Transcript Макроекономска кретања, октобар – децембар 2006. године

Macroeconomic Developments,
October – December 2006
Radovan Jelašić – Governor
Belgrade, 29 January 2007
Contents

Inflation

Monetary policy

Capital inflow and external position

Monetary aggregates

Current account balance

Economic growth

Lending activity of banks

Wages and productivity

Fiscal developments
All that was achieved in 2006 will be sustained in 2007!
Monthly inflation dynamics in 2006 (%)
3.0 2.2
1.8
1.6
2.0
1.4
0.9
0.8
0.8
0.7
1.0
0.40.5 0.4 0.3
0.6
0.0
Annual inflation rates (%)
0.6 0.70.4 0.6
0.1
0.8
0.2 0.1 0.0 ? ?
0.0
-0.1
-1.0
Dec- Jan Feb Mar
05
Retail prices
Apr May Jun
Core inflation
Jul
-0.2 -0.4
Aug Sep
Oct
Year-on-year growth rates
20 20
15 15
10
10
5
5
0
-5
0
-10
20
20.89 20.94
19.97 19.97
20.77
18.00 18.00
17.50
16.50
16
14.00
14
13,00%
12
10
Jan
Feb
Q1
Mar
Apr
May
Jun
Q2
* Preliminary data until 29 January 2007.
Jul
Aug
Q3
Sep
2003
6.6 5.9
2004
Retail prices
2005
Core inflation
Year-on-year core inflation
Switch to 2W repo securities via
fixed-rate auctions
18.41
7.8 6.1
2002
14.5
11.0
Inflation rate in 2006 (%)
20.22 20.13
18
17.7
13.7
4.4
Nov Dec- Jan06
07
NBS key policy rate in 2006 (%)
22
14.8
Oct
Nov
Q4
Dec
Jan
2007
4
3.5
3
2.5
2
1.5
1
0.5
0
3.4
2.2
2.1
1.7
1.7
0.4
Q1
Q2
Retail prices
0.5
Q3
Core inflation
0.3
Q4
2006
For 2007, the National Bank of Serbia has planned only the
things it is certain to achieve!

Planned core inflation for 2007: 4 - 8%; NBS will target the lower band of
the corridor;

Target fulfillment alone will determine the future trajectory of the NBS
key policy rate in 2007!

Inflationary expectations are declining together with inflation!

Although there is still a need for a part of regulated prices to come
closer to market prices, it is important to mention prices that have in the
meantime moved down – Politika, petrol at NIS petrol stations, white
goods, etc.
Differences between Serbian and foreign prices
cannot be put down to the exchange rate!
Example: Samsung LE 27S71 LCD television
set*
Eltim - Serbia
RSD 86.195
EUR 1,098
Tehnomarket – Serbia
RSD 64.999
EUR 828
Tehnomania
RSD 77.999
EUR 994
Mediamarkt – Hungary
HUF 159.999
EUR 625
Topvision – Germany
* Exchange rate: EUR 1 = RSD 78.5000
EUR 549
All profit from price stabilization!

Pensioners – semiannual indexation to price growth;

Our investors abroad – for every euro invested abroad, they need to
allocate (approximately) the same amount of dinars;

All people who save in Serbia – dinar and foreign currency savings,
voluntary pension funds, shares and other investments (which erode in
the context of dinar devaluation);

Corporate sector – price stability is the best way for the corporate sector
to finally focus on productivity and market competition, rather than price
and exchange rate movements!

Earlier criticisms such as “prices keep growing and the dinar is
unrealistically strong” are now obviously out of place!
Decision of the Monetary Policy Committee of 29 January
2007!
Key reasons:

Positive trend of declining core and headline inflation;

Need for additional sterilization in Q4 2006 due to
increased budgetary spending;

Lessened pressure on the dinar exchange rate;
Effects on inflation
The key policy rate of the National Bank of Serbia on 2-week repo
securities has been cut from 14.0% down to 13.0% per annum!
Price movements in the first half of the year will be
determined by the following factors
Price reduction

Low inflation rate in Q4 2006;

Appreciation effects;

Fall in prices of petroleum
Price rise

heating and electricity;

Restrictive monetary policy stance;

Strengthening of trust in the dinar.
More expansive fiscal policies in
Q4 2006;
products;

Deferred price hikes – central

Constitution of Government;

...
The National Bank of Serbia aims at notably reducing its
role in exchange rate formation...
NBS interventions in IFEM August 2006 –
January 2007 and RSD/EUR exchange rate
412.4
movements
EUR mln
500
400
86
85
300
84
200
83
120.3
Sale
100
-2.5
18.2
82
10.0
0.0
0.0
Oct
-0.3
Nov
Dec
81
0
Aug
-100
Sep
-80.2
Purchase
-153.5
-200
Net result in IFEM
-40,1
Net purchase from
exchange offices
+162,1
Total effect on
forex reserves
+122,0
-15,7
80
79
-259.4
-300
* Until and including 25 January 2007.
Jan*
0.0
78
-9,7
+259,4
+153,5
-412,4
+148,5
+154,4
+130,9
+86,0
+34,1
+132,8
+144,7
+390,3
+239,5
-378,3
... and in 2006 its efforts in this direction were successful!
Volume of interbank trade
outside IFEM
EUR bln
7
NBS purchases from
exchange offices
EUR bln
2.5
5.87
6
1.93
2
5
4
1.5
3
1
1.49
+14,2%
1.55
2
2.03 +189%
-9,3%
+13,4%
0.5
0.79
1
1.75
1.69
0
0
2003
EUR bln
7
2004
2005
2006
2003
2004
2005
2006
Number of active days
of NBS in IFEM
Foreign exchange trade in and
outside IFEM
300
251
6
252
250
240
203
5
200
4
96,2%
3
30,9%
49,1%
55,9%
2
1
69,1%
50,9%
44,1%
2003
2004
* Until and including 26 January 2007.
2005
131
150
100
50
3,8%
0
Banks – banks
2006
Banks – NBS
0
2002
2003
2004
2005
2006
Foreign exchange market will be further liberalized over
the next three months
EUR bln
10
9
8
7
6
5
4
3
2
1
0
NBS forex reserves
9.02
8.87
2006
2007
4.94

2.19
2.28
2001
2002
2.84
3.12
2003
2004
2005
As of 5 March, the functioning of the fixing session will change – the official middle exchange rate of the dinar
against the euro will be set based on the daily weighted average trade in currencies in the overall interbank
foreign exchange market;

As of 1 March, the NBS will receive only 3 currencies from exchange offices (EUR, USD, CHF);

On 1 January this year, the NBS cut the incentive fee for exchange offices to 0.5%; by the end of 2007, this
fee will be lowered to 0.1%.
For 2007, data as at 25 January.
Future exchange rate movements during 2007

If necessary, the NBS will be ready to “iron out” excessive daily and
periodical oscillations, but without interfering with the overall exchange
rate trend;

Clients that have large foreign currency inflows and outflows should
safeguard against foreign currency risk – especially those that have
foreign currency inflow only!

The NBS aims to minimize the number of days of its participation in the
market in the capacity of buyer or seller!
Capital inflow in the first 11 months well exceeded the current
account deficit – there is no 1990-1991 scenario!
in EUR mln
Import and export movements
(January-November)
+11,1%
in EUR mln
6,000
5,000
2,667
4,000
Foreign
direct
investment
10,500
8,500
3,000
2,000
1,000
1,135
Borrowing
+29,3%
6,500
2,601
1,471
4,500
-1,602
2,500
9,553
0
-1,000
10,611
6,159
-2,248
-2,000
Current
account
4,762
500
-3,000
I-XI 2005
I-XI 2006
-1,500
Export
Import
2005

In December, annual growth rates of reserve money and
broad and narrow money supply stood at 41.7%, 39.8%
and 37.1%, respectively;

Total sterilization in 2006 was RSD 239 billion – RSD
125 billion through repo operations and RSD 114 billion
against reserve requirement.

2006
Import/export coverage ratio in the first 11
months of 2006 amounted to 58.1%, compared
to 49.8% in the same period in 2005 (excluding
effects of VAT introduction).
Ratio of current account deficit to GDP declined in 2006 and,
according to projections, will be lower than in the preceding
two years
Current account balance excluding
grants (in % of GDP)
2001
2002
2003
2004
2005
2006
projection
0

-2
-4
-6
-8
-8.2
-10
-12
-9.6
-10.8
-11.0
-12.4
-14
-10.5
Current account balance is improving
regardless of 2006 appreciation!
Private debt is gaining predominance in total external debt
Public external debt of the Republic of Serbia
EUR bln
9
8
7
6
5
6.8
5.8
5.8
Level and structure of external debt of the Republic of Serbia
6.0
5.9
in EUR bln
4
3
2
16
1
0
13
13.1
14.9
15
14
2003
2004
2005
November
2006
Private external debt of the Republic of Serbia
55
9.9
9.1
50
11
41,2%
54,0%
10
8
25,8%
8.1
30
25
6
5
7
6
4
5.4
45
35
32.3%
27,2%
7
9
8
Private
debt
40
9
EUR bln
65
60
8.9
12
2002
65.7%
59.7%
64.3%
51.9%
40,0%
20
Public
debt
15
3
5
4
3
2
in %
2.3
1
2.5
0
1
0
Source: NBS.
2002
2003
2004
10
2
3.2
2005
5
8.6%
8.5%
2002
2003
8.1%
2004
6.8%
6,0%
2005
30.11.2006.
0
Kosovo and
Metohija
Share in GDP (right scale)
November
2006
Strengthening of EUR against USD had a notable effect on total debt (debt increased by 27.2%
in USD terms and 13.7% in EUR terms compared to end-2005).
Prices of petroleum products have now returned to their
June 2005 level
Ural oil price per barrel (USD)
70
World oil price trends reversed in
60
August 2006. From close to USD
50
70 in July, the price of Ural oil
40
30
declined to around USD 50 in
20
January this year. Over the past
10
five months, this has led to a 20%
0
1 2 3 4 5 6 7 8 9 10 1112 1 2 3 4 5 6 7 8 9 1011 12 1
2005
2006
2007
Retail price of petrol MB 95
100
90
80
70
60
50
40
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1
2005
2006
2007
drop in prices of petroleum
products.
In Q3 2006, GDP growth was around 4.6%
Real GDP growth
in %

16
4.6% and processing sector
13.8
14
production by relatively high
12
5.3% in the first 11 months of
10
8.3
8
Industrial production grew by
7.8
6.8
2006 compared to the matching
7.4
6.2
6
5.0
4.6
4.4
period of 2005;
5.6
4.6
4

Key contributors to such growth
were the production of basic
2
metals and non-metals, food and
0
I
III
II
2004
IV
I
III
II
IV
2005
I
II
III
chemical products;
2006
Source: RSO.

Overall economic growth, including industry, has been slowing down: 8.4% in 2004, 6.2% in
2005, but 5.8% (preliminary) in 2006!

Serbia needs another “injection” and acceleration of reforms!
Industry unit labour costs have declined
Movements in productivity and real wages in industry
(2005=100)
130
Industry productivity gains
120
(12.3% in the first eleven
110
months) outstripped growth in
100
real gross wages (11.9%); unit
90
labour costs therefore declined
80
by around 0.4%.
70
60
1
3
5
7
2004
9
11
Productivity
1
3
5
7
2005
9
11
1
3
5
7
2006
Real gross wages
9
11
In the second half of 2006, growth in lending activity underwent a
slowdown!
RSD bln
Growth in lending activity
60
50
46.5
38.2
40
30
56.6
27.4
40.0
25.4
20
12.4
8.3
10
0
2005
2006
Q1
2005
2006
Q2
2005
2006
Q3
2005
2006
Q4

2005 credit growth stood at RSD 149.4 billion, while in 2006 it equaled RSD 105.4 billion.

Lending activity slowed down appreciably in the latter half of 2006: absolute growth was lower than a
year earlier;

Lending activity growth in Q4 2006 drew mainly on domestic sources of financing (corporate, household
deposits, etc.).
Dinar savings always beat inflation!

The National Bank of Serbia launched a campaign promoting dinar
savings, which not only bear a higher interest rate than foreign currency
savings, but also invariably beat inflation!

For banks, dinar savings deposits are the most attractive source of
financing, as they are subject to a reserve requirement ratio of only 10%,
compared to 40% and 45% ratios on foreign currency savings deposits;

The aim of the campaign are not NBS savings bills, but dinar savings in
commercial banks;

Over the coming months, the NBS will actively promote dinar savings in
all media – the first who start saving in dinars will get the best interest and
the best earnings!
Thank you!
NBS Call Centre
Dial toll-free
0800-111-110