NATIONAL BANK OF SERBIA Speech at the presentation of the November Inflation Report Belgrade, 9 November
Ladies and gentlemen, esteemed members of the press and fellow economists, The current year has been marked by high inflation and a fall in economic activity. Unfavourable economic developments are attributable to bad weather, growth in global food prices, fiscal expansion in the first half of the year, and slower economic recovery in Serbia s key trading partners. We expect the situation will improve next year both in terms of price and general macroeconomic stability and in terms of economic growth. Chart Inflation projection 9 3 9 3 9 3 9 3 9 3 Chart GDP growth projection III IV I II III IV I II III IV I II III IV I II III 3 9 7 3 - - -3 - - The current macroeconomic indicators for the euro area are not favourable either, and the 3 forecasts for its growth and growth worldwide are lower than several months ago. On the other hand, international financial markets are calming down in response to the ECB and Fed s accommodative monetary policy measures, announced purchases of sovereign bonds and steps towards unified banking supervision in euro area member states. Chart 3 Yield on sovereign bonds of euro area members (daily data, in %) 3 3 3 7 9 3 7 9 3 7 9 3 7 9 9 Germany France Spain Italy Source: Bloomberg. Greece Portugal Аустрија Chart Revisions of real GDP growth forecasts for and 3 by the IMF* (%) 3. 3....... -. -. -. -. -... Central and East European countries -.. European Union. -. Euro area.9.9 Germany -.3 Italy -.7.. France (July) 3 (July) (October) 3 (October) Source: IMF WEO (October ) and IMF WEO Update (July )... USA
The announced fiscal consolidation at home and buoyed liquidity in the international financial market have bolstered investor interest in Serbia and pushed down the yields on Serbia s eurobonds. This indicates that the country risk premium is falling despite the August downgrade in Serbia s credit rating. Chart Risk premium indicator EMBI by country (daily, in basis points) 7 3 3 7 9 3 7 9 Hungary Bulgaria Poland Croatia EMBI Global Composite Turkey Source: JP Morgan. Serbia Romania Chart Movements in exchange rates of national currencies against the euro* (daily data, 3. 9. = ) 9 9 7 3 7 9 3 7 9 Turkey * Growth indicates appreciation. Source: NBS and websites of central banks. Romania Hungary 3 7 9 Czech Republic Poland Serbia Restrictive monetary policy measures and subsidised lending to the corporate sector, together with the mentioned fall in the country risk premium, have been the key factors behind the strengthening of the dinar over the past two months. Looking ahead, the perception of foreign investors will continue to depend most notably on the credibility of fiscal policy and sustainability of public debt. The National Bank of Serbia holds that the fiscal consolidation measures are a step in the right direction and expects that they will be supported by an agreement with the International Monetary Fund. This would send a positive signal to foreign investors, ease uncertainties surrounding the outlook for macroeconomic policy, and contribute to further lowering of the country risk premium. Based on available data on expected yields, the National Bank of Serbia estimates that this year s agricultural production will be lower by around one fifth than last year, which is triple the decline recorded in the drought years of 3 and 7. The actual downturn being significantly steeper relative to our expectations stated in the August Inflation Report, we have revised our GDP growth projection for from -.% down to -.%. At the same time, given the low base this year, the outturn for agricultural production next year is likely to be much higher. This explains why we have kept our GDP growth projection for 3 at.% despite the cutback in global growth forecasts.
Chart 7 Agriculture production in (growth in %) Chart Contributions to y-o-y GDP growth* (in pp) - - - - - -3 Agriculture Wheat Corn Sunflower Soybean Sugar beet Vegetables Fruit Livestock -. 3.. 3. -3... -.. -3 - - - - Source: RSO. July estimate October estimate - - 7 9 * 3* Net exports Government consumption and investment Investment Consumption * NBS estimate. GDP (%) On the expenditure side, the economic contraction in is due to the drop in domestic private demand, consumption and investment alike. By contrast, government consumption, chiefly in the first half of the year, will provide a positive contribution. Even though this spurred imports in that period, and the poor agricultural yield and weak conjuncture in the international environment are affecting our exports, the contribution of net exports this year is likely to be positive, owing to the export of automobiles and the past weakening of the dinar. Chart 9 Exports and imports of goods and services (in constant prices 9) (in RSD bln) 3 3 3 - - - - - - -3 - I II III IV I II III IV I II III IV I II III IV I II III IV I II III* 7 9 Net exports (RHS) Exports (LHS) * NBS estimate. Imports (LHS) Chart Economic activity indicators (s-a, H = ) 9 9 9 9 I II III IV I II III IV I II III IV I II III IV I II III IV I II III* 7 9 GDP (LHS) Non-agricultural value added (LHS) Industrial output (RHS) * NBS estimate. Retail trade (RHS) 9 9 Consistent with the fiscal consolidation measures, we expect a fall in government consumption in 3, while the high unemployment rate and the anticipated drop in real household income will have a dampening effect on private consumption too. On the other hand, a significant contribution to economic growth next year will come from exportoriented branches of the economy, the automobile industry in particular. Despite the fall in domestic consumption, we expect a modest growth in imports next year, driven by imports of intermediate goods for the needs of automobile industry and imports of equipment for investment purposes. 3
After rising for six months, inflation reached.9% in October. The growth in prices, notably those of food, was particularly pronounced in the last two months, which was expected given the long-lasting drought and the rising prices of production inputs. However, the intensity of these price hikes, which was more robust compared to both our expectations and the increase across the region, poses the question of adequacy of competition protection policy, commodity reserves policy and agrarian policy. Chart Contribution of CPI components to y-o-y inflation (in pp).7.9 3 9 7 3.7 - -3 3 7 9 3 7 9 3 7 9 Fruit and vegetable prices Processed food prices Non-food core Inflation Administered prices Oil prices Source: RSO and NBS. Consumer prices (%) Chart Price movements (y-o-y growth, in %) 379 379 379 379 9 Consumer prices CPI excluding energy, food, alcohol and cigarettes CPI excluding energy and unprocessed food CPI excluding energy Source: RSO and NBS. Trimmed mean % The one-off increase in a large number of products, making up two thirds of the consumer price index basket, was also driven by the October increase in VAT from % to % and the extraordinary increase in excises on cigarettes and petroleum products. After being flat for one year, administered prices were raised in October (public transportation and utilities services) in some towns. Inflationary pressures were further fuelled by the lagged effects of past depreciation of the dinar. Nevertheless, we estimate that the inflationary shock is behind us and that monthly inflation rates will slow down starting from November, while a rise in year-on-year inflation, due to the low base, Chart 3 Short-term inflation projection Chart Inflation projection Projection 3 7 9 9 3 9 3 9 3 9 3 9 3
will continue in the months to come. We expect year-on-year inflation to decline as of the second quarter of 3 and to return within the target tolerance band by the end of 3. Food prices will continue to rise for some time yet. However, with the coming of the new agricultural season and the expected lowering of prices of primary agricultural commodities as of the second quarter of 3, food prices will contribute to a drop in year-on-year inflation. Fruit and vegetable prices will be the first to drag down inflation, particularly in May and June, while the lowering of prices of primary agricultural commodities, such as wheat and corn, will have a gradual effect through falling costs in the production of processed food. The effects of the past depreciation of the dinar have been almost fully exhausted and we expect no further inflationary pressures from this source. Price growth will also slow down largely on account of the exceptionally low aggregate demand caused by plummeting real household income and a high unemployment rate. On the other hand, the months to come are likely to see a rise in some administered prices, which will compensate for the lack of their adjustment in the past period. Ladies and gentlemen, in view of the supply-side shocks, such as the agricultural shock and VAT increase, monetary policy of the National Bank of Serbia aims to mitigate the spill-over of the resulting price growth to other prices through rising inflation expectations. This is the main rationale behind our restrictive measures, i.e. raises in the key policy rate, from 9.% to.9%, and the increase in the dinar share of allocations under foreign exchange required reserves. Measures of the National Bank of Serbia will continue to focus on bringing inflation back within the target tolerance band of ±.%. In our opinion, measures of the central bank towards preserving medium-term price and financial stability, and the Government s measures aimed at public finance consolidation, are the best way to help the economy in the current circumstances as they will lower the country s risk and borrowing costs, and make the business and investment conditions more stable.