Miroljub Labus
UNDP:
Regional Policy Roundtable
“The Credit Crunch and Structural Adjustments:
The Case of Serbia”
Chisinau, Republic of Moldova
6-7 July, 2010
Crises and Policy Response in Serbia: An Overview
 Recession is over, but not the crises
 Nature of crises
 Credit crunch triggered a crises in Serbia, which looks like a typical suddenstop crises (Guillermo Calvo…)
 However, structural deficiencies would in any case cause a downturn
 Policy dilemma: Cure fundamental weaknesses or fight against recession by
any means (structural or anti-cyclical approach)?
 Nature of policy responses
 Anti-cyclical fiscal measures, but pro-cyclical monetary measures (due to
inflation challenges)
 Appropriate prudential and supervisory measures, which were not sufficient
 Weak structural measures
 International support: On time and timely (IMF, Vienna club of banks), but
the EU integration has been postponed
 Politics: Weak government and poor policy coordination between the
Government and the National bank
Outline of Presentation
Key macroeconomic figures
Key policy measures
Key structural deficiencies
Politics of the crises responses
Some concluding remarks
Recession is over, but not the crises
GDP growth rates
Source: IMF
Modest recession in Serbia, but recovery
is not robust and certain…
Source: Belox
…since the labor marker is in a deep
depression (unemployment rate is 19.2%)
Macroeconomic Imbalances
25
20
15
percent
10
5
0
-5
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
-10
-15
-20
CAB
Source: IMF
Budget
I-S
 Despite expected growth in 2010, reduction in macroeconomic imbalances will not
continue
After dramatic adjustment in 2009, current account deficit will increase in 2010
 Fiscal deficit is also expected to get worse in 2010
Macroeconomic Challenges: Foreign Debt
“Is there life after debt?” (The Economist)
24,000,000
Debt sustainability
Total foreign debt
Thousends od EUR
20,000,000
70%
60%
Private foreign debt
16,000,000
50%
40%
30%
12,000,000
20%
10%
0%
8,000,000
2009
2010
2011
Debt service/gdp
Public foreign debt
2012
2013
2014
2015
Debt service/reserve
4,000,000
I
II III IV
2006
I
II III IV
2007
I
II III IV
2008
I
II III IV
2009
I
II III IV
2010
Source: NBS
 To borrow by the Government or not to
borrow, it is the main dilemma
Tight public debt policy might be relaxed
in 2010…
Source: IMF
 …but, is there a fiscal space for that?
 In any case, debt presents a challenge for
foreign exchange stability in the future
Policy response: Macroeconomic policy measures
Measures
Before crises
During crises
Fiscal measures
Fiscal tightening
No
Easing
Automatic stabilizers
No
Yes
Not much
Yes
Subsidizing
Monetary measures
Reserve requirements
Increased
Unchanged
Raised liquidity requirements
Yes
Unchanged
Sterilization operation
Yes
Yes
Exchange rate policy response
Yes
Yes
Interest rate response
No
No
Policy response: Administrative Measures in the Financial Sector
Measures
Before crises
During crises
Credit ceilings
No
No
Capital control
Short term capital
Unchanged
Reserve requirements measures
Increased the required level
Yes
Unchanged
Temporarily
Abolished
Differentiated by currency
Yes
Unchanged
Differentiated by type of deposits
Yes
Unchanged
Broaden the reserve base
Yes
Unchanged
Marginal reserve requirements
Policy Response: Prudential and Supervisory Measures
Measures
Before crises
During crises
Prudential measures
Increase capital requirements
Yes
Unchanged
Tighten assets classification rules
Yes
Unchanged
Tighten provision rules
Yes
Unchanged
Targeting unhedged borrowing
Yes
Unchanged
Tighten net open position limits
Yes
Unchanged
Loan to value related requirements for
households
Yes
Unchanged
Limits on eligibility based on income
level of households
Yes
Unchanged
Supervisory/monitoring measures
Improving monitoring tools
Yes
Unchanged
Stress testing
No
Yes
Increase cooperation with home
supervisors
Yes
Unchanged
Tighten supervision on non-banks
Yes
Unchanged
Structural Deficiencies: Serbia and Others
Percent average 2004-08
Credit Default Swap Spread
bps, May2010
120
12
600
100
10
500
8
400
80
60
6
40
200
4
20
0
300
100
2
SVK POL CZE HUN BiH MKD EST ALB LTU HRV ROM SER BGR LVA
-20
0
0
Non-tradable
Euroisation
Saving
Inflation,rhs
Source: IMF
 Structural deficiencies in Serbia
might be compared to other transition
economies…
Source: EBRD
…but the country’s risk is much
higher.
Policy response: Structural Measures
Deficiencies
Measures
State of Affairs
Before crises
During crises
No
Present
Unchanged
Privatization
Controversial
Postponed
Reversed
Euroisation
Ineffective
High due to a
dual currency
system
Increased
Low domestic savings
No
Present
Some
improvements
Capital market development
No
Poor
Unchanged
Rigidity in labor market and
poor incentive structure
Ineffective
Present
Worsened
De-industrialization/
Huge non-tradable sector
Politics and Structural Governance
 EU accession is not any more a driver for institutional reforms
 Lack of full cooperation with the ICTY is more a formal excuse than a
substantial reason for postponing the candidate status to Serbia
 The six-party coalition government is at the mid-term
 Institutional weaknesses:
 Strong President, with no legal authority over economic issues, and
weak Government
 Poor policy coordination
 General public is in a bad mood, and tired of reforms
 March 2009 was the last momentum for structural reforms
 Is there now an opportunity for transition losers?
Policy Lessons
 False optimism: Out of recession does not mean the end of
economic crises
 Structural deficiencies undermined effectiveness of
macroeconomic measures
 High prudential standards are not sufficient to prevent
financial crises
 Coordinated international assistance proved to be of a high
importance, but this is not a substitute for domestic reforms
 Those reforms depend on a stable and determined
parliamentarian majority (two-party election system?)
 However, people’s frustration with the government might be
the key barrier to such an end.