the current account deficit,

2

which remains under the impact of rising investment and weaker external demand. Despite the slowdown in external demand, export growth stayed relatively high thanks to new production capacities, as well as the sale of agricultural inventories from the previous season. The import of goods rose slightly faster than export and, as in the prior period, it was dictated by the higher import of raw materials and equipment. In conditions of higher consumer demand, we also recorded a rise in the import of consumer goods.

At the annual level, we estimate that the share of the current account deficit in GDP will be similar to last year's, while in the medium term it is expected to decline further, considering the investments that were channelled to tradable sectors. In the coming years, the current deficit is expected to remain more than fully covered by FDI.

Chart 7 Net FDI inflow to Serbia and the region (in % GDP)

8

Romania, Bulgaria, Croatia

7

Western Balkans (excluding Serbia)

Serbia

6

5

4

3

2

1

0

2012

2013

2014

2015

2016

2017

2018

Sources: NBS, websites of central banks and Eurostat, NVBS calculation.

Chart 8 Interest rates in the primary market of dinar government securities and eurobonds

(p.a., in %)

16

Dinar securities, 5Y

14

Dinar securities, 7Y

Dinar securities, 10Y

Eurobonds, USD, 5Y

12

Eurobonds, USD, 7Y

Eurobonds, USD, 10Y

10

Eurobonds, EUR, 10Y

8

6

4

2

0

2011

2012

2013

2014

2015

2016

2017

2018

2019

Source: Ministry of Finance.

The improved internal and external position of the country, along with sustainable economic growth, provides the basis for further improvements in our country's outlook. This is confirmed by a number of indicators, notably investors' readiness to make long-term investments in Serbia at yield rates that are constantly declining. Also, Serbia's risk premium is among the lowest in the region - in July it fell below 60 bp, its lowest level on record. Appreciation pressures, which remained dominant in the past period as well, intensified as of June, and the National Bank of Serbia intervened in order to mitigate excessive short-term volatility of the dinar to the euro. Since the start of the year, the National Bank purchased EUR 1.8 bn net in the FX market, thus increasing the country's FX reserves.

Chart 9 Risk premium indicator − EMBI by country

(daily, in basis points)

650

600

550

500

450

400

350

300

250

200

150

100

50

0

2013

2014

2015

2016

2017

2018

2019

EMBI Global Composite

EMBI Europe

Croatia

Hungary

Poland

Turkey

Romania

Serbia

Source: JP Morgan.

Chart 10 Movements in EUR/RSD exchange rate and NBS FX

interventions

(in EUR mn)

(EUR/RSD)

120

130

90

120

60

30

110

0

100

-30

90

-60

80

-90

-120

70

-150

60

2011

2012

2013

2014

2015

2016

2017

2018

2019

Source: NBS.

NBS interventions (LHS)*

* + sale; - purchase.

EUR/RSD exchange rate (RHS)**

** 1 EUR in RSD.

3

The sustainability of narrowed imbalances, inflation kept firmly under control for the sixth consecutive year, and the increasingly certain monetary accommodation by leading central banks prompted the Executive Board to cut the key policy rate by 25 bp both in July and August, to the new lowest level in the inflation targeting regime (2.5%). This should reflect positively on financing conditions and a further reduction in interest rates on dinar loans. Along with growth in economic activity, wages and employment, lower interest rates will contribute to further stable growth in private sector loans, which in June picked up by 9.4% y-o-y. As NPL resolution efforts continued, growth in lending contributed to the further fall in the NPL share in total loans to the new lowest level on record - 5.2% in June, down by 17.2 pp since the adoption of the NPL Resolution Strategy.

Chart 11 Lending activity and GDP (y-o-y rates, in %)

15

Total domestic loans*

10

Real GDP**

5

0

-5

-10

2012

2013

2014

2015

2016

2017

2018

2019.

Sources: NBS and SORS.

  • Excluding the exchange rate effect.
  • NBS estimate for Q2 2019.

Chart 12 NPL share in total loans, gross principle

(in RSD bn)

(in %)

500

25

450

21.4

21.5

21.6

400

19.0

18.6

20

350

16.9

17.0

15.7

300

15

250

11.3

9.9

200

10

150

5.7

5.2

100

5

50

0

0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*

Other sectors

Household sector

Source: NBS.

Corporate sector

* June 2019.

NPL share in total loans (RHS)

* * *

The domestic drivers of economic growth compensated for the negative impact of external factors, so the economic activity continued to rise in the second quarter for the nineteenth consecutive quarter. The growth was faster than in the first quarter and, according to our estimate, led by acceleration in the construction sector, and a further rise in service sectors. On the expenditure side, GDP growth was led by investment in the second quarter as well, owing to the continued implementation of infrastructure projects, improvement of the business environment and favourable sources of private sector financing. GDP growth is also affected by household consumption, on account of rising wages and employment and lower loan-related costs.

We kept the GDP growth forecast for 2019 at 3.5% and, as in the previous projection, we expect it to be led by domestic demand, whose positive contribution is greater owing to faster growth in investment and final consumption since the start of the year. On the other hand, the contribution of net exports is negative due to lower external demand. In the medium run, we expect economic growth to accelerate to around 4%, led by a sustainable rise in investment, exports and household consumption. The medium-term risks to the GDP projection are assessed as symmetric. In the short run, the risks emanating from the international environment are titled to the downside, mirroring the potentially greater than expected slowdown in external demand. The risks at home are titled to the upside, over the potentially faster than estimated growth in investment.

4

This is an excerpt of the original content. To continue reading it, access the original document here.

Disclaimer

National Bank of Serbia published this content on 14 August 2019 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 14 August 2019 09:26:09 UTC

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