REPORT ON DINARISATION OF THE SERBIAN FINANCIAL SYSTEM December 215
Introductory note A more extensive use of the dinar in the financial system and better currency matching of income and expenses of the non-bank sector will improve the country s financial stability, lessen the risk of exchange rate volatility in the most vulnerable sectors of the economy, and enhance the effectiveness of monetary policy. To support the process of dinarisation, the (NBS) and the Government of the Republic of Serbia signed the Memorandum on the Strategy of Dinarisation of the Serbian Financial System in April 212. Pursuant to the Memorandum, the NBS and the Government have committed to monitoring and analysing the degree of dinarisation and to regularly informing the public about the use of the dinar in the domestic financial system. For that purpose, the NBS prepares and publishes the quarterly Report on Dinarisation of the Serbian Financial System as one of its supporting communication tools. The Report provides information about developments in the dinar market and highlights measures and activities taken or planned by market players and regulatory authorities with a view to supporting the process of dinarisation. Making this information accessible to the wider public will help raise awareness of the need to hedge against risks associated with changes in the exchange rate, as well as understanding of the measures and activities to be taken by the NBS and the Government in order to encourage the process of dinarisation of the Serbian financial system. Reports on Dinarisation of the Serbian Financial System are available on the NBS website (www.nbs.rs).
Dinarisation strategy The dinarisation strategy rests on three inter-connected pillars. The first pillar is the most general, but also the most important one. It envisages measures to strengthen the macroeconomic environment by delivering low and stable inflation, a stable financial system and sustainable economic growth. The second pillar consists of measures to promote dinar-denominated instruments and markets, with a special emphasis on the development of the dinar bond market. The development of the dinar yield curve is an important cornerstone of this pillar. The third pillar aims to promote hedging against the risks associated with foreign exchange rate exposure in the non-bank sector and to discourage further build-up of these risks. The NBS will lead the efforts in this field, working together with the banking sector on introducing and developing basic hedging instruments both for the interbank market and for clients.
ABBREVIATIONS mln million bln billion pp percentage point Q quarter q-o-q quarter-on-quarter Other generally accepted abbreviations are not cited.
Contents I. Dinarisation of the Serbian financial system... 1 1. Corporate and household lending... 1 2. New corporate and household loans... 2 3. Corporate and household deposits... 3 4. Dinar and FX savings... 4 5. Public debt... 5 II. FX hedging instruments... 7 1. FX swap auctions... 7 2. FX hedging instruments... 8 Dinarisation indicators... Error! Bookmark not defined. Methodological notes... Error! Bookmark not defined. List of charts and tables...11
Total Corp. Hous. Total Corp. Hous. Total Corp. Hous. Total Corp. Hous. Report on Dinarisation of the Serbian Financial System I. Dinarisation of the Serbian financial system Most indicators suggest that the degree of dinarisation of Serbia s financial system continued upward in Q4 215. Despite higher new dinar lending, the share of dinar in total corporate and household lending contracted negligibly. 1. Corporate and household lending Measured by the share of dinar loans in total corporate and household lending, the degree of dinarisation of Serbia s financial system contracted slightly in Q4 215, by.2% from a quarter earlier to 28.6% at year-end. However, at constant exchange rate, the degree of dinarisation inched up.2 pp, coming at 28.9%. 1 Corporate and household lending increased in Q4 at a higher pace than in the quarter before. Yet again, the majority of the loans were granted to corporates for financing current assets and were typically indexed to a foreign currency. Banks also extended more dinar loans for this purpose, but the increase was largely offset by the maturing of dinar loans extended in 214 under the government s subsidized lending programme. Typically approved at longer maturities, FX-indexed investment loans to corporates also continued up, though Q4 also saw a rise in dinar lending for this purpose. These trends made the dinar share in total corporate lending drop further in Q4 (from 19.6% to19.3%), yet this decline was less pronounced than in any of the previous three quarters. Household lending was on the increase in Q4, primarily as a result of a further rise in dinar lending (by RSD 7.4 bln) driven mainly by cash loans. The share of dinar loans in total household lending consequently went further up, coming at 42.8% at end-q4, up by.2 pp from late September. At constant exchange rate, this share rose more sharply, by.6 pp to 43.5%. Chart I.1.1. Share of dinar lending in total corporate and household lending (RSD bln) (%) 2,4 2,1 1,8 1,5 1,2 9 6 3 3.3 212 213 214 215 23.4 Dinar lending (l.s.) FX-indexed and -denominated lending (l.s.) Share of dinar lending in total lending (r.s.) Chart I.1.2. Lending by sector 2,4 2, 1,6 1,2 8 4 4.8 29.6 21.7 41.5 28.8 19.6 42.6 28.6 19.4 42.8 36 32 28 24 2 16 12 8 4 (RSD bln) (%) 31.3.215 3.6.215 3.9.215 31.12.215 Dinar lending (l.s.) FX-indexed and -denominated lending (l.s.) Share of dinar lending in total lending (r.s.) 5 4 3 2 1 1 Calculated at the RSD/EUR exchange rate as at 31 December 214. 1
2. New corporate and household loans Compared to a quarter earlier, banks extended more dinar and fewer FX and FX-indexed loans in Q4. Consequently, the share of dinar loans in total new corporate and household loans rose by 7.5 pp to 35.9%. In Q4, banks extended RSD 296. bln worth of corporate and household loans, RSD 26.5 bln more than in the quarter before. The amount of newly approved dinar loans rose by RSD 29.6 bln from Q3, as a result of monetary policy easing and the consequent drop in interest rates on dinar loans. In Q4, banks extended higher amount in corporate loans than in the previous quarter. FX and FX-indexed loans accounted for over three quarters of corporate loans. The share of dinar loans in total newly extended corporate loans remains modest (22.6%), yet higher than in the previous quarter (by 7.4 pp), owing to higher dinar lending to corporates primarily for the purpose of financing current assets. Chart I.2.1. Share of dinar loans in newly granted corporate and household loans (RSD bln) (%) 3 6 27 24 5 21 4 18 15 3 12 9 2 6 1 3 212 213 214 215 Dinar loans (l.s.) FX-indexed and -denominated loans (l.s.) Share of dinar loans in total loans (r.s.) The amount of newly approved household loans also increased in Q4. Banks extended RSD 77.3 bln worth of household loans, RSD 9.2 bln more than in Q3. This was brought about mainly by a further rise in dinar lending, where share in total lending continued up, coming at 73.5% at quarter-end. Similar to the previous period, cash loans, as a rule extended in dinars, made up the bulk of household lending (6%). Relative to Q3, housing loans dropped, while other loans increased, accounting respectively for 13% and 23% of the newly approved loans. 2
Total Corp. Hous. Total Corp. Hous. Total Corp. Hous. Total Corp. Hous. Report on Dinarisation of the Serbian Financial System 3. Corporate and household deposits Measured by the share of dinar in total corporate and household deposits, the degree of dinarisation equalled 27.2% at end-q4, up by 2.2 pp from end-q3. At constant exchange rate, the degree of dinarisation was somewhat higher (27.5%), owing to a stronger rise (2.6 pp) vis-à-vis Q3. 2 During Q4, corporate and household deposits rose RSD 89.8 bln, arriving at RSD 1,741.7 bln at end-december. The rise in deposits, usual for this part of the year, was supported by a moderate recovery in credit activity, and hence all deposit categories increased. Dinar deposits rose more sharply than FX deposits (RSD 61.1 bln and RSD 28.7 bln, respectively). Within dinar deposits, it was deposits of enterprises that increased the most (RSD 44.7 bln), which is ascribed to an increase in demand deposits and other deposits with maturity of up to a year. Corporate FX deposits rose more modestly, and so their share in total corporate deposits declined. Household deposits in Q4 increased by RSD 35.5 bln. Although dinar deposits rose less than FX deposits (RSD 16.4 bln vs RSD 19.1 bln), dinar household deposits still expanded more rapidly. Their share in total deposits thus went up by 1. pp to 13.9%. The rise in household dinar deposits was facilitated primarily by higher balances in citizens current accounts, while longterm household dinar deposits also went up, albeit to a relatively lesser degree. Household FX deposits improved in terms of the maturity structure, as the reduction in deposits with maturity of up to a year was fully neutralised by a more intensive increase in long-term deposits. Chart I.3.1. Share of dinar deposits in total corporate and household deposits (RSD bln) (%) 1,8 3 1,5 1,2 9 6 3 22.9 212 213 214 215 51.1 Dinar deposits (l.s.) FX-indexed and -denominated deposits (l.s.) Share of dinar deposits in total deposits (r.s.) Chart I.3.2. Deposits by sector (RSD bln) 1,75 1,5 1,25 1, 75 5 25 11.3 23.5 51.1 12. 25. 52.7 12.9 27.2 55.6 13.9 31.3.215 3.6.215 3.9.215 31.12.215 Dinar deposits (l.s.) FX-indexed and -denominated deposits (l.s.) Share of dinar deposits in total deposits (r.s.) (%) 7 6 5 4 3 2 1 25 2 15 1 5 2 Calculated at the RSD/EUR exchange rate as at 31 December 214. 3
4. Dinar and FX savings During Q4, dinar savings went further up with each coming month, while FX savings stayed almost unchanged from the previous quarter. As a result, the share of dinar in total savings rose by.2 pp to 4.3%. The long period of low and stable inflation and relative stability of the exchange rate, higher interest rates and a more favourable tax treatment than in case of FX savings helped dinar savings go further up in Q4. At end-december, dinar savings equalled RSD 45.4 bln, up by RSD 3.3 bln i.e. 7.9% from end-september. The entire rise in dinar savings is a result of higher savings with maturity of over one year, with demand deposits accounting for the bulk of this rise, as in Q3. Up to one-year savings deposits in dinars stayed unchanged compared to late September. Up to one-year savings deposits remained prevalent among dinar household savings of shorter maturity (76.1%). The majority were savings termed for the period from six months to one year (38.8%) and demand deposits (3.%). However, the rise in longer-maturity dinar savings continued. At end- Q4, it reached 23.9%, climbing 5.9 pp from late Q3. Having declined in Q3, FX savings rose modestly in Q4 (by EUR 29.1 mln, coming at EUR 8,339.2 mln at end- December 3. Deposits with up to one-year maturity accounted for over two thirds of total FX savings, although for quite some time there have been improvements with regard to the extension of the maturity period of longer term deposits. During the review period, the amount of household deposits with up to one-year maturity decreased (by EUR 39.9 mln). Similar to Q3, the amount of six- to twelve-month savings deposits fell the most (by EUR 77.9 mln), which was cushioned by a EUR 43.8 mln rise in demand deposits. Savings deposits with over one-year maturity rose by EUR 59.1 mln, owing to a EUR 57.7 mln rise in deposits with the maturity from one to two years. Chart I.4.1. Dinar and FX savings (RSD bln) 5 4 3 2 1 (EUR bln) 1 8 6 4 2 212 213 214 215 Dinar savings 212 213 214 215 FX savings Chart I.4.2. Maturity structure of dinar savings (31 December 215) 1-2 years; 16.3% 6 months- 1 year; 29.5% Over 2 years; 7.7% 3-6 months; 13.1% Up to 3 months; 33.4% Chart I.4.3. Maturity structure of FX savings (31 December 215) 1-2 years; 15.8% Over 2 years; 15.1% Up to 3 months; 43.2% 6 months- 1 year; 22.% 3-6 months; 3.9% 3 Excluding non-resident savings. 4
5. Public debt In Q4, public debt rose in both dinars and foreign currency. The dinar part of the debt rose slightly more (5.6% vis-à-vis 4.5% respectively), hence the share of dinar in total public debt rose.2 pp from Q3 to 22.2%. At end-q4, public debt amounted to RSD 3,17.5 bln, up by RSD 136. bln from the quarter before. The rise in public debt stems from an increase in both its dinar and FX share (RSD 35.3 bln and RSD 1.7 bln). The increase in the dinar portion of the public debt was brought about mainly by government borrowing in the domestic capital market, through sale of long-term securities (RSD 13.3 bln). Public debt also rose on account of the implementation of the Programme amending the Programme of measures for the settlement of claims of registered agricultural estates based on the right to agricultural incentives in 215 (RSD 1.1 bln) and the adjustment of pensions of military pension beneficiaries retired by 31 December 27 (RSD 1. bln). The share of public debt in foreign currency also went up in Q4. It was the part of public debt in euros that increased the most (EUR 21.8 mln), primarily due to the assumption of debt of some state enterprises. 4 Borrowing from international creditors also expanded further, e.g. the European Investment Bank assistance to SMEs and the European Bank for Reconstruction and Development assistance to the deposit insurance agency, as well as the stock of government securities issued in euros (by EUR 41.2 mln). The rise in euro debt was moderated in part by the repayment of debt in respect of frozen FX savings, repayment of loans with domestic banks and IFIs. The debt was also reduced owing to government guarantees for some domestic enterprises. Public debt in dollars also expanded (USD 11.5 mln), primarily due to loans taken from China to finance projects in energy and infrastructure construction. Consequently, amid the persistent inter-currency changes (weakening of the euro against the dollar), the euro share in total public debt contracted (by.4 pp to 39.8%), while the dinar and dollar shares expanded by.2 pp to 22.2%, and.3% to 32.9%, respectively. Chart I.5.1. Share of dinar debt in total RS public debt (RSD bln) 3,5 3, 2,5 2, 1,5 1, 5 212 213 214 215 Dinar debt (l.s.) FX debt (l.s.) Share of dinar debt in total RS public debt (r.s.) Source: Ministry of Finance. Chart I.5.2. Currency structure of RS public debt (31 December 215) EUR; 39.9% USD; 32.9% * GBP, JPY, DKK, SEK, NOK Source: Ministry of Finance. CHF;.6% RSD; 22.2% Chart I.5.3. Maturity structure of government securities issued on the domestic market (end-quarter data) (RSD bln) 1, 8 6 4 2 SDR; 3.9% (%) 24 2 16 12 8 4 other currencies *;.5% 212 213 214 215 Short-term dinar denominated securities (T-bills) Long-term dinar denominated securities Long-term euro denominated securities Source: Ministry of Finance. 4 In late 215, the government assumed debt of the Srbijagas towards the NIS in the amount of EUR 192.2 mln, but since a part of this debt was repaid by the end of the year, it equalled EUR 153.8 mln at 31 December 215. 5
Chart I.5.4. Secondary trading in dinar government securities Public debt in respect of securities issued in the domestic market amounted to EUR 932.8 bln in late Q4, up by RSD 25.8 bln from end-q3. The government largely relied on the issuing of dinar securities in the domestic market, which pushed the public debt up by RSD 16.4 bln. The bulk of this amount related to securities of over one-year maturity (RSD 13.3 bln). Consequently, these securities dominated the portfolio of dinar government securities issued in the domestic market (97.8%), though declining for the third consecutive quarter (decline of.4 pp). In respect of FX government securities issued in the domestic market, public debt rose by EUR 41.2 mln to EUR 2,43.9 mln in late Q4. The portfolio of FX government securities is still entirely made up of securities with over one-year maturity. Trading volumes in the secondary market of dinar government securities equalled RSD 13.9 bln in Q4, rising by RSD 38.4 bln (58.%) from a quarter earlier. This is primarily the result of higher trading in bonds of any original maturity, primarily five- (RSD 16.1 bln) and seven-years (RSD 8. bln). And it was solely government securities with original maturity over one year that were traded in the secondary market. As usual, most trading related to three-year securities (43.8%), but seven-year securities also took up a significant proportion (21.7%). The secondary trading in dinar securities carried out right after the primary trading settlement is still relatively modest due to a small number of auctions and a modest volume of long-term dinar government securities offered. In Q4, such trading amounted to RSD 12.1 bln, of which the majority was executed in October, following the auction of five-year dinar securities. This amount excluded, the secondary trading came at RSD 91.8 bln, the highest since the beginning of 212. (RSD bln) 12 1 8 6 4 2 212 213 214 215 3-m 6-m 12-m 53-w 18-m 2-y 3-y 5-y 7-y 1-y Source: Ministry of Finance and CSD. Chart I.5.5. Secondary trading in dinar government securities excluding transactions effected up to two business days from the primary settlement date (RSD bln) 12 1 8 6 4 2 212 213 214 215 Total trading in dinar securities Trading excluding transactions executed up to two business days from the primary settlement date Source: Ministry of Finance and CSD. From the standpoint of dinarisation, it was particularly significant that long-term government securities have been included in trading on the Belgrade Stock Exchange since November 215. This helped expand the base of investors in government securities, which contributes to the liquidity of the secondary market of government securities and the development of other financial instruments in the capital market. Since 12 November 215, when these securities were included on the Prime BSE listing, until the end of the year, the total trading volume in dinar and FX government securities in this market came at RSD 35.6 bln and EUR 1.4 mln, respectively. 6
II. FX hedging instruments 1. FX swap auctions In Q4, the NBS continued with regular three-month and two-week FX swap auctions. At 26 regular three-month FX auctions organised in Q4, the NBS swap sold and bought EUR 26. mln. The NBS held 26 regular two-week auctions, where it swap sold and bought EUR 16. mln, EUR 55. mln less than in the previous quarter (EUR 161. mln). The highest volume of swaps was recorded in December, when the NBS sold and bought EUR 72. mln. At all auctions held, the NBS swap bought and sold the same amounts, but with a positive difference in swap points, which indicates interest in developing interbank swap trading, i.e. local interbank swap market. For the purpose of liquidity management, in Q4, banks entered into 22 interbank swap transactions of purchase and sale of FX for dinars, worth EUR 99.5 mln. The average weighted maturity of these transactions was 7 days. Table II.1.1. NBS sw ap transactions, quarterly data (EUR mln) Quarter Sw ap FX sale Sw ap FX purchase 214 Q1 18. 18. Q2 31. 31. Q3 65. 65. Q4 66. 66. Тotal in 214 18. 18. 215 Q1 146.5 146.5 Q2 53. 53. Q3 181. 181. Q4 132. 132. Total in 215 512.5 512.5 Table II.1.2. NBS sw ap transactions in 215, monthly data (EUR mln) Month Sw ap FX sale Sw ap FX purchase 3M 2W 3M 2W January 3. 53. 3. 53. February. 39.5. 39.5 March 12. 39. 12. 39. Total in Q1 15. 131.5 15. 131.5 April. 22.. 22. May. 11.. 11. June 14. 6. 14. 6. Total in Q2 14. 39. 14. 39. April 8. 55. 8. 55. May 2. 6. 2. 6. June 1. 46. 1. 46. Total in Q3 2. 161. 2. 161. July 2. 33. 2. 33. August 6. 19. 6. 19. September 18. 54. 18. 54. Total in Q4 26. 16. 26. 16. Total in 215 75. 437.5 75. 437.5 7
2. FX hedging instruments Resident transactions with banks in Q4 mainly related to forward purchases of foreign currency for dinars (a total of EUR 189.1 mln, EUR 53.5 mln more than in Q3. The share of forward FX purchases by residents from banks in total FX purchases equalled 6.1% in Q4 (vs. 4.9% in Q3), and was the highest in October 7.3%. A total of 17 domestic enterprises in Q4 hedged against FX risks by entering into this type of transactions with banks. The weighted average maturity of forward FX purchases was 16 days, while the longest weighted average maturity was recorded in November 19 days. The value of forward FX purchase contracts averaged EUR.7 mln. The currency structure of forward deals was dominated by the US dollar 93%. The euro accounted for 7%. Q4 saw four forward FX sales by residents, with the total value of EUR.2 mln and average maturity of 4 days. Table II.2.1. FX forw ard transactions betw een residents and banks, quarterly data Quarter 214 Amount in EUR mln Weighted av erage maturity in day s % share in total purchase Amount in EUR mln Weighted av erage maturity in days % share in total sale Q1 134.6 15 5.6 - - - Q2 122.7 13 4.6.3 11. Q3 89.7 17 3.5 - - - Q4 83. 19 2.7.5 49. Total in 214 43. 24 5..8 39. 215 Q1 12. 13 4.1.4 54. Q2 14.3 19 3.8.7 14. Q3 135.6 18 4.9.2 84. Q4 189.1 16 6.1.2 4. Total in 215 531. 16 4.8 1.5 77. Amount in EUR mln Forward purchase by residents Weighted av erage maturity in day s % share in total purchase Amount in EUR mln Forward sale by residents Table II.2.2. FX forw ard transactions betw een residents and banks in 215, monthly data Month Forward purchase by residents Forward sale by residents Weighted av erage maturity in days % share in total sale January 3. 11 3.7. - - February 42.5 13 5.6.2 5. March 29.5 15 3.2.2 62. Total in Q1 12. 13 4.1.4 54. April 34.2 19 3.8.3 98. May 19.7 15 2.5.2 112. June 5.3 19 4.7.1 16. Total in Q2 14.3 19 3.8.7 14. July 47.7 17 4.8. - - August 45.5 21 5.4.2 84. September 42.4 57 4.6. -. Total in Q3 135.7 18 4.9.2 84. October 69.5 16 7.3. -. November 34.3 19 3.7. -. December 85.3 15 6.9.2 4. Total in Q4 189.1 16 6.1.2 4. Total in 215 531. 16 4.8 1.5 77. Chart II.2.1. Currency structure of FX forward transactions between residents and banks in Q4 215 EUR 7.% USD 93.% 8
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Methodological notes 1. Lending includes dinar and FX (including FX-indexed) loans, advances, securities, corporate shares, receivables from interest and charges. Dinar loans are loans extended in dinars without an FXclause. An FX-clause is a currency clause as defined by the Law on Foreign Exchange Operations and any other clause stipulating hedge against the risk of dinar exchange rate volatility. 2. Lending is expressed by the gross principle, i.e. it is not reduced by value adjustment. When excluding the exchange rate effects, the exchange rate of the dinar against the euro, Swiss franc and US dollar is taken into account. 3. In line with the ECB methodology, the category of newly granted loans also includes re-scheduled loans. 4. In line with the ECB methodology, the household sector includes entrepreneurs and non-profit institutions serving households. 5. Deposits include dinar and FX (including FX-indexed) deposits. 1
List of charts and tables Charts I.1.1. Share of dinar lending in total corporate and household lending 1 I.1.2. Lending by sector 1 I.2.1. Share of dinar loans in newly granted corporate and household loans 2 I.3.1. Share of dinar deposits in total corporate and household deposits 3 I.3.2. Deposits by sector 3 I.4.1. Dinar and FX savings 4 I.4.2. Maturity structure of dinar savings (31 December 215) 4 I.4.3. Maturity structure of FX savings (31 December 215) 4 I.5.1. Share of dinar debt in total RS public debt 5 I.5.2. Currency structure of RS public debt (31 December 215) 5 I.5.3. Maturity structure of government securities issued in the domestic market (end-of-quarter data) 5 I.5.4. Secondary trading in dinar government securities 6 I.5.5. Secondary trading in dinar government securities excluding transactions effected up to two business days from the primary settlement date 6 II.2.1. Currency structure of FX forward transactions between residents and banks in Q4 215 8 Tables II.1.1. NBS swap transactions, quarterly data 7 II.1.2. NBS swap transactions in 215, monthly data 7 II.2.1. FX forward transactions between residents and banks, quarterly data 8 II.2.2. FX forward transactions between residents and banks in 215, monthly data 8 A Dinarisation indicators 9 11