Transcript Slide 1

Serbia: Staying the Course as an
Investment Destination
Diana Dragutinović, PhD
Main Themes
• Serbia before the crisis
• Crisis imported into Serbia
– Serbia has been hit at an unfortunate moment;
• Some weak spots, some good achievements
• Policy responses:
– Central bank measures addressing the liquidity situation;
– Fiscal policy adjustments;
– IMF program;
– IFIs helping hand
A joke…
• There is a joke that Serbia was the country of the future and
always would be
– I disagree (to me, the growth potential seems to be without
limits)
A vulnerable growth model
•We had made a lot of progress since 2000
•Economic growth in Serbia was among the highest in Eastern
Europe
• The good economic performance was helped by a combination
of
– Macro stability and structural reforms in the context of
very strong external anchors:
• IMF programmes
• EU accession perspective
– Very favourable external conditions:
• Rapid global economic growth
• Ample liquidity in financial markets enabling strong
capital inflows that fuelled mainly consumption, and
less investment
Slowdown or faul, but not
Armageddon
•The future is not necessarily a simple extension of the past
• The crisis, although
delayed, is now affecting the region
– Capital inflows slowing dramatically – parent banks
– Deposit withdrawals, but without bank failures
– Very substantial currency devaluation
• Prospects
– No radical “sudden stop” of foreign capital inflows, but reduced and more
expensive financing of still large external imbalances
– Harsh adjustment in the real economy
– Do we have a plan for the future (if you fail to plan, you plan to fail)
• Action plan depends on our weak spots, but achievements as well
Some Weak Spots
•...limit policy response to crisis
– Dependence on the capital inflow
– High level of euroization leaves fiscal policy as
the only/key short term policy instrument
– External imbalances (high level of private
external debt) limit the scope for “Keynesian”
fiscal stimulus policy response
Some Good Achievements
• Recent achievements of the Serbian economy, such as
– Low sovereign debt level (regardless significant depreciation)
– Comfortable level of FX reserves
– Strong profit, capital and liquidity position of the banking system (no bank
failures):
• Banks exceed not only the BIS regulatory minimum ratio, but also the
NBS’s more conservative 12% floor, for regulatory capital as a share of
risk-weighted assets
• generally conservative and well-regulated
• Domestic financial institutions without substantial exposure to the U.S.
sub-prime mortgage-linked toxic assets
• Low direct exchange rate risk exposure in the banking sector
• …will help the economy to adjust in an orderly manner
• Shallow domestic capital markets protected the Serbian economy from the abrupt
capital flight experienced by other emerging market economies
Crisis – manageable,
but needs to be managed
• It is easy to be pessimist
• Our first priority is to make the current crisis as short as
possible
– There is a fairly wide consensus among economists that fiscal stimulus
in the form of large spending bill is the way to go
– And there is a clear consensus that putting money into economy, to
counter the recession and help people, is the right thing to do
How Much is the Government Doing
• The first package with a goal to preserve trust in financial
sector, the Government adopted in November 2008
•In fact, the Government
a) Increased deposit guarantees from EUR 3,000 to 50,000
b) Suspended the tax on interest income and taxes in securities trade,
namely on capital gain and transfer of ownership
•
The second one, adopted in February is focused mainly on
encouraging credit channel to work. In fact, through banks,
the Governmnent
a) Subsidized interest rate
– for companies
– on liquidity / investment loans
– for households
– on consumer loans
b) Extended subsidies to households for cars and tractors, based
on the principle “old for new”
c) Extended guarantees
» for investment loans with a 30% Development Fund
component, for the 75% of the rest of the loan
» to the NBS for liquidity loans granted to banks
•The Government is active in mobilization IFIs funds to
provide some stimulus to growth
–
What is encouraging
• The coordination of IFIs (IMF, WB, IBRD, EIB) in considering / providing
packages of equity and credit lines to support priority projects with
focus on infrastructure, SMEs, energy efficiency, financial sector
–
We agreed on support of
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one billion euro for Koridor 10
250 million fro NIP
300 million for SMES
300 million for the budget
120 million for Komercijalna bank
•Serbian government asked for the support from IMF
–
The IMF approved the SBA in amount of 3 billion for 2 years,
that replaced a smaller package in January
– What is encouraging
» In its long history, IMF was in favour of hard money / tight budget
– The new Fund beleives in Keynesian policy
» Monetary easing and fiscal stimulus (looks like joke)
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This programme is important for Serbia, not only because of
money, but because its role in organizing other donors given,
the absence of EU shield
This will bring some confort for investors both, local and nonresident
The IMF deal has helped the country negotiate loans from
other international creditors
– EIB announced series of loans worth over 1.4 billion euros over the
next two years
– WB agreed to provide the country 300 million USD for budgetary
support
•The main pillars are
– Fiscal adjustments
– Vienna agreement providing assurance from the parent
banks to at least maintain their exposures to Serbia
– Financial Sector Support Program
– The start of a new T-bill program
Fiscal Policy
• First, we are targeting large fiscal adjustment
– Running fiscal policy only within fiscal rules
– Lower fiscal revenue require prompt fiscal rebalancing exercises
– Lower revenues / expenditures ratio to GDP, but higher deficit - 3% of GDP,
among the lowest in the globe
– Social and priority capital spending will be protected
• On the expenditure side, we will focus on tightening recurrent spending on
wages, pensions, and discretionary spending at all levels In particular, we will:
– (i) freeze all general government and public enterprise wages and salaries in
nominal terms in 2009 and 2010;
– (ii) extend the nominal freeze of pension benefits to end-2010; and
– (iii) freeze hiring at all levels of government, including for temporary contracts,
with only duly motivated and limited exceptions
– (iv) cut discretionary spending at all levels of Governments
– (v) dicretionary actions are to be focused on financial crisis
– (vi) safeguard medium-term fiscal sustainability
Monetary Policy
• Monetary policy measures - addressing the FX market liquidity
– Allowing banks to use FX reserves to address the liquidity problems
– Reducing reserve requirements to facilitate borrowing from abroad
(note that RRs are high by international standard; accordingly, there is
plenty of room for the CB to further foster liquidity on the back of RRR
easing)
– Frequent interventions injecting FX liquidity and cushioning the speed
of the FX adjustment
• however, the CB does not set any floor or ceiling for the currency;
in other words, it may lean against the wind of currency moves
and it can smooth the process, but it does not fight currency
trends by defending any particular currency level and trend
– Interest rates remaining high
Vienna Agreement
• What is encouraging
– The coordination of IFIs in seeking agreements with
government and parent institutions of Serbian systemic
banks to prevent reducing their balance sheets (to
maintain their exposures to Serbia)
• A system of written promises could soon be extended to Hungary,
Ukraine, Bulgaria and other vulnerable countries
• IMF is initiating a regionally coordinated stress testing exercises
Financial Sector
Support Program
•Banks are obliged to assume some obligations like:
– pre-emptive recapitalization should the stress tests results indicate the need
(In general, banks with CAR less than 12% could be given additional 4 -6
months to raise their CAR to 12 percent by the shareholders or new investors
or the NBS could ask the Government to increase these banks’ capital)
– conversion of FX or FX-indexed loans to local currency, and
– facilitate restructuring of loans to clients
•In exchange for some facilities such as:
– using the NBS dinar liquidity facilities at non-penalty interest rates, FX swaps
facility and extension of zero mandatory reserve requirements on new
external liabilities
– certain supervisory relaxations
The start of a new T-bill program
•...is a significant step in:
– developing money markets
– improving monetary policy transmission
– promoting the use of dinar instruments by the banking sector and public
•The program has so far focused on issuing 3M bills at modest
volumes, but the plan is to start issuing
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–
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6M bills
9M bills
12M bills
T bond program
– T-bills are important source of collateral for inter – bank transactions
– and also for the NBS new facilities under the IMF sponzored Financial
sector support program
Investments in Serbia
bring many opportunities
• One of the largest markets in the region with a lot of development potential
and unique geographical location making it the natural center of the region
• Many markets and market niches not occupied or saturated, giving
advantages to early movers
• Existing markets can be easily developed and sophisticated further at low
costs and risks
• Many business processes and networks are just being established, providing
unique opportunities for business development and expansion
• Low competition provides good profit opportunities to be reaped
• Generally low labor costs (giving competitive advantage to traditional
industries such as textiles)
• Cheap qualified labor (in such areas like electrical engineering, IT, graphical
design)
• Young generation eager to learn, work hard and advance fast
with very few risks
• The future of Serbia in the European Union is known
• Its economic, legal and political convergence to Europe will follow
trajectories similar to other Eastern European countries the risks are
therefore known from the experiences of other countries and relatively
contained
• The lessons learned by other countries can be used to avoid many
unnecessary mistakes
• In sum, there is probably not another country with such a large
development and market potential whose economic and political future
would be so well anchored in Europe such as Serbia today
•I am very much aware, success depends on trust
•Trust doesn t depend on being perfect
•Trust depends on being honest, systematic and predictable
Thank you !
Ministry of Finance
20, Kneza Milosa St., Belgrade
[email protected]