Transcript soskicpresenation

The New Growth Model for Serbia:
Monetary and Fiscal Policy Challenges
Dejan Soskic – Governor, National Bank of Serbia
Athens, 11 February 2011
Characteristics of the Previous Growth Model in Serbia
(2000-2008)
Contributions to y-o-y growth rate (by expenditure)
Contributions to y-o-y growth rate (by activity)
(percentage points)
(percentage points)
18
10
14
8
8.3
10
5,6
6
3,9
6,9
3.9
5,5
5,2
5.5
5.2
6
8,3
6.9
5.6
4
2.4
2,5
2
2
0
-2
-2
-6
-4
-10
2002
2002
2003
Final consumption
2004
2005
Investment
2006
2007
Net-exports
2008
GDP
2003
2004
Agriculture
Services
Taxes less subsidies on products
2005
2006
2007
2008
Industry and construction
FISIM
GDP
* NBS estimate

GDP growth was based primarily on domestic consumption and to a much smaller extent on
investments. Rising domestic consumption was the main generator of the increase in trade deficit.

Acceleration in economic activity was financed by large capital inflows (FDIs, corporate and bank
borrowing).

GDP growth resulted from the expansion in non-tradable sectors – most of the growth was realized in
the services sector, and not in traditionally significant tradable sectors (agriculture and industry).
Unsustainability of the Previous Growth Model
Current account deficit (% of GDP)
25
21,1
20
17,6
13,8
15
8,8
10
5
10,1
7,8
4,2
0
2002

2003
2004
2005
2006
2007
2008
Growth in wages outpaced the growth in productivity, high level of domestic consumption
and a very low level of investments.

High trade deficit and also current account deficit.

Maintaining the previous growth model, based on externally financed domestic
consumption (through foreign borrowing and privatization revenues), would result in rising
debt, decrease in economic growth and deterioration of macroeconomic stability.
First steps towards New Growth Model – since 2009
Contributions to y-o-y growth rate (by expenditure)
(percentage points)
Current account deficit (% of GDP)
25
18
21.1
14
20
10
17.6
8.3
6.9
5.6
6
3.9
5.5
5.2
13.8
15
2.5
1.7
2
8.8
10
-3.1
10.1
7.8
-2
5
7.0
6.9
7.1
4.2
-6
0
-10
2002
2003
2004
Final consumption
2005
2006
Investment
2007
2008
2009
Net-exports
2010*
GDP
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
* NBS projection
* NBS estimate

Introduction of public wages and pension freezing, and more then 25% depreciation of RSD at
end 2008 and beginning of 2009

Consumption contributed negatively to GDP growth in 2009 and 2010. The fall in consumption
induced a smaller trade deficit, causing net exports to contribute positively to the overall
economic activity.

Current account deficit was reduced to a third of its 2008 level.
No Bailouts Due to Restrictive Pre-Crisis Monetary and
Prudential Measures of the NBS
• At end-September 2008, Serbian banks had
a very high capital adequacy ratio of 23.3%
• Commercial banks had substantial NBS
REPO holdings (EUR 3.2 bn or 13% of total
banking sector assets at the time).
• High reserve requirements: 40% on new FX
savings, 45% on foreign borrowing.
• Level of private indebtedness was low (EUR
627 per citizen, EUR 2,282 per employee).
• 74.8% of the banking sector was owned by
EU resident banks.
• No need for bailouts of
Serbian banks during or
after the crisis.
• Stress tests conducted
in collaboration with the
IMF show that Serbian
banks are resilient to
potential negative
shocks.
Central Bank’s Role in the New Growth Model

National Bank of Serbia has a primary role in securing a stable environment – price and
financial stability.

Decreasing the level of Euroisation

Increase in the share of domestic sources in investment financing.

Key source of economic growth should be net exports (through export expansion and
import substitution) and export-related investments.

Fine tuning of monetary policy and micro and macro prudential tools in order to keep
inflation in target, allow export growth and preserve systemic stability.
Monetary Policy Must Be Complemented with Effective
Fiscal Policy


Because monetary policy can not:

decrease excessive public spending;

curb the prices of individual products or groups of products;

directly boost exports;

directly increase employment.
Stability and economic development can be fostered only through a
combination of effective monetary and fiscal policies (low deficit and
manageable public debt), supported by adequate budget-financed capital
investment.
Risks Related to NBS’s Role
 Inflation
 High Eurisation increases the correlation of FX rate and NPLs
 Use of FX rate as an external shock absorber without negative implications for financial
stability.
 From a standpoint of consistency between monetary and fiscal policy:
o
Wage policy in public sector;
o
Development of domestic financial market;
o
Still high level of euroization in public financing;
o
Higher than agreed growth in regulated prices.
Transition from 2000 to 2010
1.
GDP growth driven by domestic demand, imports, services;
2.
FDI (brown field and green field predominantly in non-tradable GDP);
3.
External borrowing;
4.
Increased public spending on consumption including privatization
revenues;
5.
From December 2000 until September 2010, FX rate has depreciated
78% against the EUR and 23,3% against the USD while RPI at the same
time increased by 246,6%;
6.
Serbian industries predominantly import oriented and uncompetitive;
7.
In 2010 number of employees is less then in year 2000;
8.
Industrial output in 2010 is less then 50% of industrial output in 1989.
Post-crisis agenda

Serbia needs to spend within its means (lower budget deficit and lower
current account deficit)

Serbia needs to invest much more (FDI, government capital investments,
domestic private investments, portfolio investments)

We need to produce more before we spend more

We need to export more before we can import more

As a rule: stable and strong currency is a consequence of a strong and
competitive economy