Macroeconomic Developments in Serbia

Transcription

1 Macroeconomic Developments in Serbia November 217

2 Inflation has been Moving Within the Target Tolerance Band Since the Beginning of the Year Inflation expectations are anchored - moving close to the target Inflation will continue to move within the target tolerance band Chart 1 CPI and inflation expectations developments (y-o-y rates, in %) CPI Inflation Core Inflation* Inflation expectations of the financial sector (Bloomberg) *CPI excl. Food, Energy, Alcohol and Tobacco Since the beginning of the year inflation has moved within the target tolerance band (3.±1.5%), with y-o-y inflation at 2.% in October. Core inflation is moving around the lower bound of the target tolerance band, measuring 1.% in October. Inflation expectations of the financial sector and corporates are anchored within the target tolerance band Chart 2 Inflation projection (from November 217 IR) (y-o-y rates, in %) We expect inflation to fall below its current level at the beginning of 21, as this year s one-off price increases drop out of the y-o-y comparison. Low imported inflation will work in the same direction, while the increase in domestic aggregate demand will work in the opposite direction. The risks to the projected inflation path are symmetrical and related to future developments in the global commodity and financial markets, and to a certain degree, to administered price growth. 2

3 GDP on a Stable Upward Path Diversified and export-oriented economic growth continues Chart 3 GDP developments (seasonally adjusted, Q1 2=1) Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q Following strong growth in 21, GDP was adversely affected by weather conditions this year, while domestic and foreign demand provided a boost to growth. In GDP accelerated and recorded growth of 2.1% y-o-y, led by industry, services and recovery in construction, while from the expenditure side growth was led by private investments and consumption. Outside supply-side shocks, the Serbian economy is still growing at the rate of around 3%, with manufacturing recording nearly 7% y-o-y growth. GDP growth expected to accelerate in the coming years Chart GDP growth projection (from November 217 IR) (y-o-y rates, in %) I 215 III I 21 III I 217 Investments in export-oriented sectors will be the main driver of 3.5% GDP growth in 21 and 219. Growth acceleration is attributable to macroeconomic stability, improved business environment, higher government capital spending, effects of past monetary policy easing, implementation of structural reforms and demand growth. Major IFIs and the European Commission also gave a positive assessment of the growth dynamics and composition of Serbian GDP. III I 21 III I 219 III 3

4 Improved Business Environment Resulted in Strong FDI Inflow Structural reforms and the business and investment environment have attracted a high FDI inflow Chart 5 Net FDI (EUR bn) 3,5 3, 2,5 2, 1,5 1,,5,.% of GDP * * NBS forecast 7.%.7% 3.% 9.9% 2.% 3.% 3.7% 5.% 5.7% 5.5% which is well-diversified and concentrated in export-oriented sectors Chart FDI composition by sector (% of inflow) H1 217 Other Construction & real estate Finance Trade Manufacturing So far this year, the net FDI inflow stood at EUR 1. bn (+12.% y-o-y), still predominantly concentrated in tradable sectors. Net FDI projection for 217 is revised upwards again and stands at EUR 2.1 bn. Improvement of the business environment is confirmed by the World Bank Doing Business list (Serbia moved up from 7 th to 3 rd place), where Serbia is ranked among the ten most-improved countries. According to FT, Serbia has the best global performance index for greenfield FDIs in the world. Since the crisis, and particularly in the last four years, FDIs are project-diversified and mostly directed to exportoriented sectors. Within manufacturing, most FDI inflows went to the production of basic metals, food products, motor vehicles, chemicals, pharmaceutical and rubber and plastic products. FDI inflows are increasingly diversified by the region of origin as well, with a greater share of countries from the Asia Pacific and Middle East regions, alongside the EU.

5 CAD More Than Fully Covered With FDI Strong and well-diversified export growth Stable level of the CAD Chart 7 Exports and imports (seasonally adjusted, 2=1) Exports, lhs Imports, lhs X/M coverage (12M MA), rhs 9% % Chart Current account deficit and remittances (% share in GDP) CAD Remittances Inflow So far this year, exports and imports of goods grew by 11.% and 12.7% y-o-y, respectively. Higher imports growth was led by imports of capital and reproduction goods, as well as energy due to cold weather at the beginning of the year and higher oil prices. Exports growth is still strong, diversified and in line with our projection, led by manufacturing exports (+13.% y-o-y), with nearly all branches recording growth (21 out of 23). 7% % 5% % This year we expect the CAD share in GDP to widen temporarily due to energy and agriculture supply-side shocks, as well as higher imports of capital and reproduction goods. In the medium term, we expect the CAD deficit to be around % and to be fully covered by the FDIs * 21* * NBS forecast

6 Sustained Improvement of Fiscal Position Significant fiscal adjustment as of 215 yielded better-than-expected results resulting in a decline of public debt-to-gdp ratio since 21 Chart 9 Fiscal revenues, expenditures and result (% share in GDP) Chart 1 Public debt (central government) Primary balance, rhs Revenues, lhs Fiscal balance, rhs Expenditures, lhs 2. 2 EUR bn External, lhs % of GDP, rhs Internal, lhs in % of GDP overall balance: Fiscal balance switched to surplus of 2.% of GDP during nine months of 217, with the primary surplus of 5.% of GDP. While the bulk of the consolidation programme was based on expenditure-side measures in 215, fiscal improvement since 21 was driven primarily by higher revenues, on the back of economic growth (the share of revenues in GDP stood 3. pp higher in I-IX 217 compared to I-IX 215) and improved collection of all tax revenue items. The share of wages and pensions in GDP will stay almost unchanged in I - IX Q1 21 Q1 215 Central government debt amounted to EUR 2.1 bn at end-september 217, which is.% of GDP (compared to 71.9% at end-21). Measures to continue the structural adjustment include reforms of public enterprises and rightsizing of the public sector, as well as further improvements to the efficiency of the Tax Administration. Q1 21 Q

7 Monetary Policy Relaxation on the Back of Low Inflationary Pressures, Low Risk Premium and Anchored Inflation Expectations In September and October the policy rate was reduced by 25 bp both times Monetary policy easing was also achieved through a reduction in the FX required reserve Chart 11 Interest rates (y-o-y rates, in %) Private Sector* (3 months moving average) Policy Rate Deposit Facility Lending Facility BELIBOR 1W *weighted interest rate on non-indexed RSD loans (up to September 21 the data was exclusively used for research purposes of NBS) Cuts in September and October were motivated by a reduced medium-term inflation projection, due to favorable fiscal developments, decreased country risk premium, anchored inflation expectations, as well as lower imported inflation. In line with the two cuts, money market interest rates have declined as well. In November the rate was kept on hold. The decision was guided by the expected effects of past monetary policy easing, the new inflation projection and the movement in its key factors, as well as better economic performance in Chart 12 Reserve requirement ratios (in %) FX <2y RSD <2y FX >2y RSD >2y In order to support lending activity, the NBS eased monetary conditions through the required reserves in late 215 and early 21. During that period the NBS cut the FX RR ratio by pp (to the level of 2/13% for liabilities up to/over 2Y maturity), thereby releasing banks credit potential by app. EUR 73 mn (o/w app. 2/3 in foreign currency and 1/3 in RSD). In October 217, RR amounted to EUR 1.7 bn and RSD bn

8 By Lowering the Key Policy Rate the NBS Provides Support to Credit Activity Interest rates on dinar loans have declined significantly over the last four years Chart 13 Interest rates on loans new business (3 months moving average, in %) Economic recovery and lower costs of financing remain the main drivers of bank lending Chart 1 Bank lending to enterprises and households (y-o-y rates, constant exchange rate 3 Sept 21, in %) Dinar loans to enterprises - l.h.s Dinar loans to households - l.h.s Eur-indexed loans to enterprises - r.h.s Eur-indexed loans to households - r.h.s Monetary policy easing from May 213 (by.25 pp) was the main driver of the strong fall in dinar lending rates to enterprises and households (by 1. pp and 9. pp respectively up to September 217). In September, interest rates on new dinar loans stood at 5.9% for corporates and 1.% for households. Monetary easing by the ECB, as well as a sharp fall in the country risk premium contributed to the fall in EURindexed lending rates Enterprises Households Total Growth in domestic lending equaled 5.% y-o-y in September 217, driven mainly by lending to households (11.% y-o-y). Excluding the NPL write-off effect, corporate loans saw a rise of.5% y-o-y and total domestic loans 9.% y-o-y in September 217. We expect positive growth in domestic lending and in 21, facilitated by the effects of monetary policy easing, a rise in economic activity and labour market further recovery, competition among banks and low interest rates in the international money market

9 Sustainable Economic Prospects are Confirmed by Serbia s Improved Rating and Fall in Risk Premium Serbia s risk premium reached its all-time low Since Q2 217 the dinar has been under appreciation pressures against the euro Chart 15 EMBI risk premium (basis points, daily values) Chart 1 Exchange rate developments (31 December 212 = 1) 5 EMBI Global Romania Hungary Poland Turkey Serbia Croatia 15 Serbia Poland Romania Hungary * *Until November 1, 217 Macroeconomic stabilization in Serbia combined with a fall in global risk aversion resulted in a sharp fall in the country risk premium to all-time lows. Currently it moves below 12 bp. In March 217, Moody s upgraded Serbia s sovereign credit rating from B1 to Ba3 with a stable outlook. In June 217, S&P affirmed Serbia s BB- rating with a positive outlook and Fitch affirmed its BB- rating with a stable outlook * *Until November 1, 217 Appreciation of the dinar since April has been supported by the net FDI inflow and increased interest of foreign investors in dinar government securities. After purchasing EUR 52 mn net in the IFEM in 215, the NBS sold EUR 1 mn net in 21. Since the beginning of 217, the NBS has purchased EUR 92 mn net (by November 15 th ). 9

10 Upward Trend of Households Dinarisation Overall macroeconomic stability leаds to increased dinarisation of household deposits Dinarisation of household loans is on a firm upward path Chart 17 Share of dinar deposits of corporate and household sectors in total banking sector deposits (in %) Chart 1 Share of dinar in total bank receivables from the corporate and household sectors (in%) Household sector outstanding amounts lhs Corporate sector outstanding amounts rhs The NBS supports the dinarisation process by delivering low and stable inflation, preserving relative stability of the dinar exchange rate and also by appropriate design of monetary policy instruments. The Government is contributing to the same goal through tax policy and by developing the dinar securities market the dinar share of debt rose from 2.5% (2) to 22.% (September 217). The dinar yield curve has been extended to ten years. Private sector deposit dinarisation at end-september 217 stood at 29.1% up by 9.7 pp compared to end-212 (when it stood at 19.3%) and also up by.5 pp compared to end Household sector outstanding amounts lhs Corporate sector outstanding amounts rhs At end-september 217, 32.% of loans to the private sector were in dinars. Dinarisation of household loans is on the rise from 35.1% at end-212 to 5.% at end-september 217 as a result of a sharp drop in dinar interest rates, low inflation, relative stability of the exchange rate and NBS measures aimed to support dinarisation. Results of the dinarisation process are confirmed by the first dinar security issuance by a top-rated IFI. In December 21, the EBRD issued the 3Y dinar bond. 1 1

11 Conservative Framework Created a Robust Banking Sector High banking sector capitalisation as a result of strong prudential measures Stress tests show that Serbian banking sector is resilient to potential adverse shocks Chart 19 Capitalization of the Serbian banking sector (in %) Table 1 Core FSIs Core FSI s September 217 data CAR 22.5% Tier I to RWA 21.5% Liquidity indicator (reg. min 1.) 2.2 Gross NPL 12.2% Gross NPL LLR coverage 127.2% Gross NPL IFRS coverage 2.2% NOP 3.% 12 Q1 21 Q1 215 Q1 21 Q ROA 2.2% ROE 11.% CAR Tier I to RWA Equity to Assets As a result of conservative prudential measures in the previous period, Serbian banks have built up strong capital buffers, making them capable to cope with credit risk which is still relatively high. Capital adequacy indicators are even stronger after the adoption of Basel III standards in Serbia. High quality of the Serbian banking sector capital base is evidenced by the fact that Tier 1 capital accounts for the dominant share (9%) of regulatory capital. As a result of adopted measures, the NPL ratio declined by 1 pp since the adoption of the NPL Resolution Strategy, to 12.2% in September 217. Narrowing was most evident with corporates, the NPL ratio being reduced by 12. pp, to 13.% in September 217. The NPL coverage by IFRS provisions and regulatory reserves is high. Solvency stress tests confirm that the CAR remains above the regulatory minimum even in the worst-case scenario. 11

12 During the Crisis Excess Risk Aversion Pushed Asset Structure Towards More Liquid Assets Serbian banking sector is highly liquid Favourable structure of banking sector assets Chart 2 Liquidity indicators of the Serbian banking sector (lhs in ratio points, rhs in %) Liquidity indicators are constantly at levels significantly higher than regulatory limits. Seasonal effects of the savings week no longer have a high impact on liquidity indicators due to a decrease in interest rates on term deposits % Liqudity indicator (reg. min 1., lhs) Narrow liquidity indicator (reg. min.7, lhs) Liquid assets to total assets (%, rhs) Chart 21 Structure of banking sector assets (RSD bn) 3,5 3, 2,5 2, 1,5 1, (Sep) Cash and assets with central bank Securities Loans Other 3.% 3.2% 19.% 13.% Liquid assets accounted for ca. 37% of total balance sheet assets in September 217. The share of financial assets (dominantly government securities) has increased in the last few years, and in September 217, those assets accounted for ca. 2% of the banking sector s total net balance sheet assets. 12

13 Structural slides 13

14 Pick-up in Headline Inflation at the Beginning of the Year Driven Mainly by Energy and Unprocessed Food Prices 1 Chart 22 Contributions of CPI components to y-o-y inflation (y-o-y rates, pp) Energy Services Industrial products excl. food and energy Processed food Unprosessed food CPI Inflation Tolerance Band Inflation Target Historically, short-term volatility of headline inflation was mainly driven by food prices. 1

15 GDP Growth More Sustainable than Pre-Crisis Pre-crisis GDP growth was driven by consumption, the trend reversed after the crisis in favour of investments and exports GDP composition has shifted towards less consumption and more net exports and investments Chart 23 Contributions to real GDP growth (y-o-y rates, pp) NX G I C CII GDP Chart 2 GDP composition (share in GDP) 1% C I G CII NX % 77.7% 7.9% 7.% 75.% 7.7% 73.% 73.2% 72.% % % 2% *21* % -2% -% -13.% -12.% -1.9% -17.5% -13.3% -1.%-13.5%-13.% * NBS forecast Prior to the crisis, high capital inflows led to consumptionbased growth which resulted in increased external imbalances. With the first wave of the crisis, this trend reversed. Growth was slower, but more sustainable and driven by net exports and investments. Large-scale investments in the automobile and oil industries ( ) have helped the economy to rebalance. The new investment cycle that began in 215 is more diversified, and is leading to further rebalancing of the economy and sustainable growth. * NBS forecast As a consequence of the crisis, the share of private consumption in GDP is declining, bringing painful but necessary adjustments. The EU accession process and euro area recovery, as well as improvement of the investment and business climate, led to an increase in tradable sector FDIs, contributing to a more favourable GDP composition. Successful fiscal consolidation and structural reforms created a foundation for healthy growth and freed up growth potential. 15

16 Continued Recovery of the Labour Market During 217 Continued decline in the unemployment rate accompanied with productivity gains Chart 25 Labour market indicators according to the Labour Force Survey (%) Q1 Q2 Q Q1 Q2 Q Q1 Q2 Q Q1 Q2 21* Source: Statistical Office Republic of Serbia. * Since 21, LFS data published according to the new methodology. Unemployment rate Employment rate According to the Labor Force Survey, the unemployment rate in Q2 equaled 11.%, which is 3. pp lower than Q2 21. The employment rate increased by 2.2 pp in the same period (from 5.9% in Q2 21 to.1% in Q2 217) as a result of higher employment in industry and services. The most favorable trends are present in the formal segment of the labor market where employment in the private sector in the last three years has increased by 7.7% y-o-y, and this increase in employment mostly came from manufacturing. Chart 2 Unit labour costs in manufacturing (cumulative indices, Q 21=1) Q Q1 Q2 Q Q1 Q2 Q Q1 Q ULC in manufacturing Productivity in manufacturing Real gross wages Source: Statistical Office Republic of Serbia, Central Registry of Compulsory Social Insurance, NBS calculation. Higher manufacturing production over the three quarters of 217 (.% y-o-y) exceeded employment growth (.1% y-o-y), and therefore productivity in manufacturing increased by.% y-o-y. This was mainly due to productivity growth in the manufacture of machinery and equipment, then in pharmaceuticals, textiles and chemicals manufacturing, as well as in manufacturing of basic metals. In the last three years, major productivity growth was recorded in the branches with largest FDI inflows - steel and tobacco, chemical and pharmaceutical industries, as well as in manufacturing of rubber and plastics. 1

17 Improved External Position Owing to the Recovery of External Demand and Improved Supply of Exports Chart 27 Imports by country in I-IX 217 (EUR mln) % of total imports 1.%.% 7.3% Chart 29 External Demand Indicator (long-term average = 1) %.2% 3.% 3.1% 2.9% 2.% GER ITA CHN RUS HUN PL TUR AT FRA SLO Chart 2 Exports by country in I-IX 217 (EUR mln) % of total exports 12.7% 7.9%.% 5.%.% Chart 3 Real Effective Exchange Rate (25=1) % 3.7% 3.7% 3.% ITA GER BH RUS ROM MNE BUG MKD CRO HUN Source: European Commission,NBS *Growth indicates appreciation. 17

18 NPL Resolution Required a Systemic Approach and, as Such, Gave Results NPL data, September 217 Gross loans (EUR bn) Gross NPL (EUR bn) NPL ratio (%) Corporates Households of which: natural persons Corporates in bankruptcy proceedings Other Total NPL development after the adoption of the NPL Resolution Strategy, especially in 21, confirmed the soundness of the inter-institutional and coordinated approach envisaged by the Strategy. The share of NPLs is still relatively high, but recorded a significant drop (. pp since the beginning of the year and 1 pp since the adoption of the Strategy) Despite a substantial fall, companies still account for the largest share of NPLs, especially those engaged in manufacturing, trade and construction activities, as well as entities in the bankruptcy procedure. CHF-linked NPLs (% of which are housing loans) accounted for.7% of total NPLs at the end of September 217. The continuation of NPL resolution efforts by banks, as well as the regulatory measures aimed at the recovery of credit activity are expected to further stimulate the decrease in the share of NPLs. 1

19 Efforts on NPL Resolution and Regulatory Efforts On 13 August 215, the Government adopted the national NPL Resolution Strategy. In addition, both the Government and the National Bank of Serbia adopted action plans in order to fulfil strategic objectives. In the previous period, the NBS carried out all activities envisaged by its Action Plan aimed primarily at the enhancement of banks capacities to resolve NPLs. In line with this plan, the NBS: Published the Guidelines for Implementation of IAS 39; Enhanced the reporting on NPLs by banks; Conducted an analysis regarding NPL market obstacles and limitations; Established a database on real estate collateral valuations and loans approved based on reported collateral; Introduced additional requests for banks regarding monitoring of collateral and engagement of persons that evaluate that collateral; Strengthened the regulatory treatment of restructured receivables in order to encourage sustainable restructuring practices and prevent unsustainable refinancing practices (evergreening); The distressed asset management in banks has been improved by introducing additional requirements for banks in the context of strategic planning; Published the Guidelines for Disclosure of Bank Data and Information Related to the Quality of Assets for Banks. Other activities envisaged by the Strategy are under the competence of ministries (finance, economy, justice and construction), as well as the Deposit Insurance Agency. In addition, by-laws implementing Basel III standards in the Republic of Serbia have been adopted, cooperation with supervisors of the home countries of banks present in Serbia is continuously developing and strengthening, and regular communication with the ECB and EBA is maintained. In August 217 the NBS adopted the Decision on the Accounting Write-off of Bank Balance Sheet Assets which applies as of 3 September

20 Serbia s Economic Outlook Serbia NBS forecast Real GDP, y-o-y % Private consumption, in % Private investment, 1 in % Government, in % Exports, in % Imports, in % Unemployment Rate, in % n/a n/a Real Wages, in % n/a n/a Money Supply (M3), in % n/a n/a CPI, 2 in % Chart 2 National Bank of Serbia Key Policy Rate, 3 in % n/a n/a Current Account Deficit BPM- (% of GDP) ¹ Excluding the effect of change in inventories ² Inflation figures in the table represent Dec on Dec inflation: (Pt/Pt-12)*1-1 ³ End of period data Labour Force Survey. Since 21, data are revised according to the new LFS methodology. 2

21 Banking Sector Overview Serbia September Number of banks * 3* 29* 3* 31* 3* Employees 31,12 29,7 29,22 2,39 2,3 25,1 2,257 23,7 23,32 Branches 2,35 2,7 2,33 2,23 1,99 1,77 1,73 1,719 1,71 HHI Assets Share of foreign banks, % Assets (net), EUR m 22,53 2,15 25,211 25,322 2,27 2,55 25,59 2,253 27,59 Capital, EUR m,7,72 5,1 5,19 5,1 5,7 5,9 5,122 5,552 Loans (gross), EUR m 13, 15,32 17,2 17,273 1,1 1,17 1,175 1,2 17,2 Of which gross NPL, EUR m 2,13 2,592 3,275 3,217 3, 3,3 3,91 2, 2,1 Gross NPL ratio, % Deposits, EUR m 13,57 1,23 1,5 1,93 15,7 15,37 1,523 1,22 19,151 Pretax Income, EUR m ** 23*** CAR, % Liquidity Ratio FX ratio, % ROA, % ** 1.*** ROE, %. 5..**.7*** NIM 1, % NIM to average total asset ** The NBS revoked operating licence from Nova Agrobanka on 27 October 212, from Razvojna banka Vojvodine on April 213, from Privredna banka Beograd on 2 October 213 and from Univerzal banka Beograd on 31 January 21. The NBS issued operating licence to Mirabank on 1 December 21 and the bank started its operations in April 215. The NBS issued operating licence to Bank of China Srbija on 2 December 21. ** with Agrobanka: Pretax Income 12.m, ROA.5, ROE.2 *** with Razvojna banka Vojvodina: Pretax Income 12.5m, ROA.3, ROE