NATIONAL BANK OF SERBIA
Speech at the presentation
of the Inflation Report – February 2016
Ana Ivković, Acting General Manager
Directorate for Economic Research and Statistics
Belgrade, 19 February 2016
Ladies and gentlemen, esteemed members of the press and fellow economists,
Welcome to the presentation of the February Inflation Report, where we will present current and
expected economic developments and explain measures taken by the National Bank of Serbia.
First of all, let me note that the movements in the prior period were consistent with our expectations
stated in the November Report – inflation stayed low and stable and GDP continued growing. As
global prices of primary commodities declined in the meantime, inflation’s return within the target
tolerance band will be slower than expected. According to the new projection, inflation should return
within the target tolerance band late this or early next year and hover around 3% thereafter. GDP is
expected to accelerate from 0.8% last year to 1.8% this and 2.2% next year.
The National Bank of Serbia trimmed the key policy rate further in February, to 4.25%. Past
monetary easing, begun in May 2013, greatly reduced the cost of private sector and government
borrowing, while also contributing to the recovery in lending since mid-2015. It is in 2015 that
interest rates on dinar loans to the private sector recorded the sharpest drop so far, of close to 5
percentage points. Their decline was also supported by the narrowing of internal and external
imbalances – the budget deficit was almost halved in 2015 (from 6.6% to 3.7% of GDP), and the
current account deficit was lower by a fifth and fully covered by foreign direct investment. The
narrowing of internal and external imbalances increases our economy’s resilience to external shocks.
Similar trends are expected to continue in the years ahead.
Chart 1 Inflation
(y-o-y rates, in %)
projection
Chart 2 GDP growth
(y-o-y rates, in %)
projection
7
5
6
4
5
3
2
4
1
3
0
2
-1
1
-2
0
-3
-1
-4
-2
12 3
2013
6
Source: NBS.
9
12 3
2014
6
9
12 3
2015
6
9
12 3
2016
6
9
12
2017
-5
IV I
2013
II
III
IV I
2014
II
III
IV I
2015
II
III
IV I
2016
II
III
IV
2017
Source: NBS.
***
Movements in the international environment late last and early this year were marked by weaker
global growth prospects, continuing slide in global prices of oil and other primary commodities and
heightened uncertainty in the international financial market.
Global growth forecasts have been revised downwards. Emerging markets in particular face
challenges, including increased financial vulnerability triggered by the Fed’s monetary policy
reversal, Chinese growth slowdown and tumbling global prices of primary commodities. Euro area
growth has, by contrast, continued at a moderate pace and is expected to reach 1.7% in 2016. A
deceleration in emerging markets’ growth could, however, dent the recovery of the euro area by
pushing down the demand for euro area exports. Given its importance as our key trading partner, any
potential slowdown in euro area recovery would affect our economy as well.
1
Chart 4 Movements
Chart 3 Revisions
of real GDP growth forecasts for
2015 and 2016 by the IMF
(in %)
8
6
4
2
in GDP and economic activity indicators
of the euro area
(quarterly rates)
2015 (previous projection)
2016 (previous projection)
2015 (new projection)
2016 (new projection)
1.5 1.7
1.5 1.7
1.3
6.9
2.5
2.6
3.4
(in index points)
(in %)
6.3
3.1
2
60
55
1
0.8
50
0
0
45
-1.0
-2
-1
-4
40
-3.7
China
Russia
Central and East
European countries
USA
Italy
Germany
Euro area
-6
GDP, s-a (LHS)*
EuroCoin (LHS)
Eurozone composite PMI (RHS)
-2
-3
35
30
I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV
2008
2009
2010
2011
2012
2013
2014
2015
Sources: Eurostat, Markit Group and Banca d’Italia.
* Preliminary estimate for Q4 2015.
Source: IMF WEO (October 2015) and IMF WEO Update (January 2016).
After recovering temporarily to over USD 50 per barrel in early October, oil prices tumbled again in
January to their thirteen-year low. They currently stand at around USD 30 per barrel, which is more
than 70% lower than a year and a half ago when their slide began. Although in our inflation
projection we assumed a certain recovery of such depressed oil prices on the basis of futures,
downward pressures on oil prices may persist over the short run, mostly on account of persistently
high supply and inventories and weaker prospects for global growth.
Chart 5 Oil and copper price
(average monthly prices, in USD)
movements
Chart 6 Prices
of primary agricultural commodities
and their futures
130
10,000
120
9,000
(USD/t)
350
300
110
8,000
100
90
7,000
80
6,000
70
5,000
250
200
60
4,000
50
40
30
150
3,000
2,000
1 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101
2009 2010 2011 2012 2013 2014 2015 2016 2017
Price of Brent oil per barrel (LHS)
Brent oil futures (LHS)
Price of copper per ton (RHS)
Source: Bloomberg.
Copper futures (RHS)
100
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1
2010
2011
2012
2013
2014
2015
2016
2017
Corn
Wheat
Source: CBOT - Chicago Boаrd of Trade.
In addition to oil, prices of other primary commodities also continued to decline, which made
primary commodities one of the factors behind extremely low inflation worldwide. This has
prompted central banks to take measures in order to bring inflation back to target. In December, the
ECB decided to cut further its (already negative) interest rate on the deposit facility and to extend its
quantitative easing programme at least until March 2017 in order to support the return of inflation to
target and sustain economic recovery in the euro area. In January, the ECB announced the possibility
of further stimulus in March this year, which could moderate the negative effects of the Fed’s
normalisation on capital flows to emerging markets. The pace of the Fed’s rate hikes, however, may
be slowed by weaker global growth prospects and the continuing slide in prices of primary
commodities.
Heightened uncertainty in the international financial market reflected on the domestic foreign
exchange market as well. And while appreciation pressures on the dinar prevailed during most of
2015, depreciation pressures built up late last and early this year. In the first half of December and in
January, pressures stemmed from increased investor risk aversion to emerging markets, Serbia
2
included. To an extent, they were also generated by the interplay of seasonal factors at home. Factors
working in the opposite direction included higher foreign direct investment in Serbia, which in 2015
reached EUR 1.8 bln and exceeded the current account deficit. Depreciation pressures were also
moderated by the successful completion of the third review under the IMF arrangement and Serbia’s
improved credit rating outlook. As before, the National Bank of Serbia kept a close eye on
developments and intervened in both directions – by selling and buying foreign exchange, in order to
moderate excessive daily volatility of the exchange rate.
Chart 7 Current account deficit and net capital inflow
Chart 8 Movements
(in EUR mln)
interventions
1,200
105
125
90
120
(EUR mln)
in EUR/RSD exchange rate and NBS FX
(EUR/RSD)
75
800
115
60
110
45
400
0
30
105
15
100
0
95
-15
90
-30
-400
85
-45
80
-60
-800
I
II
2012
III
IV
Sources: SORS and NBS.
* Preliminary data.
I
II
2013
III
IV
I
II
2014
III
IV
I
II
2015
Current account deficit
Direct investment - net
III IV*
-75
75
1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1
2009
2010
2011
2012
2013
2014
2015
2016
Source: NBS.
* + sale; - purchase.
** 1 EUR in RSD.
NBS interventions (LHS)*
EUR/RSD exchange rate (RHS)**
***
Serbia’s GDP posted growth in the fourth quarter. On the back of increased domestic demand,
primarily in terms of investment, GDP rose by 0.2% in seasonally-adjusted terms relative to a quarter
earlier or by 1.3% compared to the same period of 2014. Investment determined GDP growth on the
expenditure side throughout the entire last year, which is an important precondition to sustainable
growth. On the production side, growth was led by industry and construction. At the same time,
more than two-thirds of branches within manufacturing boasted increased production and almost all
recorded higher exports. Such trends are expected to continue, accompanied by further acceleration
in economic activity. After growing by 0.8% in 2015, GDP is expected to go up by 1.8% in 2016 and
2.2% in 2017.
3
Chart 9 Contributions
(in pp)
to y-o-y GDP growth
Chart 10 New
investment loans and FDI
(EUR mln)
(RSD bln)
30
250
5.5 4.9 5.9 5.4
200
0.6
2.6
1.4
0.8
-1.0
1.8 2.2
20
150
-1.8
-3.1
100
10
50
Sources: SORS and NBS
calculation.
* NBS estimate.
2017*
2016*
2014
2015*
2013
2012
2011
2010
2009
2008
2007
2006
0
2005
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
0
Net exports
Government consumption and investment
Investment
Consumption
GDP (%)
-50
1 3
2013
5
7
9 11 1 3
2014
FDI (RHS)
5
7
9 11 1 3
2015
5
7
9 11
New investment loans,
3m moving average (LHS)
Sources: SORS and NBS calculation.
We expect growth in investment this year to result from an interplay of a number of factors, most
notably lower operating expenses of businesses owing to more favourable lending terms and lower
oil prices, as well as an improved investment environment. In addition, we expect that investment
will also rise on the back of the recovery in the euro area which is expected to continue and stable
inflow of capital from foreign direct investment. Higher investment implies higher imports of
equipment and intermediate goods, which means that although we expect higher exports, the
contribution of net exports to GDP growth will most likely be neutral, like it was last year.
Favourable tendencies should continue in 2017 – in all likelihood, investment will continue to drive
economic growth. Household consumption will probably be an additional positive contributor to
GDP, while the impact of net exports is likely to stay close to neutral. The risks to GDP projection
are largely associated with the pace of economic recovery of the euro area and movements in
international primary commodity prices.
***
Inflation has been low and stable for the last three years. Year-on-year, it continued below the lower
bound of the target tolerance band in Q4 and amounted to 1.5% in December. Inflationary pressures
remained subdued due to the disinflationary effect of the majority of domestic factors, continuing
slide in global prices of oil and primary agricultural commodities, and generally low inflation
abroad.
Looking ahead, year-on-year inflation is likely to stay low in the first half of the year owing to a
further decline in global prices of primary commodities (notably oil) over the past several months.
This decline is the main reason why our new projection was revised down relative to the November
forecast.
4
Chart 11 Contribution
(in pp)
Chart 12 Domestic inflation and external prices
(y-o-y rates, in %)
of CPI components to y-o-y inflation
25
15
13
20
11
9
15
7
10
5
3
1.5
5
1
-1
0
-3
1 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 911
2010
2011
2012
2013
2014
2015
Petroleum product prices
Administered prices
Nonfood core Inflation
Processed food prices
Sources: SORS and
Fruit and vegetable prices
NBS calculation.
Consumer prices (%)
-5
I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV
2010
2011
2012
2013
2014
2015
External prices growth rate
Headline inflation
Sources: Destatis, FАО, Bloomberg and NBS calculation.
According to our central projection, year-on-year inflation should rise moderately from mid-year
and return within the target tolerance band late this or early next year. We estimate that its growth
will continue in 2017, though at a much slower pace, averaging around 3.0%.
Gradual inflation growth over the projection horizon will mainly reflect the weakening of
disinflationary pressures amid the assumed moderate rise in international primary commodity prices,
domestic aggregate demand and inflation abroad.
The risks to the projected inflation path are mostly associated with future developments in the
international commodity and financial markets and, to a degree, with the speed of recovery in the
euro area.
***
Having kept the key policy rate unchanged for three months, the National Bank of Serbia’s
Executive Board decided to cut it by 0.25 pp to 4.25% in its most recent meeting. The slower pace of
key policy rate trimmings over the past months is attributable to heightened uncertainty in the
international environment. In the same meeting, the Executive Board also decided to narrow the
interest rate corridor by 0.25 pp – from ±2.0 pp to ±1.75 pp relative to the key policy rate. This move
should be conducive to further stabilisation of interest rates in the interbank money market and
strengthening of the interest rate transmission channel. In addition, this month was the last in the sixmonth cycle of the FX required reserve ratio cuts which the National Bank of Serbia implemented to
stimulate credit activity and, in turn, quicken the recovery of the Serbian economy. In 2015, lending
activity increased by 1.8%, despite the maturing of subsidised loans. A particularly favourable
development is the fact that new investment loans granted in 2015 were two and a half times higher
than in 2014.
5
Chart 13 Inflation projection
(y-o-y rates, in %)
7
6
5
4
3
2
1
0
-1
12
2013
3
6
9
12
2014
3
6
9
12
2015
3
6
9
12
2016
3
6
9
-2
12
2017
Source: NBS.
As inflationary pressures are likely to stay low in the period ahead, the monetary policy stance of the
National Bank of Serbia should remain expansionary. Given the current prevalence of external risks
associated with movements in the international financial and commodity markets, the degree of
monetary expansion will depend primarily on the assessment of their potential inflationary effect.
The National Bank of Serbia will continue to closely monitor the developments in the domestic and
international environment, and its future decisions will be consistent with the commitment to return
inflation within the target tolerance band in a sustainable manner while, at the same time,
maintaining financial stability.
Thank you for your attention. We now open the floor for questions.
6