Download New growth model in Serbia

New Growth Model in Serbia:
New Investment Opportunities
Diana Dragutinović
Main Themes
• Serbian economy has gone through the crisis well
• Financial sector is resilient and well managed
– No signs of direct Greek contagion
• Macroeconomic management further strengthening
– Monetary policy based on IT (inflation targeting)
– Efforts to increase transparency of budgetary procedures and
implement a rule-based medium-term fiscal sustainability framework
– Campaign to reduce euroization of the economy
• Large investment opportunities
– Exchange rate depreciation has sheltered the economy during the
crisis, while at the same time adding to the attractiveness of domestic
assets
– Investors to bring technology, infrastructure investments
Before the Crisis
• The growth of 6.5% in period 2004-2008 was one of
the strongest GDP in CEE
• Like in other countries in the Region, the growth came
from big capital inflow
–
–
–
–
donor support (2001 -2003)
FDIs, mainly privatization
bank privatization and recapitalization from abroad
cross - border lending
• High growth, but also high CAD
– CA deficits huge by regional standards
– Only meaningful if used to build an export base and generate
future savings
Growth record impressive?
• Judging against the past – the growth rate was
impressive: judging against the potential – not
impressive at all
• The catch-up growth potential should be
much bigger given the starting conditions of
– Low productivity
– Low capital base
– Relatively highly educated labor force
Previous growth model not sustainable
• Based on domestic consumption
– share of private consumption close to 75%, largely covered by
imports
– low (virtually zero) private sector domestic savings flows
– Investment share in GDP low, in particular in the export sector
– Low export base
• Based on non-tradable sector
• While three non-tradable sectors (trade, transport and
telecommunications and the financial sector) grew rapidly (15%
on average) generating 75% of the overall growth, industry was
mainly stagnant (growth of 2% per year) –growth model which
resulted from the structure of FDI inflows: 20% in tradable and
80% in non-tradable in 2004-2008 period
Weak points, but also strengths
• In October 2008, Serbia suffered a sudden
stop and strong ER depreciation, but trigger
was more psychological, less fundamental
– After the news spun that a company with the
name resembling the name of one local bank
failed, the reaction of households was panicky;
– household started to withdraw their deposits;
– they withdrew almost one billion (20% of HH
savings)
Weak points, but also strengths
• Crisis showed us weak points, but also strengths
– Weak points
• External imbalance
• Financial system vulnerable to E.R. fluctuations
• Procyclical fiscal policy
– Frequent elections led to loose fiscal policy
– Strengths
• Low level of public debt
• Adequate level of FX reserves
• Very robust financial sector, with strong liquidity and capital
base
Serbia has gone through crisis well
• Serbia did not avoid the downturn, like China
and Poland, but frequent crises in the past
made Serbia more resilient and adaptable
• Better growth performance than the region
– Decline in GDP was bellow 3% in 2009, but with
enormous CA adjustment (deficit decreased from
18.5 to 5.7%)
• Net exports recovering fast in response to
exchange rate depreciation
Serbia has gone through crisis well
• Relatively small drop in output
Real GDP grow th in 2009 (%)
2,0
0,0
-2,0
-4,0
-6,0
Poland
Macedonia
Serbia
Bosnia and
Herzegovina
Czech
Republic
Turkey
Bulgaria
Croatia
Hungary
Montenegro
Romania
-8,0
Serbia has gone through crisis well
• Inflation on the target during the crisis
– Only recently undershooting – expected to be back on target in 2011
– First time in years inflation is on a similar level as in regional peers
Inflation developments (y-o-y, in %)
Inflation rate and the target band
(%, y-o-y)
14,0
12,0
12,0
10,0
10,0
8,0
6,0
8,0
6,6
4,0
6,0
2,0
4,0
4,3
Czech Republic
Hungary
Poland
Romania
Croatia
Serbia
feb.10
mar.10
jan.10
nov.09
dec.09
okt.09
sep.09
jul.09
avg.09
jun.09
apr.09
maj.09
mar.09
feb.09
jan.09
dec.08
nov.08
okt.08
sep.08
apr.10
feb.10
dec.09
okt.09
avg.09
jun.09
apr.09
feb.09
dec.08
-2,0
avg.08
0,0
2,0
Sound macroeconomic management
during the crisis
• Flexible IT monetary policy
• Responsible fiscal policy striking a balance between
the cyclical deficit and debt sustainability
• IMF program
Sound macroeconomic management
during the crisis
• Flexible IT monetary policy
– NBS increased interest rate to defend ER and
intervened at F/X market provided floor for ER and
FX liquidity, but allowed moderate exchange rate
depreciation
– Prudently managed and resilient financial
(banking) sector
Sound macroeconomic management
during the crisis
• Responsible fiscal policy striking a balance between the
cyclical deficit and debt sustainability
– Government froze public sector wages, pensions and
purchasing goods and services, to make more room for
fiscal stimulus:
• Investment in major road network Corridor 10
• subsidized loans to provide liquidity / investment for companies
• subsidized loans for newly built apartments to boost construction
industry
• measures focused on keeping people in work
– extending subsidies / lending to companies with perspective
– covering the part of labor costs to support current and new jobs
Sound macroeconomic management
during the crisis
– Government agreed on program with IMF providing
support for f/x reserves and giving the credibility to
policies
• Based on 3 pillars:
1.Fiscal adjustment in Serbia – to lower domestic demand,
and to ease pressures to the CAD
2.Commitment of the foreign banks to continue
supporting Serbia (Vienna accord – prevents potential
capital outflows, and ease pressures to corporate BS
3.Role of the IFI’s – project loans and budget support,
provide FX inflows, liquidity to the budget and
infrastructure projects that stimulates the economy
Good initial position for addressing a
possible Greek contagion
• Greek scenario is not a threat
– Deficits of 4%, public debt of 30%
• Greek contagion possible only indirectly
– through parent banks
– through general aversion to risk
• But we are not seeing any signs of a serious contagion
– Banking sector is liquid, profitable, with high capital
buffers, share of Greek banks relatively small
– Newly introduced auctions of 18M T-bills met with a great
interest of both domestic and international investors
Resilience of the banking system:
well capitalized
• CAR regularly stress tested
Capital adequacy ratios
( in %)
Comparative overview of the capital
adequacy ratio, 2005 - 2009
( in bln RSD)
(in %)
30
500
25
450
400
350
20
30
25
22
300
15
250
20
200
10
150
100
5
50
0
0
2005
2006
2007
2008
17
15
17
16
17
16
14
13
13
10
2009
5
Banking sector capital - right scale
Capital adequacy - left scale
Tier 1 capital/total risk assets - left scale
Capital/assets - left scale
Source: NBS, national central banks
0
SRB
MNE
MAC
ALB
ROM
BiH
BUL
CRO
HUN
Resilience of the banking system:
liquid
Banking sector liquid assets
3,0
45,0
40,0
2,5
35,0
2,0
30,0
25,0
1,5
20,0
1,0
15,0
10,0
0,5
5,0
0,0
0,0
2005
2006
2007
2008
Average monthly liquidity indicator - left scale
Share of liquid asset in total asset - right scale (in %)
Source: NBS
2009
Resilience of the banking system:
well funded
Loans to deposit ratio
(in %)
110,0
105,0
100,0
95,0
90,0
85,0
80,0
2005
Source: NBS
2006
2007
2008
2009
Resilience of the banking system:
profitable despite rising NPLs
RoA and RoE of the banking sector
Share of NPL in total loans
(in %)
(in %)
16
16
14
12
14
12
10
8
10
8
6
4
6
4
2
0
2
Q4
Q1
Q2
2006
Q3
Q4
2007
Q1
Q2
Q3
Q4
Q1
Q2
2008
Return on asset (RoA)
Return on equity (RoE)
Source: NBS
Q3
Q4
2009
Q1
0
Q4
2006
Q1
Q2
Q3
Q4
2007
Q1
Q2
Q3
Q4
2008
Q1
Total
Households
Corporate
Q2
Q3
Q4
2009
Q1
Resilience of the banking system:
share of Greek banks small
• Greek owned banks well capitalized and
relatively limited exposure
Share of Greek banks in total balance
sheet of banking sector-Q1 2010
Capital adequacy ratios
( in %)
30,00
25,00
20,00
15,00
10,00
5,00
0,00
Q3
2008
Q4
Q1
Q2
Q3
2009
Q4
Q1
2010
16%
Banking sector
Source: NBS
Average of greek banks
Financial system vulnerability: high FX
exposure
846
Credits and Deposits - private non-financial sector
(RSD bn, current exchange rate)
Credits and Deposits - households
(RSD bn, current exchange rate)
682
617
74%
489
456
419
62%
418
382
364
351
287
92%
305
61% 307
256
207
138
90%
203
132
92%
68
91%
91%
310
280
78%
91%
35%
78%
67%
70%
81%
63% 138
78%
63%
74%
190
130
39%
42%
39%
43%
64%
2004
2005
2006
2007
Dinar Credits
FX (and indexed) Credits
Dinar Deposits
FX (and indexed) Deposits
Source: NBS
2004
2005
2006
2007
Dinar Credits
FX (and indexed) credits
Dinar Deposits
FX (and indexed) deposits
Agenda for Going Forward
• Make growth more robust
• Ensure sustainable external balance
• Make the financial system more resilient with
respect to exchange rate risks
• Make monetary and fiscal policies more
effective and transparent
Serbia faces four interlinked transitions
• From consumption to export led expansion
• From using foreign savings to generating
domestic savings
• From a highly euroized to a dinar based
economy and financial system
• From a traditional fiscal system based on
rolling deficits and discretion to a rule-based
framework and sustainable structural deficit
1. Moving to Export-led Growth
•
•
Why?
– we need growth that is consistent with external balance
– Successful export led strategy generates sustainable demand for other sectors
and services
How?
– improve formal sector business environment
– Upgrade infrastructure needed to support the export led strategy
– Tax system conducive to growth and employment, while remaining tax
competitive
– Sustainable fiscal policy
– Weeker dinar may be of help in rebalancing economy
– Serbian mentality and competitive labor force (half of population speak some
English); efforts to contain wage growth below productivity growth
– revive privatization
– foster trade flows (Western Balkan Trade Pact, EU SAA, WTO)
– FDI in tradables (the clear vision of which non-financial sector will drive
growth in the future)
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1. Moving to Export-led Growth:
Foreign investments
• Capital inflows of all sorts and maturities are welcome
– Capital inflows needed even in the new growth model
• But we give preference to such flows and arrangements in
which the risks are shared by the foreign investor and not left
with the domestic economy and its financial system
– Before the crisis, much of the currency, credit and maturity risk was
born by domestic consumers, businesses and the local banking sector
• Ideal examples are FDIs, joint-ventures or direct purchase of
T-bills In such investments
– the investor is expressing the faith into the domestic economy and
share its potential
2. Encouraging savings
•
Gross domestic savings
– Domestic savings would increasingly
be a source of domestic investment
(foreign savings are too high and
unstable in Serbia);
– Serbia seems to save (and invest)
much less than peers (Rom, Bul, Cro)
% of GDP
20.00
15.00
10.00
5.00
0.00
-5.00
2001
2002
2003
2004
2005
2006
Peer countries
2007
2008
•
How?
–
–
–
–
–
–
Serbia
Gross capital formation
35.00
% of GDP
Why?
30.00
25.00
Sustained growth acceleration
Public saving
Privatization (corporate savings)
Deeper capital markets?
Pension system pillar II?
Other incentives? – at least make the
level play field for savings
20.00
15.00
2001
2002
2003
2004
Peer countries
2005
2006
2007
2008
Serbia
26
2. Encouraging savings:
ongoing
• We are developing the government T-bill market
– Main current constraints can be sorted out soon
• Low volumes
• Short maturities
• Absence of foreigners
– Currently most buyers are local banks whose needs are not yet satiated – i.e. have no interest
to sell on the secondary market
• Remaining technical/legal constraints on OTC trading
• We are building institutions:
– Secondary T-bill market
– Corporate / municipal bond market
– FX hedging and derivative market
• We are building a yield curve
– We shift from short maturity (3 or 6 months) to longer maturity (12, 18, 24
months)
3. Trimming Euroization: a tall order?
•
•
Why?
– To make monetary policy more effective and resilient; re-establish key IT links
(interest rate and credit channels)
– Enhance benefits from the flexible exchange rate regime (i.e., for trade)
– Protect balance sheets from ER shocks – strengthening exporters’ hand
– Achieve balanced financial market development
How?
– Flexible exchange rate IT monetary policy
– Educational campaign
– Promotion of T-bill, bond and hedging markets
– Facilitation of FX to dinar credit conversions
– Government provides only dinar based credits (with only one exemption –
mortgage loans); provides subsidies only to dinar based credits and deposits
or for FX to dinar conversions
Loans to Private Sector , excl. banks, in millions RSD
Non-indexed RSD loans
FX and FX-indexed loans
Cross border FX loans
Share of FX and FX-indexed Loans in Total Loans
30-Sep-08
208,084
420,896
825,182
84.4%
31-Dec-09
212,674
627,524
1,042,311
88.3%
28
4. Fiscal policy for the stable future
• We are aware that the fiscal policy should be the magic
wand that we are looking for
• On the expenditure side, fiscal responsibility legislation
is on our agenda
• How to achieve medium-term fiscal sustainability?
– Base monetary and fiscal policies on the same principles
– For a fiscal framework to be credibly sustainable it must be
based on:
• Transparency in targets and instruments
• Simple rules
• Clear mandate and independence of analysis
29
Medium-term fiscal sustainability:
Targets and Instruments
• Targets
– aim at fiscal balance over the cycle
• Instruments
– Based on expenditure rather than revenue
• Revenues based more on indirect than direct
(especially labor) taxes
– Simple expenditure ceilings and rules
• Allow for easy monitoring and individual accountability
• May be countercyclical by design: if growth is on the
upside, use the revenues for debt reduction
4. Medium-term fiscal sustainability:
Adjustment period
– Adjustment period: 2011 – 2015
– Bring the deficit down gradually to 0%-1% GDP in
2015
– Key issues – 2011 fiscal adjustment, particularly
wage and pension policy (real growth below GDP
growth)
– After 2015 – balanced (over the cycle) rules
• aim at fiscal balance over the cycle: the primary
structural deficit close to zero
31
Medium-term fiscal sustainability:
Transitional rules
• Transitional rules
– We set a path for public expenditures cuts (by 0.75pp per
year), but excluding investments
– We set a rule for public sector wages / pensions
adjustment (expected inflation plus 50% of real growth)
– We set corrective mechanisms (in case we do not make
public expenditure cuts that we planned, the taxes will be
increased)
– We set the limit on public debt (including guarantees) to
40%
– We set the limit on new net borrowing (including
guarantees) to max 2.5%
Medium-term fiscal sustainability:
Transparency and Mandate
• A more efficient and transparent budget process
– Already partly implemented
– Clear procedural rules allowing for all information to
be available on time
– Enhances discipline and accountability
• More comprehensive and detailed information
gathering and analysis
• Independent fiscal council
• Legal proposals on the new rule-based system are
on the table
– Should also include a reform on a municipal level
Is fiscal consolidation appropriate in
the post-crisis situation?
• Consolidation can be successful both in stabilizing debt
levels as well as being pro-growth
– Especially if the program is decisive and based on expenditure
cuts (and eventually) indirect taxes
– Decisiveness and sense of urgency (wrt to Greece fallout) may
help to make consolidation popular with the electorate
• Channels
– People’s expectations of an even worse situation in the absence
of consolidation create a positive wealth effect of consolidation
– Lower costs of borrowing – both private and public
– Higher attractiveness of domestic stocks and bonds
– Induce higher labor supply
Is fiscal consolidation feasible?
• Political will to embrace these proposals is
critical
– Credible rules cannot be imposed from outside
– The program needs to be made equitable
– Improve the efficiency of the social safety nets
Fiscal policy for the stable future
• On revenue side
– Tax system reform
– Shift towards consumption taxation, diminishing
taxation of factors of production
– Downsize the tax wedge on wages – effects on
competitiveness, employment
– Better property taxation
– Rethought fiscal decentralization
36
Thank you!
37