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1 Macroeconomic Developments January– September 2005 Radovan Jelasic, Governor Belgrade, November 3, 2005

Macroeconomic Developments January – September 2005 Radovan Jelasic, Governor

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Macroeconomic Developments January – September 2005 Radovan Jelasic, Governor Belgrade , November 3, 2005. Contents. Prices ( inflation, interest rates, wages, productivity ). The dinar exchange rate. - PowerPoint PPT Presentation

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Page 1: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

1

Macroeconomic Developments January– September 2005

Radovan Jelasic, Governor

Belgrade, November 3, 2005

Page 2: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

• Prices (inflation, interest rates, wages, productivity)

• The dinar exchange rate

Contents

• External position (current account, capital inflow, foreign exchange reserves,

indebtedness)

• Economic growth

• Моnetary policy and developments

• Fiscal policy

• Оther

Page 3: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

Measures to be undertaken by the NBS...

• Raising the reserve requirement ratio on enterprises’ foreign exchange deposits and

external borrowing from 29% to 35% as of November 10, 2005;

• Lowering the reserve requirement ratio on dinar deposits from 20% to 18% as of

November 10, 2005;

• Lowering the reserve requirement ratio on citizens’ foreign exchange savings from 41% to

40% as of December 10, 2005;

• Introduction of obligatory 20% deposit and a monthly installment of 30% of overall

household income on all loans, apart from housing loans, for the period of 10 years

instead of the present 5 years – otherwise, a higher provisioning level will be needed;

• As of February 1, 2006, physical persons will be required to obtain a report of the Credit

Bureau when taking a loan or lease - otherwise, a higher provisioning level will be

needed;

• The requirement for leasing companies to report to the Credit Bureau on all transactions

with physical entities;

• The requirement to disclose the unique leasing fee as of February 1, 2006

• Strengthening the role of repo operations.

Page 4: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

... and expected effects

• Curbed inflationary pressures as a consequence of reduced domestic demand;

• Decelerated external borrowing;

• Lower euroization level;

• Further strengthening of dinar and foreign exchange savings;

• Strengthening of NBS foreign exchange reserves, which will positively affect the dinar

exchange rate!

Page 5: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

During 2005 inflation will shoot past the projected level; it has been on the rise since 2003

• Inflation is not just “one of the indicators” of the efficiency of economic policy, but one of

the most significant indicators;

• From the viewpoint of the NBS, high economic growth does not justify the high inflation

level!

• Out of 13.7% price growth in the first ten months, 6.2% was driven by:

– Petroleum products2.5% - Utilities 2.2%

– Еlectricity 0.5% - Effect of VAT introduction 2.0%

Monthly inflation trends in 2004 and 2005

1.4 1.4

0.6

1.7

0.5

2.7

1.5

0.8

1.1

1.7

1.0

0.40.4

0.9 0.8 0.8

1.1

0.4

0.8

2.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Јаnuary February Маrch Аpril Маy Јune Јuly Аugust September Оctober

у %

13.0

14.0

15.0

16.0

17.0

18.0

19.0

у %

2004 2005 Interannual growth ratesSource: RSO

Inflation in period 2002-2005

13.714.8

7.8

16-17

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2002 2003 2004 2005

у %

Source: RSO

Page 6: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

Rise in core inflation primarily points at aggregate demand growth

• In the first 10 months of 2005, core inflation accounted for almost 50% of overall inflation;

• In the second half of the year, money supply rose substantially mainly in respect of the

conversion of foreign exchange into dinars due to foreign capital inflow, which negatively

affected the inflation rate.

Core inflation and money supply M1 trends

0

5

10

15

20

25

30

1 3 5 7 2004

9 11 1 3 5 7 2005

9

М1 Core inflation

interannual rates, %

Source: RSO and NBS

Page 7: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

With a view to increasing sterilization and due to higher inflation rate, the NBS offers a higher interest rate

• The 14-day repo rate will be used as a reference rate by the NBS;

• Sterilization will be stronger albeit it implies higher costs for the NBS and possibly a higher level of interest rates in the short run!

NBS reference weighted interest rates and NBS securities placement in 2005 2005

10.0

12.0

14.0

16.0

18.0

20.0

February Маrch Аpril Маy Јune Јuly Аugust September Оctober0

5000

10000

15000

20000

25000

14 days 30 days 60 days NBS securitiesSource: NBS

% at the annual level CSD mill.

Page 8: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

Average wages in Serbia have reached CSD 18,345 (EUR 217), and the rise of real wages stands at 5.9% showing an upward trend

Average real net wages

0

2

4

6

8

10

12

14

16

18

20

12 2002

2 4 6 2003

8 10 12 2 4 6 2004

8 10 12 2 4 6 2005

8

Interannual growthТrend

Source: RSO

у %

Page 9: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

Wages in the public sector declined by 0.5% in real terms, reaching CSD 20,677 (EUR 245) with a stable tendency

Average real net wages in the public sector

-10

-5

0

5

10

15

20

25

30

35

40

12 2002

3 6 2003

9 12 3 6 2004

9 12 3 6 2005

9

Interannual growthТrend

Source: RSO

%

Page 10: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

Labor costs and productivity grow, but employment is on the decline

• Real gross wages growth in

the industry (10.4% in the first

nine months) is higher than

productivity growth (5.6%), i.e.

unit labor costs in the industry

went up by 4.5%;

• However, at the level of the

overall economy, unit labor

costs have been reduced.

Productivity and real wages trends in industry(2004=100)

60.0

70.0

80.0

90.0

100.0

110.0

120.0

1 3 5 7 2003

9 11 1 3 5 7 2004

9 11 1 3 5 7 2005

9

Productivity Real gross wagesSource: RSO

Page 11: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

The NBS pursues an exchange rate policy that balances influences both on inflation and balance of payments

A considerable depreciation

or appreciation would exert

a negative impact on either

inflation or balance of

payments.

** Real effective exchange rate calculated against the currency basket.

Trends of retail prices and the dinar exchange rate** by quarters 2005

3.62.85.1

13.7

-2.3-2.1-2.7

-7.8

-1.5-0.2

-2.2

0.3

-12.0

-8.0

-4.0

0.0

4.0

8.0

12.0

16.0

I II III January-October

%

Retail prices Euro nominal exchange rate Real effective exchange rate*** Negative rate implies depreciation of the dinar, and positive rate implies appreciation of the dinar.Source: NBS and RSO

Page 12: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

The role of the market in determining the exchange rate is gradually becoming stronger

• Significant daily

fluctuations reflect

market relations;

• Banks should develop

more efficient risk

management;

• Banks should (if they

wish to advise their

clients in a professional

manner) inform their

clients of the existing

risks.

Trends of the euro nominal exchange rate against the dinar

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

July August September Оctober

82.0

82.5

83.0

83.5

84.0

84.5

85.0

85.5

86.0

Daily changes* Level of exchange rate

у %

* Negative rate implies depreciation of the dinar, and positive rate implies appreciation of the dinar.

Source: NBS

in CSD

Page 13: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

The NBS encourages the interbank foreign exchange market (IFEM) development, and its interventions are becoming increasingly less important

Sale of foreign exchange by the NBS at the IFEM session and interbank trade outside the IFEM session

1,373

1,604

1,015

1,7631,607

1,545

192

789

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2002* 2003 2004 Јаn-Oct. 2005

Banks-NBS (IFEM) Bank-bank

Source: NBS

in EUR mill.

* Total since the introduction of the fixing session on May 14 until Dec 12, 2002

462.6

358.0 386.8

577.7

452.7

370.4

0

100

200

300

400

500

600

700

I II III

Banks-NBS (IFEM) Bank-bankSource: NBS.

in EUR mill.

2005

Page 14: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

Current account in 2005 is much more favorable mainly owing to export boost

Coverage of import by export of

goods and services in 2004 stood

at 44.6%, whereas in the first nine

months of 2005 it reached 54.6%.

Export and import trends by quarters

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

Export Import Export Import Export Import Export Import

2004 2005 I quarter II quarter III quarter Total (I-III)

Source: NBS

in EUR mill.

+29.3%

-8.2%

+38.0%

+6.2%

+15.2%

+15.1%

+26.5%

+4.9%

Page 15: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

Current trend of export growth is sustainable in the long run

• Export determinants

– preferential status on EU markets;

– better quality of export supply, especially supply of privatized companies;

– effect of VAT introduction;

– the key factors behind export growth are the following: ferrous metallurgy, non-

ferrous metals, sugar, grain, clothes and footwear (almost 2/3 increment in the nine

months of 2005).

Import determinants

– effect of VAT introduction;

– growth of crude oil prices in the world market;

– the key factors behind import growth are the following: energy, ferrous and non-

ferrous metallurgy (increment higher by around 25%).

Page 16: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

Current payments deficit and capital inflow

• Structure of capital inflow has improved – foreign direct investments have for the first time

sufficed for financing the deficit in the first nine months of 2005;

• Determinants of capital inflow: lower risk, high interest spread and high demand for capital;

• The structure of the 2005 current account so far is sustainable in the long term!

-1350 -1362

-2234

-886-1371

901 935

17471116

1619505

1203

780

925

1118

-3000.0

-2000.0

-1000.0

0.0

1000.0

2000.0

3000.0

2002 2003 2004 Jan-Sept. 2005 Projections 2005

in EUR mill.

Source: NBS

Indebtedness

FX reserves

Current account balance

Foreign direct investments

Page 17: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

Although external debt balance has been on the rise during 2005, the share of public debt is decreasing

Level and structure of external debt of the Republic of Serbia*

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2002 2003 2004 Jan-Aug. 2005

50.0

52.0

54.0

56.0

58.0

60.0

62.0

Share in GDP (right scale)

in EUR mill.

65.4%64.0%

59.4% 55.0%

25,8% 27,232.2%

37,1%

*In all observed years, the debt towards the London Club has stood at USD 1.08 billion, while the debt towards the Paris Club has been reduced by USD 730 million. The share of debt of Kosovo and Metohija for the previous period has been calculated on the basis of the debt structure in 2005

Source: NBS

%

8.8 9.09.8

11.3

8.8% 8.7% 8.4% 7.9%

Private debt

Public debt

Kosovo and Metohija

Page 18: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

The expected GDP growth in 2005 will be around 5%

Real GDP growth by quarters in 2004 and 2005

7.1

4.85.85.3

6.8 6.1

0.0

2.0

4.0

6.0

8.0

10.0

I II Total (I-II)

%

2004 2005Source: RSO

Sectors “responsible” for growth:

• Trade – 7.7% of GDP

• Financial services – 5.9% of

GDP

• Transport – 7.7% of GDP

Page 19: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

Role of fiscal policy remains crucial from the viewpoint of inflation

• In 2005, consolidated government revenues rose by around 19.5% compared to

2004 (the planned increase in 2006 is 15.4%);

• In 2005, consolidated government expenditures rose by almost 16.1% compared

to 2004 (planned increase in 2006 is 13.7%);

• A surplus has been recorded, but both revenues and expenditures witnessed a

high rise – the reduction of expenditures is still the main challenge facing the

fiscal policy.

Consolidated public revenues and expenditures

400

450

500

550

600

650

700

750

800

850

2003 2004 2005 2006

CSD billion

Revenues ExpendituresSource: Ministry of Finance

Consolidated public revenues and expenditures

38

39

40

41

42

43

44

45

46

2003 2004 2005 2006

% GDP

Revenues ExpendituresSource: Ministry of Finance

Page 20: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

Monetary policy challenges and key instruments

• Lowering of the inflation rate;

• Reduction of the euroization level;

• Growth of dinar savings;

• A more moderate rise in lending to

households.

Challenges Instruments

• Strengthening the influence of

interest rates;

• Open market operations;

• Banking sector liquidity;

• Required reserves;

• Deposit and credit facilities.

Page 21: Macroeconomic Developments January –  September  2005 Radovan Jelasic, Governor

The largest change sustained by lending activity was that of its structure, with the share of household lending registering a steep rise

Average monthly growth of household lending in 2005 amounted to CSD 4.6 billion, whereas in 2004 it stood at mere CSD 2.6 billion!

81.2

66.4

37.329.6

20.323.723.6

13.1

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2004 2005 2004 2005 2004 2005 2004 2005 I quarter II quarter III quarter Total (I-III)

Source: NBS

CSD billion

28.1%

71.9%77.8%

62.6%

37.4%

47.3%

52.7%

22.2%

59.8%

53.9%

46.1%

39.8%

60.2% 46.8%

53.2%

40.1%

legal entities

households