Post-crisis Challenges for the
Serbian Economy
1
Inflationary Pressures from H2 2010
Rolled Over to 2011
Inflation rose in March 2011,
as pressures from food prices persisted
Chart 1 CPI Developments
(y-o-y rates, in %)
Though expected to go up in the next couple
of months, annual inflation should fall back
towards the target band by the end of 2011
Chart 2 Inflation Projection
(y-o-y rates, in %)
16
14
12
10
8
6
4
2
0
12 3
2008
6
9
12 3
2009
6
9
12 3
2010
6
9
12 3
2011
6
9
12
2012
Source: February Inflation Report
• In March 2011, inflation measured 14.1% y-o-y, which is
above the upper bound of the target.
• Core inflation (CPI net of administered prices, fruits &
vegetables and oil products prices) came at 13.2% y-o-y.
• Prices of fruits and vegetables increased by 39.3% y-o-y.
• Administered prices rose 10.4% y-o-y.
• We expect y-o-y inflation rates to remain high throughout
H1 2011.
• Key inflationary factors in H1 expected to come from a
rise in regulated prices and strong pressures from food
and oil prices.
• On the other hand, low demand and restrictive monetary
policy will tend to bring inflation towards the goal in H2
2011 and 2012.
2
Slow but Sustainable Recovery Based on
Growth in Net Exports and Investments
to Continue in 2011
After a drop in Q4 2010, we expect net export
led GDP growth in Q1 2011
Chart 3 GDP Developments
(seasonally adjusted, Q1 2006=100)
GDP expected to grow faster in 2011 and 2012
Chart 4 GDP Growth Projection
(y-o-y rates, in %)
120
10
8
115
6
4
110
2
105
0
-2
100
-4
95
-6
Q3
Q1
2007
Q3
Q1
2008
Q3
Q1
2009
Q3
Q1
2010
Q3
Q1*
2011
* NBS estimate
• In Q4 2010 seasonally adjusted GDP declined by 1.0%.
• GDP growth in 2010 is 1.7% (contributions: C -1.2, I
+1.7, G -0.6, (X-M) +1.8 pp).
• Based on current movements of economic activity
indicators, we expect GDP recovery in Q1 2011 ((3.0%,
y-o-y), led by private investments..
Q4
2008
Q2
Q4
2009
Q2
Q4
2010
Q2
Q4
2011
Q2
Q4
2012
Source: February Inflation Report
• Past depreciation of dinar against euro (together with
rising world prices of base metals and food) should
continue to boost export led growth as the economic
recovery of Serbia’s export partners gathers pace.
• We also expect significant contribution from capital
investments in years to come.
• GDP growth in 2011 estimated at around 3%, and further
3
acceleration is expected in 2012.
Current Account Deficit Narrowed due to
a Stronger Growth in Export
After the 2008 crisis, export is recovering
faster than import
Chart 7 Export and Import
(seasonally adjusted, 2008=100)
Current account deficit in 2010 was three
times lower than in 2008
Chart 8 Current Account Deficit and Remittances
(% share in GDP)
130
65%
120
60%
110
55%
100
50%
90
45%
25
CAD
Remittances
21.6
20
17.7
15
11.0
10
80
40%
70
35%
60
30%
2 4
2008
6
8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 2
2009
2010
2011
Export
Import
Coverage of imports by exports* (right scale)
*moving average of previous twelve months.
• In 2010, export and import in EUR grew by around 23.8%
and 9.7%, respectively.
• Coverage of imports by exports has risen from app. 45%
prior to the 2008 crisis to around 60% in 2010.
• In February 2011, export regained pace, while import
declined.
• At the moment, export is 19% above its pre-crisis level,
whereas import is 19% below.
10.8
10.2
7.2
7.2
2009
2010
9.2
9.7
7.0
10.1
5
6.1
0
2006
2007
2008
2011*
* NBS estimate (without Telekom privatization)
• Strained access to external financing and depreciation of
dinar caused a drop in trade deficit. Together with record
high remittances (€3.2bn) this resulted in a sharp decline
of the current account deficit (CAD) in 2009.
• In 2010, CAD was around €2.1bn (7.2% of GDP), and in
2011 is expected to be contained at around €1.9bn (6.1%
of GDP).
4
High Country Risk Premium Influenced
Exchange Rate and Real Interest Rate
Following a 9% nominal depreciation in 2010,
dinar has been appreciating in early 2011
Chart 13 Exchange Rate Developments
(RSD/EUR, monthly average)
After a year and a half, NBS starts raising its
key policy rate in August 2010
Chart 14 Interest Rates
(y-o-y rates, in %)
25
110
Private Sector
Policy Rate
105
20
100
101,4
15,6
95
15
90
12,5
85
10
80
75
4 8
2006
5
12
4 8
2007
12
4 8
2008
12
4 8
2009
12
4 8
2010
12
4
2011
• FX market developments in 2010 were driven by a
decline in capital inflows and a relatively stable corporate
demand.
• Current appreciation pressures (5,6% since December)
stem from the increase in NBS repo rate, falling country
risk premium and issuance of dinar denominated T- bills.
• FX reserves of €10.0bn are at or above optimum level,
judging by all standard criteria, and are enough to cover
around 7.5 months of imports.
2
4
6
2009
8
10
12
2
4
6
2010
8
10
12
2
4
2011
• From January 2009 to May 2010, key policy rate has
been substantially lowered – by 9.75 pp (from 17.75% to
8.0%).
• Since August 2010, NBS Repo rate has been raised by
4.5 pp to keep the medium-term inflation on target.
• Interest rates on corporate and household loans broadly
reflected the movement of the key policy rate.
5
After a Very Low 2010 Level,
FDI Inflow to Recover in 2011
From 2005, Serbia has attracted around
€10.5bn of FDI
Chart 11 Net FDI
(EUR bn)
Brownfield investments were the dominant
part of FDI
Chart 12 FDI Composition
(EUR bn)
5
12
0.860 10.451
3.4%
10
1.824
8
5.5%
1.821
6
1.373
4.6%
4
3
6.3%
3.323
2
4
6.2% of GDP
0
2005
* NBS estimate
0
2006
2007
2008
2009
2010*
Total
2005
Telenor & NIS
NIS
1
1.250
Telenor
14.3%
2
2006
2007
2008
2009
Privatizations
Banks recapitalizations
2010*
Greenfield
*NBS estimate
• Average annual net FDI inflow to Serbia was around
€2.1bn (app. 7% of GDP) from 2005 to 2008.
• Financial crisis of 2008 has significantly reduced capital
inflows in the past two years.
• Expected FDI inflow in 2011 (targeting financial sector,
telecommunications and manufacturing) is around
€2.4bn, third of which should come from the privatization
of Telekom (app. €850mln).
• Share of greenfield investments throughout the period
was low.
• Since 2006, privatization revenue has been significantly
reduced (with the exception of NIS in 2009).
• In 2010, bank recapitalization inflows and investments in
manufacturing have continued.
6
Responsible Fiscal Policy and a
Sustainable Deficit, Financed Increasingly
from Domestic Sources
Fiscal deficit to GDP ratio remains under
control
Chart 17 Fiscal Revenues, Expenditures and Result
(RSD bn)
Government debt is rising, but still remains
below worrisome levels
Chart 18 Public Debt
(EUR bn)
30
10
50
10
8
40
300
-10
6
30
250
-30
4
20
-50
2
10
-70
0
450
400
350
200
150
100
Q1
2007
Q3
Q1
2008
Q3
Q1
2009
Fiscal balance, rhs
Consolidated expenditures, lhs
Q3
Q1
2010
Q3
Q1*
2011
Consolidated revenues, lhs
0
Q1
2007
Q3
Q1
2008
External, lhs
Q3
Q1
2009
Q3
Internal, lhs
Q1
2010
Q3
Q1*
2011
% of GDP, rhs
* NBS estimate
* NBS estimate
• Public finance consolidation measures are yielding
results. Budget expenditure has been adjusted to match
the reduced revenue, resulting in a relatively low budget
deficit.
• Budget deficit to GDP ratio is expected to be around
4.5% and 4.1% in 2010 and 2011, respectively.
• Budget deficit is financed increasingly by borrowing
domestically.
• Despite an upward trend, public debt is still at a relatively
low level.
• Its sustainability should be guaranteed by the announced
public finance management measures (including the
adoption of the Fiscal Responsibility Act and Council).
7
Banking Sector Stability Achieved
without Government Interventions
High banking sector capitalisation, owed to
restrictive monetary policy (pre-crisis) and
strict prudential and supervisory measures
Chart 19 Capitalization of Serbian Banks
(CAR, in %)
After a slowdown in 2009, growth rates of bank
lending are taking pace again
Chart 20 Banks' Lending to Private Sector
(real growth, y-o-y rates, in %)
30
Enterprises
25
Private Sector
20
Households
18,4
30
25
20
15
15
Regulatory Minimum (12%)
15,3
10
10
10,2
5
Basel Standard (8%)
5
0
0
2006 2007 Q2
Q3
Q4 Q1
2008
Q2
Q3
Q4 Q1
2009
Q2
Q3
Q4*
2010
-5
1
3
5
2009
7
9
11
1
3
5
2010
7
9
11
1
3
2011
*Preliminary data
• At end-Q4 2010, capital adequacy ratio is estimated at
around 20%, significantly above Basel standards (8.0%).
• Stress tests conducted in collaboration with the IMF
showed that Serbian banks are highly resilient to
potential negative shocks.
• Credit activity (mainly in corporate sector) gathered pace
in Q4 2010, with quarterly real growth of 4.8%.
• Subsidised segment of the loan market records decline in
activity. As crisis effects begin to fade out, borrowing
under market conditions is expected to regain its
dominance in 2011.
• The number of dinar loans, with no foreign clause, is
8
constantly on the rise.
Growth in Domestic Credit Activity
and Modest Dinarisation in 2010
Financial crisis caused private sector to shift
more towards domestic sources of finance
Chart 23 Private Sector Debt in GDP
(share in GDP)
From the beginning of 2010, share of
FX-indexed loans has been declining
Chart 24 FX-Indexed Receivables from Private Sector
(share in total receivables from private sector)
80%
100%
76%
80%
75%
4.4
5.0
8.1
9.4
11.0
10.4
9.6
2008
2009
2010
4.3*
60%
7.5
40%
70%
68%
65%
20%
0%
60%
2006
2007
Domestic loans to enterprises
Loans to households
gdp minus loans
1
2
3 4
2010
5
6
7
8
9
10 11 12
1
2
3
2011
* Values in white are in EUR bn
• Unlike most neighbouring countries, that recorded a real
decline in lending, Serbia saw continued real lending
growth, albeit at a slower pace than before the crisis.
• Enterprises are repaying their foreign debt, but this is
compensated by a rise in loans taken from domestic
banks.
• Banking sector balance sheet continued to rise even
during the crisis.
• During the last 12 months, the share of banks’ FXindexed receivables in total receivables from households
and enterprises fell from 75% to 68% (-6.9 pp).
• This is partly due to subsidized dinar loans, provided by
the government to cushion the effects of crisis, and partly
due to NBS’s efforts to dinarise Serbian economy.
9
Strong GDP Growth Before, and Mild
Recovery After Crisis
Average GDP growth rate over 2005-2008 was
5.8% and was driven mainly by consumption,
but the trend reversed during the crisis
Chart 21 Contributions to Real GDP Growth
(y-o-y rates, pp)
GDP composition has been correcting towards
less consumption and more net export
Chart 22 GDP Composition
(share in GDP)
16
100%
12
80%
8
4
60%
6.9
5.5
5.2
5.6
3.0
40%
1.7
0
20%
-3.1
-4
0%
-8
-20%
-12
-40%
2005
2006
Consumption
2007
2008
Investment
2009
2010*
Net export
2011*
GDP
* NBS estimate
• In 2010, GDP growth (1.7%), driven by net export, will be
above average for SEE countries.
• In 2011, GDP is projected to grow around 3.0%. Most
significant contribution should come from investments.
2005
2006
Consumption
* NBS estimate
2007
2008
Investment
2009
2010*
2011*
Net export
• Consumption makes up the largest part of GDP and prior
to the crisis it was stimulated by capital inflows.
• As a result of the crisis, the share of consumption and
investment in GDP declined somewhat, while net export
increased.
10
The basic goals and presumptions for the dynamic
economic growth until 2020
• The world economic crises showed that the previous model of economic growth and development of
Serbia is not sustainable and have to be changed.
• Actually, that model was based on faster growth of domestic demand than GDP growth due to growing
share of current account deficit in GDP.
• Because of over-drying privatization revenues and limited possibilities for further over-borrowing
abroad Serbian economy has to implement the new model of economic growth and development that is
pro-investment and export oriented.
• Due to previous, the main scenario of future development in the period 2011-2020 is that the
dominance of growth of consumption have to be replaced with the dominance of investment growth.
• The basic scenario for the period until 2020 involves, the award of the EU candidate country status,
and finally the status of EU member of course using the full capacity of economic benefits that this
political development would bring.
Note: The source for the graphs in the text that follows is document Serbian post-crisis economic growth and development model 20112020.
11
The basic goals and presumptions for the dynamic
economic growth until 2020
• The average annual real GDP growth would
Cumulative growth of GDP, productivity and employment,
2010-2020 (in %)
be 5,8%, and growth of domestic demand would
be 4,7%.
•The value of GDP in 2020 would reach 52,7
billion euros, or about 7,5 thousand euros per
capita.
• Also, in mention period (2010 – 2020)
productivity would be cumulatively increased by
50,4% and employment by 16,9% what is
equivalent to number of 440 thousand new jobs.
• In order to ensure sustainability of external
debt the internal demand has to grow slower
than GDP.
12
The basic goals and presumptions for the dynamic
economic growth until 2020
The manufacturing structure of GDP, cumulative growth
2011-2020 (in %)
• The projected annual growth of industry is
6,9%, construction 9,7% and services 5,5%
create the conditions for changing the economic
structure.
• The share of exchangeable products in GDP
would increase from 30,7% in 2009 to 33,1% in
2020.
• The share of industry and construction in GDP
taken together would increase from 21,1% in
2009 to 25,5% in 2020 until share of services
would drop from 55,3% to 52,9%.
• Also, the share of agriculture in GDP would
decline from 9,6% in 2009 to 7,6% in 2020.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
The share in GDP
64.3%
35.7%
2009
Sector of
non tradable
goods
Sector of
tradable
goods
61.5%
38.5%
Average growth rate in
period 2011-2020.
Agriculture
3,4%
Industry
6,9%
Processing
7,3%
Construction
Services
9,7%
5,5%
2020
13
Target parameters in the basic development
scenario
• Raising the share of fixed investment to 25% in 2015
Export of goods and services 2001 - 2020
and to 28% in 2020 (with an average annual growth
rate of 9.7%).
• Reduction of the state expenditure share in the GDP
from 20.5% in 2009 to 12.4% in 2020.
• Raising the share of exports of goods and services in
GDP, from 27.6% in 2009 to 65% in 2020.
• Significantly narrowing the current account deficit in
balance of payments from 7.1% in 2010 to 3.3% of
GDP in 2020.
Share of Export, Import and Current account in GDP
• Inflation in the period 2011-2012 is projected at 5%,
at 4% in 2013 and 2014 and at 3% in all the years until
2020.
• The dinar exchange rate would depreciate about 2%
per year until 2015, after which it would be neutral (the
growth of the euro would be equal to inflation growth in
Serbia and the euro zone).
14
Employment projections and trends on the labor
market
• Projections of trends in the labor market by 2020 were based on macroeconomic projections of GDP growth by economic
sectors and the respective sector estimates of employment elasticity in relation to GDP by approximately corresponding
elasticity in the successful countries of Central and Eastern Europe.
• Total employment will return to pre-crisis level but not before 2013, and will begin to steadily grow a an average pace of over
50.000 persons per year.
• At the end of the period (2020) total employment will be close to 3 million, which will be about 440.000 employees more than in
2010.
• On the other side total unemployment will mildly decrease until 2013 so the number of unemployed will be approximately
340.000.
• Analysis of the projected changes in the structure of employment shows that they occur in the expected and desired direction,
although their intensity is not going to be very strong.
The employment rate in EU and Serbia in 2010 and 2020
Goals
Employment rate
EU
2010
66
2020
73
Serbia
2010
2020
48
65
Difference
2010
2020
-18
-8
(15-64 years of age)
15
Fiscal adjustment and economic growth in Serbia
• Serbia should immediately begin with credible medium-term fiscal adjustment, i.e. reduction of the fiscal deficit, primarily
(relative) reduction of the current public expenditure in order to ensure sustainable of medium term growth.
• The fiscal deficit of almost 5% of GDP in 2010 should be reduced to slightly above 1% in 2015.
• An important prerequisite for this is that the state should carry out the fiscal consolidation - reduce the deficit, limit the growth
of public debt, achieve relatively reduced public spending by its restructuring followed by appropriate reforms, etc
• Serbia, in terms of fiscal policy and adjustments, is going to face the two different periods: first, the fiscal consolidation, i.e.
significant reduction of the deficit and control of the public debt growth (until 2015), and then maintenance of the prudent fiscal
position and policy.
• As additional anchors for reduction of the deficit is control of wages and pensions so that they should grow more slowly than
GDP.
• The Fiscal Council, as an independent institution from government, is usually introduced along with the prescribing the fiscal
rules, and it should be done in Serbia. It should provide an independent and credible assessment for the general population of
the fiscal policy, control the implementation of legally defined fiscal rules, encourage public discussion on fiscal policy, thus
raising knowledge and awareness of it.
16
Reform of the public sector
• The most important is to improve investment and business environment in order to reduce costs and risks of doing business
in Serbia.
•Key activities are to improve the regulatory functions of the state and the modernization and construction of transport, energy,
utilities and telecommunications infrastructure .
• Another direction of reforms is the reduction of public spending to about 40% of the GDP and fiscal deficit to about 1% of the
GDP in the medium term.
• The third direction of reform is the change in the structure of public expenditure and the structure of the tax system in the
direction of stimulating investment, employment and growth. In the case of public spending that means increasing the share of
public investment, and reducing the current consumption, while in the case of taxes, it means reducing the tax burden of labor
and increase of tax on consumption.
• The fourth direction of reforms is the improvement of efficiency of all segments of the public sector: education, health, justice,
customs and tax administration, local administration etc.
• Finally, improving the efficiency of the republic, local and provincial public enterprises the continued liberalization of
infrastructure and utilities, as well as the partial privatization of public enterprises are an important component of public sector
reform.
17
Reindustrialization
Designed share of sectors and industries in the GDP and growth rates
Share in the GDP
2008
2020
50,7
43,0
29,9
24,0
4,9
5,2
Growth rates
2008 - 2020
6,0%
4,1%
8,0%
• Industry of Serbia has not made a
significant contribution to the transitional
economic growth.
Sectors
• Industrial production in 2009 was just
2,9% hired than in 2001.
Medium-low-tech
Coce and petroleum derivatives
Rubber and plastic
Other minerals
Metal
25,4
0,3
6,0
6,0
13,1
22,0
0,4
5,5
5,6
10,5
6,0%
8,0%
5,0%
6,0%
5,0%
Medium-high-tech
Chemical
Machines and equipment
Means of transport
High-tech
Electronics
16,4
7,7
5,0
3,8
7,5
7,5
23,0
10,0
7,0
6,0
12,0
12,0
10,0%
10,0%
8,0%
11,0%
12,0%
12,0%
• The main aggravating circumstances for
the industry in previous period were: lack
of investments in modernization of
equipment and technology, unfinished
privatization and lack of effective process
of liquidation.
• Activities
that
may
encourage
reindustrialization and which can achieve
the stated goals are classified into three
groups:
improving
the
business
environment, direct and indirect state
measures.
Low-tech
Food production
Textile
Share in GDP
Agriculture
60
50
2009
2020
40
30
20
10
Services
0
Construction
Industry
18
Assumptions for the sustainability of the new
economic model
• First, adjustment in the economic system, macroeconomic policy and sector policies, the concept of
accelerating economic growth based on replacement of consumer scenario with the pro-investment model of
development and shifting the focus of investment towards the exchangeable goods. A special place in this
sense is held by a public sector reform. Deviation from these assumptions, especially bearing in mind the
upcoming election cycle, is one of the biggest risks for achieving the presented scenario.
• The second group consists of assumptions that allow the continuity and acceleration of the EU membership
process. When it comes to the economic environment of the Serbian economy, this group of assumptions
has another side - the time of recovery of the world economy, on which the projected growth of our exports
and economic growth depend on dramatically.
•Third, the last but perhaps the most important, is the risk associated with the issue of sustainability of
external debt and external liquidity. Serbia in the next five years bears the risk of higher repayment
burden of private debt, and its investment cycle needs to be based on foreign direct investments, public
loans, and - significant increase of the share of domestic savings in financing investment. The main risk point
in the financing the balance of payment is high debt servicing rate, which for the first five years is more or
less already fixed and in 2015 it would still be 38% to 39% of the value of exports of goods and services.
Hence there comes the imperative to reduce the share of trade deficit and current account deficit in balance
of payments in the GDP.
19
Assumptions for the sustainability of the new
economic model
Indicators of external debt
20
THANK YOU FOR YOUR ATTENTION
21