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Macroeconomic Developments January – September 2005 Radovan Jelasic, Governor

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

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Macroeconomic Developments January – September 2005 Radovan Jelasic, Governor

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

  2. Contents • Prices (inflation, interest rates, wages, productivity) • The dinar exchange rate • External position (current account, capital inflow, foreign exchange reserves, indebtedness) • Economic growth • Fiscal policy • Моnetary policy and developments • Оther

  3. 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.

  4. ... 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!

  5. Inflation in period 2002-2005 Monthly inflation trends in 2004 and 2005 у % у % у % 18.0 3.0 19.0 2.7 16-17 16.0 14.8 2.5 18.0 13.7 14.0 2.0 2.0 17.0 12.0 1.7 1.7 1.5 10.0 1.4 1.4 1.5 16.0 7.8 1.1 1.1 8.0 1.0 0.9 1.0 15.0 0.8 0.8 0.8 0.8 6.0 0.6 0.5 0.4 0.4 4.0 0.4 0.5 14.0 2.0 0.0 13.0 0.0 Јаnuary February Маrch Аpril Маy Јune Јuly Аugust September Оctober 2002 2003 2004 2005 2004 2005 Interannual growth rates Source: RSO Source: RSO 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%

  6. Core inflation and money supply M1 trends interannual rates, % 30 25 20 15 10 5 0 1 3 5 7 9 11 1 3 5 7 9 2004 2005 М1 Core inflation Source: RSO and NBS 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.

  7. NBS reference weighted interest rates and NBS securities placement in 2005 2005 % at the annual level CSD mill. 20.0 25000 18.0 20000 16.0 15000 14.0 10000 12.0 5000 10.0 0 February Маrch Аpril Маy Јune Јuly Аugust September Оctober 14 days 30 days 60 days NBS securities Source: NBS 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!

  8. Average real net wages у % 20 18 16 14 12 Interannual growth 10 Тrend 8 6 4 2 0 12 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6 8 2002 2003 2004 2005 Source: RSO 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

  9. Average real net wages in the public sector % 40 35 30 25 20 Interannual growth 15 Тrend 10 5 0 -5 -10 12 3 6 9 12 3 6 9 12 3 6 9 2002 2003 2004 2005 Source: RSO Wages in the public sector declined by 0.5% in real terms, reaching CSD 20,677 (EUR 245) with a stable tendency

  10. Productivity and real wages trends in industry (2004=100) 120.0 110.0 100.0 90.0 80.0 70.0 60.0 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 2003 2004 2005 Source: RSO Productivity Real gross wages 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.

  11. Trends of retail prices and the dinar exchange rate** by quarters 2005 % 16.0 13.7 12.0 8.0 5.1 3.6 2.8 4.0 0.3 0.0 -0.2 -1.5 -2.3 -2.2 -2.1 -2.7 -4.0 -8.0 -7.8 -12.0 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 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.

  12. Trends of the euro nominal exchange rate against the dinar 0.4 0.2 0 -0.2 -0.4 -0.6 The role of the market in determining the exchange rate is gradually becoming stronger in CSD у % 0.6 86.0 • 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. 85.5 85.0 84.5 84.0 83.5 83.0 82.5 82.0 July August September Оctober Daily changes* Level of exchange rate * Negative rate implies depreciation of the dinar, and positive rate implies appreciation of the dinar. Source: NBS

  13. in EUR mill. in EUR mill. 700 2,000 1,763 1,604 1,607 577.7 1,750 600 1,545 1,373 1,500 462.6 452.7 500 1,250 386.8 358.0 1,015 370.4 400 1,000 789 300 750 200 500 192 100 250 0 0 2002* 2003 2004 Јаn-Oct. 2005 I II III Banks-NBS (IFEM) Bank-bank 2005 Source: NBS. Source: NBS * Total since the introduction of the fixing session on May 14 until Dec 12, 2002 Banks-NBS (IFEM) Bank-bank 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

  14. Export and import trends by quarters in EUR mill. 7,000.0 +4.9% 6,000.0 5,000.0 +26.5% 4,000.0 +15.1% 3,000.0 +6.2% -8.2% 2,000.0 +15.2% +38.0% +29.3% 1,000.0 0.0 Export Import Export Import Export Import Export Import I quarter II quarter III quarter Total (I-III) Source: NBS 2004 2005 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%.

  15. 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%).

  16. in EUR mill. 3000.0 Foreign direct 1118 780 investments 2000.0 925 1203 505 Indebtedness 1000.0 1747 1619 1116 935 901 0.0 Current account -886 balance -1350 -1362 -1371 -1000.0 -2234 -2000.0 FX reserves -3000.0 2002 2003 2004 Jan-Sept. 2005 Projections 2005 Source: NBS 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!

  17. Level and structure of external debt of the Republic of Serbia* in EUR mill. % 14.0 62.0 11.3 12.0 60.0 9.8 9.0 8.8 10.0 Private debt 37,1% 58.0 32.2% 8.0 27,2 25,8% 56.0 6.0 Public debt 54.0 65.4% 59.4% 55.0% 4.0 64.0 52.0 % 2.0 8.8% 8.7% 8.4% 7.9% Kosovo and 0.0 50.0 Metohija 2002 2003 2004 Jan-Aug. 2005 Share in GDP (right scale) *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 Although external debt balance has been on the rise during 2005, the share of public debt is decreasing

  18. The expected GDP growth in 2005 will be around 5% Sectors “responsible” for growth: • Trade – 7.7% of GDP • Financial services – 5.9% of GDP • Transport – 7.7% of GDP

  19. Role of fiscal policy remains crucial from the viewpoint of inflation Consolidated public revenues and expenditures Consolidated public revenues and expenditures CSD billion % GDP 850 46 800 45 750 44 • 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. 700 43 650 42 600 41 550 500 40 450 39 400 38 2003 2004 2005 2006 2003 2004 2005 2006 Source: Ministry of Finance Revenues Expenditures Revenues Expenditures Source: Ministry of Finance

  20. Monetary policy challenges and key instruments Challenges Instruments • Strengthening the influence of interest rates; • Open market operations; • Banking sector liquidity; • Required reserves; • Deposit and credit facilities. • Lowering of the inflation rate; • Reduction of the euroization level; • Growth of dinar savings; • A more moderate rise in lending to households.

  21. The largest change sustained by lending activity was that of its structure, with the share of household lending registering a steep rise CSD billion 90.0 81.2 80.0 66.4 70.0 legal entities 53.2% 60.0 50.0 59.8% 37.3 40.0 29.6 23.7 23.6 30.0 46.1% 20.3 60.2% 46.8% 13.1 20.0 52.7% households 37.4% 40.1% 77.8% 71.9% 53.9% 10.0 47.3% 62.6% 39.8% 28.1% 22.2% 0.0 2004 2005 2004 2005 2004 2005 2004 2005 I quarter II quarter III quarter Total (I-III) Source: NBS 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!

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