Under the influence of the exit from the pandemic and the movement on the world market, inflation in most countries, including Serbia, is at a somewhat higher level. In 2020, the central bank sold 1.45 billion euros net in order to preserve the necessary exchange rate stability.
Thanks to the responsible conduct of economic policy, Serbia managed to reduce the economic damage during the pandemic to a minimum. The most important factor was the preservation of macroeconomic and financial stability, and its basis is the relative stability of the dinar exchange rate. In addition, a key contribution was made by a package of economic measures adopted immediately at the beginning of the pandemic, followed by two more. Thus, as a state, we sent a clear signal to the economy and citizens that we will do everything to preserve incomes and the labor market, but also a favorable business environment for investments. We are witnesses that the results that Serbia has achieved in attracting foreign direct investments (FDI) are often deliberately silenced or relativized in public. In the previous three years, Serbia received 10.3 billion euros in FDI. From the beginning of 2018 to the end of 2020, our country managed to make more investments than Hungary, twice as much as Bulgaria and three times as much as Slovakia. When it comes to the region, Serbia alone has attracted more investors than Croatia, BiH, Macedonia, Albania and Montenegro combined.
Since the National Bank makes growth projections for gross domestic product, what are your expectations? Do you predict growth of six percent of GDP or is it possible even higher? What will determine it?
Since the beginning of the pandemic, the National Bank has projected that Serbia will record a growth of about six percent this year and that it will thus be one of the few European countries that will not only reach but also exceed the level of economic activity before the pandemic. Data in the first quarter give a real possibility that this growth will be even higher than six percent. As a result of high private and state investments, as well as due to strong growth in industry and exports, Serbia recorded a year-on-year GDP growth of 1.2 percent in the first quarter. Thus, it reached the pre-crisis level of GDP in the first quarter. In the first three months of this year, the inflow of foreign direct investments amounted to almost one billion euros, and the capital investments of the state increased by 13.7 percent. At the annual level, half of the projected growth will most likely be the result of growth in industry and construction, while the other half should come from the service sectors.
What are your expectations regarding inflation? For the first time in a long time, it was slightly higher in April, close to the central target of three percent. Is inflation waking up in Serbia or not?
Under the influence of the exit from the pandemic and the movement on the world market, inflation in most countries, including Serbia, is at a somewhat higher level. The temporary factor influencing the growth of inflation is, first of all, the movement of the world oil price, which in 2020 during the epidemic of Covid 19 was at an extremely low level. In addition, partly due to the exit from the pandemic, and partly due to the movement on world markets, a somewhat faster growth of food prices can be expected this year. With the arrival of the new agricultural season, this effect will also lose its effect. In any case, inflation will remain under control in the coming years and will continue to move within the allowed deviation from the target of three, plus or minus 1.5 percent.
Economists in the world and leading people of the main central banks and financial organizations say that a lot of printed money increases the price of many products from food, metals, energy, which will affect the growth of inflation. How do you look at it?
When it comes to money issued, it should be noted that this is one of the key factors that has contributed to avoiding a much deeper and longer recession globally. Favorable financing conditions maintained in this way prevented a larger drop in demand. I will remind you that the NBS, among the first central banks in the world, responded to the crisis by easing monetary policy and reducing the reference interest rate as much as four times. However, in the year of coming out of the pandemic, there is a global disturbance on the supply side, where producers cannot respond to demand growth in the short term. Combined with relatively preserved income and frequent changes in consumer habits, this leads to a temporary rise in prices in parts of the market. This can be felt to a certain extent in Serbia as well, but since these disorders are related to the introduction and abolition of restrictive health measures, their effects should be limited in the short term.
The reference interest rate of the NBS has been one percent for a long time. Borrowing, ie the price of money for our conditions is never lower. What can citizens and the economy expect – will such a situation last or should we slowly prepare for the growth of interest rates?
The easing of monetary policy was fully transferred to lower interest rates on the money market, and on that basis, the conditions for borrowing by the economy and the population in dinars were much more favorable. Interest rates on dinar loans to the economy in the first quarter averaged 2.8 percent, and on loans to households 8.7, which is lower in the case of the economy than at the end of 2020, and close to the level recorded at the end of last year. Given our inflation projection, favorable conditions for dinar lending should be maintained in the coming period. The European Central Bank has similar assessments in terms of inflation, which is why it continues to stimulate favorable financing conditions with its measures. In addition to the effects of the country’s lower risk premium, maintaining low interest rates in the euro area should continue to have a favorable effect on interest rates on euro-indexed loans in Serbia.
The NBS is the supervisor of the banking sector. How did the banks withstand the blow of the two moratoriums when the debtors did not pay their obligations for five months? The application for the third, selective, was completed a month ago. Were there any consequences for them?
Thanks to the activities of the NBS in the previous period, the banking sector welcomed this global crisis highly liquid, well-capitalized and with the lowest level of problem loans since this indicator was monitored in Serbia, ready to face challenges and support economic measures. This is best illustrated by the ability of the banking sector to successfully implement moratoriums on the repayment of client obligations, repayment facilities and numerous other adjustments to the regulatory framework to better cope with the health emergency. Despite all the measures, and despite the pandemic, the liquidity and high capitalization of the banking sector have been preserved, and the share of problem loans has been further reduced compared to the pre-crisis period – to 3.9 percent.
With how much money has the NBS intervened in the market since the beginning of the Covid crisis? How much foreign currency did it buy, how much did it sell?
The most important thing is that the NBS preserved the stability of the dinar exchange rate against the euro during the global economic crisis. We have not allowed any part of the uncertainty from the international environment to be transferred to the domestic financial market. Thus, we have maintained the credibility of the monetary and exchange rate policy that we established nine years ago. By behaving responsibly in the three years before the crisis (2017-2019), we increased foreign exchange reserves by five billion euros on the basis of interventions alone. Therefore, the fact that the NBS sold 1.45 billion euros net in 2020 in order to preserve the necessary exchange rate stability, did not endanger foreign exchange reserves at any time, and thus the stability of the domestic financial system. At the same time, the largest part refers to the second quarter of 2020, when the consequences of the pandemic were most pronounced. Later in the year, the uncertainty calmed down and there was a much smaller need for interventions, and at the end of the year, there was pressure to strengthen the dinar and the need to buy foreign currency. From the beginning of 2021, the participation of the NBS in the foreign exchange market is almost neutral, ie we sold and bought approximately the same amount of foreign exchange. This indicates that stability in the foreign exchange market is the rule, not the exception.
The number of banks in Serbia has decreased. Will the trend of enlarging this market continue and the number of banks decrease? How do you look at it?
There are currently 25 banks operating in the banking sector. The changes in their number primarily reflect the development of the domestic market and the high degree of interest of investors to invest in Serbia. This is another confirmation of the credibility of the banking system and the NBS as supervisors and regulators. Status changes in the banking market are taking place according to market principles, and in the previous period they were primarily the result of developments in the market of parent banking groups, but they are also a reflection of increased stability and attractiveness of the domestic banking market. As before, we will decide on each request in accordance with the legally prescribed procedure, taking into account the stability of the banking sector and the protection of depositors’ funds.
The NBS bought five issues of corporate bonds from banks. It seems to me that this is the first time that the central bank has done that. Was the exception due to a pandemic or is there room for something like that still?
“Accuracy is the virtue of kings”, wrote Aleksandar Dima, and for the NBS this is the basic rule: the NBS did not buy five issues of corporate bonds, but part of the bonds issued by five domestic companies during 2020. The NBS thus bought corporate bonds worth of 234 million euros – just over half of the total broadcast. This is the first time that the NBS has realized the purchase of bonds of domestic companies, but the conditions for that have been met – the lowest ever interest rates on dinar sources and the possibility of using the advantages of financing through the issue of bonds. Buying corporate bonds is nothing new, but a standard practice in the developed world. By financing through bonds, companies increase flexibility in cash flow management, through diversification of financing sources, but also through reducing exposure to exchange rate risk because only bonds in domestic currency are issued.
Almost 200 million Swiss francs were replaced
Back in December 2020, the NBS informed the public that the eighth series of Swiss francs was to be withdrawn from circulation, so that banks and citizens had enough time to replace them. Since the National Bank of Switzerland announced on April 28 that it would withdraw the eighth series banknotes from circulation on April 30, we decided to give citizens an additional deadline to replace those banknotes with banks or authorized exchange offices, ie to allow banks to have them with the NBS by May 31st without replacement fee. The fact that the NBS exchanged these banknotes for banks every day during May and that almost 200 million Swiss francs were exchanged speaks volumes about the efficiency of this process, Politika reports.
