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Macroeconomic Developments, October – December 2006 Radovan Jelašić – Governor Belgrade, 29 January 2007 Contents Inflation Monetary policy Capital inflow and external position Monetary aggregates Current account balance Economic growth Lending activity of banks Wages and productivity Fiscal developments All that was achieved in 2006 will be sustained in 2007! Monthly inflation dynamics in 2006 (%) 3.0 2.2 1.8 1.6 2.0 1.4 0.9 0.8 0.8 0.7 1.0 0.40.5 0.4 0.3 0.6 0.0 Annual inflation rates (%) 0.6 0.70.4 0.6 0.1 0.8 0.2 0.1 0.0 ? ? 0.0 -0.1 -1.0 Dec- Jan Feb Mar 05 Retail prices Apr May Jun Core inflation Jul -0.2 -0.4 Aug Sep Oct Year-on-year growth rates 20 20 15 15 10 10 5 5 0 -5 0 -10 20 20.89 20.94 19.97 19.97 20.77 18.00 18.00 17.50 16.50 16 14.00 14 13,00% 12 10 Jan Feb Q1 Mar Apr May Jun Q2 * Preliminary data until 29 January 2007. Jul Aug Q3 Sep 2003 6.6 5.9 2004 Retail prices 2005 Core inflation Year-on-year core inflation Switch to 2W repo securities via fixed-rate auctions 18.41 7.8 6.1 2002 14.5 11.0 Inflation rate in 2006 (%) 20.22 20.13 18 17.7 13.7 4.4 Nov Dec- Jan06 07 NBS key policy rate in 2006 (%) 22 14.8 Oct Nov Q4 Dec Jan 2007 4 3.5 3 2.5 2 1.5 1 0.5 0 3.4 2.2 2.1 1.7 1.7 0.4 Q1 Q2 Retail prices 0.5 Q3 Core inflation 0.3 Q4 2006 For 2007, the National Bank of Serbia has planned only the things it is certain to achieve! Planned core inflation for 2007: 4 - 8%; NBS will target the lower band of the corridor; Target fulfillment alone will determine the future trajectory of the NBS key policy rate in 2007! Inflationary expectations are declining together with inflation! Although there is still a need for a part of regulated prices to come closer to market prices, it is important to mention prices that have in the meantime moved down – Politika, petrol at NIS petrol stations, white goods, etc. Differences between Serbian and foreign prices cannot be put down to the exchange rate! Example: Samsung LE 27S71 LCD television set* Eltim - Serbia RSD 86.195 EUR 1,098 Tehnomarket – Serbia RSD 64.999 EUR 828 Tehnomania RSD 77.999 EUR 994 Mediamarkt – Hungary HUF 159.999 EUR 625 Topvision – Germany * Exchange rate: EUR 1 = RSD 78.5000 EUR 549 All profit from price stabilization! Pensioners – semiannual indexation to price growth; Our investors abroad – for every euro invested abroad, they need to allocate (approximately) the same amount of dinars; All people who save in Serbia – dinar and foreign currency savings, voluntary pension funds, shares and other investments (which erode in the context of dinar devaluation); Corporate sector – price stability is the best way for the corporate sector to finally focus on productivity and market competition, rather than price and exchange rate movements! Earlier criticisms such as “prices keep growing and the dinar is unrealistically strong” are now obviously out of place! Decision of the Monetary Policy Committee of 29 January 2007! Key reasons: Positive trend of declining core and headline inflation; Need for additional sterilization in Q4 2006 due to increased budgetary spending; Lessened pressure on the dinar exchange rate; Effects on inflation The key policy rate of the National Bank of Serbia on 2-week repo securities has been cut from 14.0% down to 13.0% per annum! Price movements in the first half of the year will be determined by the following factors Price reduction Low inflation rate in Q4 2006; Appreciation effects; Fall in prices of petroleum Price rise heating and electricity; Restrictive monetary policy stance; Strengthening of trust in the dinar. More expansive fiscal policies in Q4 2006; products; Deferred price hikes – central Constitution of Government; ... The National Bank of Serbia aims at notably reducing its role in exchange rate formation... NBS interventions in IFEM August 2006 – January 2007 and RSD/EUR exchange rate 412.4 movements EUR mln 500 400 86 85 300 84 200 83 120.3 Sale 100 -2.5 18.2 82 10.0 0.0 0.0 Oct -0.3 Nov Dec 81 0 Aug -100 Sep -80.2 Purchase -153.5 -200 Net result in IFEM -40,1 Net purchase from exchange offices +162,1 Total effect on forex reserves +122,0 -15,7 80 79 -259.4 -300 * Until and including 25 January 2007. Jan* 0.0 78 -9,7 +259,4 +153,5 -412,4 +148,5 +154,4 +130,9 +86,0 +34,1 +132,8 +144,7 +390,3 +239,5 -378,3 ... and in 2006 its efforts in this direction were successful! Volume of interbank trade outside IFEM EUR bln 7 NBS purchases from exchange offices EUR bln 2.5 5.87 6 1.93 2 5 4 1.5 3 1 1.49 +14,2% 1.55 2 2.03 +189% -9,3% +13,4% 0.5 0.79 1 1.75 1.69 0 0 2003 EUR bln 7 2004 2005 2006 2003 2004 2005 2006 Number of active days of NBS in IFEM Foreign exchange trade in and outside IFEM 300 251 6 252 250 240 203 5 200 4 96,2% 3 30,9% 49,1% 55,9% 2 1 69,1% 50,9% 44,1% 2003 2004 * Until and including 26 January 2007. 2005 131 150 100 50 3,8% 0 Banks – banks 2006 Banks – NBS 0 2002 2003 2004 2005 2006 Foreign exchange market will be further liberalized over the next three months EUR bln 10 9 8 7 6 5 4 3 2 1 0 NBS forex reserves 9.02 8.87 2006 2007 4.94 2.19 2.28 2001 2002 2.84 3.12 2003 2004 2005 As of 5 March, the functioning of the fixing session will change – the official middle exchange rate of the dinar against the euro will be set based on the daily weighted average trade in currencies in the overall interbank foreign exchange market; As of 1 March, the NBS will receive only 3 currencies from exchange offices (EUR, USD, CHF); On 1 January this year, the NBS cut the incentive fee for exchange offices to 0.5%; by the end of 2007, this fee will be lowered to 0.1%. For 2007, data as at 25 January. Future exchange rate movements during 2007 If necessary, the NBS will be ready to “iron out” excessive daily and periodical oscillations, but without interfering with the overall exchange rate trend; Clients that have large foreign currency inflows and outflows should safeguard against foreign currency risk – especially those that have foreign currency inflow only! The NBS aims to minimize the number of days of its participation in the market in the capacity of buyer or seller! Capital inflow in the first 11 months well exceeded the current account deficit – there is no 1990-1991 scenario! in EUR mln Import and export movements (January-November) +11,1% in EUR mln 6,000 5,000 2,667 4,000 Foreign direct investment 10,500 8,500 3,000 2,000 1,000 1,135 Borrowing +29,3% 6,500 2,601 1,471 4,500 -1,602 2,500 9,553 0 -1,000 10,611 6,159 -2,248 -2,000 Current account 4,762 500 -3,000 I-XI 2005 I-XI 2006 -1,500 Export Import 2005 In December, annual growth rates of reserve money and broad and narrow money supply stood at 41.7%, 39.8% and 37.1%, respectively; Total sterilization in 2006 was RSD 239 billion – RSD 125 billion through repo operations and RSD 114 billion against reserve requirement. 2006 Import/export coverage ratio in the first 11 months of 2006 amounted to 58.1%, compared to 49.8% in the same period in 2005 (excluding effects of VAT introduction). Ratio of current account deficit to GDP declined in 2006 and, according to projections, will be lower than in the preceding two years Current account balance excluding grants (in % of GDP) 2001 2002 2003 2004 2005 2006 projection 0 -2 -4 -6 -8 -8.2 -10 -12 -9.6 -10.8 -11.0 -12.4 -14 -10.5 Current account balance is improving regardless of 2006 appreciation! Private debt is gaining predominance in total external debt Public external debt of the Republic of Serbia EUR bln 9 8 7 6 5 6.8 5.8 5.8 Level and structure of external debt of the Republic of Serbia 6.0 5.9 in EUR bln 4 3 2 16 1 0 13 13.1 14.9 15 14 2003 2004 2005 November 2006 Private external debt of the Republic of Serbia 55 9.9 9.1 50 11 41,2% 54,0% 10 8 25,8% 8.1 30 25 6 5 7 6 4 5.4 45 35 32.3% 27,2% 7 9 8 Private debt 40 9 EUR bln 65 60 8.9 12 2002 65.7% 59.7% 64.3% 51.9% 40,0% 20 Public debt 15 3 5 4 3 2 in % 2.3 1 2.5 0 1 0 Source: NBS. 2002 2003 2004 10 2 3.2 2005 5 8.6% 8.5% 2002 2003 8.1% 2004 6.8% 6,0% 2005 30.11.2006. 0 Kosovo and Metohija Share in GDP (right scale) November 2006 Strengthening of EUR against USD had a notable effect on total debt (debt increased by 27.2% in USD terms and 13.7% in EUR terms compared to end-2005). Prices of petroleum products have now returned to their June 2005 level Ural oil price per barrel (USD) 70 World oil price trends reversed in 60 August 2006. From close to USD 50 70 in July, the price of Ural oil 40 30 declined to around USD 50 in 20 January this year. Over the past 10 five months, this has led to a 20% 0 1 2 3 4 5 6 7 8 9 10 1112 1 2 3 4 5 6 7 8 9 1011 12 1 2005 2006 2007 Retail price of petrol MB 95 100 90 80 70 60 50 40 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2005 2006 2007 drop in prices of petroleum products. In Q3 2006, GDP growth was around 4.6% Real GDP growth in % 16 4.6% and processing sector 13.8 14 production by relatively high 12 5.3% in the first 11 months of 10 8.3 8 Industrial production grew by 7.8 6.8 2006 compared to the matching 7.4 6.2 6 5.0 4.6 4.4 period of 2005; 5.6 4.6 4 Key contributors to such growth were the production of basic 2 metals and non-metals, food and 0 I III II 2004 IV I III II IV 2005 I II III chemical products; 2006 Source: RSO. Overall economic growth, including industry, has been slowing down: 8.4% in 2004, 6.2% in 2005, but 5.8% (preliminary) in 2006! Serbia needs another “injection” and acceleration of reforms! Industry unit labour costs have declined Movements in productivity and real wages in industry (2005=100) 130 Industry productivity gains 120 (12.3% in the first eleven 110 months) outstripped growth in 100 real gross wages (11.9%); unit 90 labour costs therefore declined 80 by around 0.4%. 70 60 1 3 5 7 2004 9 11 Productivity 1 3 5 7 2005 9 11 1 3 5 7 2006 Real gross wages 9 11 In the second half of 2006, growth in lending activity underwent a slowdown! RSD bln Growth in lending activity 60 50 46.5 38.2 40 30 56.6 27.4 40.0 25.4 20 12.4 8.3 10 0 2005 2006 Q1 2005 2006 Q2 2005 2006 Q3 2005 2006 Q4 2005 credit growth stood at RSD 149.4 billion, while in 2006 it equaled RSD 105.4 billion. Lending activity slowed down appreciably in the latter half of 2006: absolute growth was lower than a year earlier; Lending activity growth in Q4 2006 drew mainly on domestic sources of financing (corporate, household deposits, etc.). Dinar savings always beat inflation! The National Bank of Serbia launched a campaign promoting dinar savings, which not only bear a higher interest rate than foreign currency savings, but also invariably beat inflation! For banks, dinar savings deposits are the most attractive source of financing, as they are subject to a reserve requirement ratio of only 10%, compared to 40% and 45% ratios on foreign currency savings deposits; The aim of the campaign are not NBS savings bills, but dinar savings in commercial banks; Over the coming months, the NBS will actively promote dinar savings in all media – the first who start saving in dinars will get the best interest and the best earnings! Thank you! NBS Call Centre Dial toll-free 0800-111-110