NBS headquarters, Belgrade, Serbia (jaime.silva, CC BY-NC-ND)
The news shared by the NBS are indeed good. The inflation decreased from 13 per cent in 2013 to 2,2 percent a year later. In the forthcoming two years it is predicted to remain at level of 3.0 ± 1.5 percent. And for four years it has remained low, stable and predictable. This was possible thanks to the pressure of international institutions, as well as domestic factors, such as relative stability of the exchange rate, more anchored inflation expectations and the effects of fiscal consolidation. These in turn were fruits of the liberal and often painful reforms introduced by the previous government of Aleksandar Vučić, between 2014 and 2017.
“With the price stability it has achieved, Serbia is now comparable to other European countries – since the start of the year, inflation has moved within the new, lower target tolerance band and measured 3.2 percent y/y in July. Core inflation moved at around 2 per cent during the year and equaled 1.7 per cent y/y in July”, emphasized Tabaković.
Considerable reduction of interest rates on corporate, household and the governmental borrowing resulted in a higher disposable income, a rise in lending and in economic activity, what in turn had positive impact on overall economic recovery and situation on the labor market.
Decrease of interest rates enabled the government to finance fiscal consolidation, which was marked by restructuration and/or privatization of the numerous state-owned companies. The Serbian society paid lower costs for the economic transformation reforms undertaken in the last four years. The political position of the then PM Aleksandar Vučić has been significantly enhanced and Vučić has been elected as President of the republic this year.
“The NBS policy and the reforms have had a positive impact on EUR loans. Within four years, interest rates on EUR-indexed loans decreased by 3.5 percentage points for corporates and by 3.8 percentage points for households. The decline was partially a result of lower interest rates on the EUR market and partially due to the country’s lower risk premium and interbank competition. NBS’s efforts to create a more stable business environment, as well as the significant fall in the country’s risk premium and Serbia’s improved credit rating, were the dominant factors leading to the lowering of interest rates on euro-indexed loans and the greater availability of cross-border borrowing at lower costs,” said Tabaković
Additionally, in 2015, a resolution strategy on non-preforming loans has been adopted. It led to significant (7 percentage points) drop of the NPLs, number of which increased with the lowering the interest rate by the NBS in 2013.
Conducted studies indicate also that the overall stability of the Serbian economy is secured by high degree of capitalization (almost twice higher than the regulatory requirements) of Serbian banking sector. Relying on the domestic sources of funding increases stability by reducing exposure to risk stemming from international environment or sudden withdrawal of the funds by the parenting bank.
Tabaković pointed at the stability of the exchange rate of the Serbian Dinar (RSD). Despite challenges which arose from various international factors such as diverging monetary policies of leading central banks, the Greek crisis, the Asian stock market crisis, shifting outlooks for global and Chinese growth, the effects of Brexit, geopolitical tensions, etc., the NBS maintained relatively stable course of Dinar.
“In the last five years until July, the NBS intervened in the foreign exchange market by net selling EUR765m, with the nominal depreciation of the RSD against EUR of 1.5 percent. This is significantly less than the net sale of EUR5.7bn in the five years before that, when the nominal depreciation of the dinar was 33.2 percent.”
“Over the past five years, the NBS managed to achieve and maintain price and financial stability, (…) contributing to the creation of a more encouraging business environment, a fall in the risk premium to its lowest level and improvement in the country’s credit rating, progress on the Doing Business list and prospects for the coming period,” claimed Tabaković.
“The practical importance of this is substantiated by the inflow of foreign direct investment, which measured 5.5 per cent of GDP in each of the past two years, and was more than sufficient to cover the current account deficit,” he added. Also a predicted deficit in international trade of Serbia (estimated for 4 per cent of GDP) will be covered by foreign direct investment, which in 2017 is expected to amount to EUR1.7bn, exceeding by over 12 per cent the inflow recorded in the same period last year.
Ana Ivković, PhD, General Manager at the Directorate for Economic Research and Statistics also shares optimistic views. “Economic activity is expected to rise in the coming period, aided mainly by acceleration of growth in the Eurozone and our other important trade partners, continued recovery of domestic demand, the diversified inflow of foreign direct investment, and further improvement in the business and investment environment.”
Jan Muś is a lecturer at the University of Vistula in Warsaw