Serbia: Staying the Course as an Investment Destination

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Serbia Staying the Course as an Investment
Destination

• Diana Dragutinovic, PhD

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Main Themes

• Serbia before the crisis
• Crisis imported into Serbia
• Serbia has been hit at an unfortunate moment
• Some weak spots, some good achievements
• Policy responses
• Central bank measures addressing the liquidity
  situation
• Fiscal policy adjustments
• IMF program
• IFIs helping hand

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A joke

• There is a joke that Serbia was the country of
  the future and always would be
• I disagree (to me, the growth potential seems to
  be without limits)

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A vulnerable growth model

• We had made a lot of progress since 2000
• Economic growth in Serbia was among the highest
  in Eastern Europe
• The good economic performance was helped by a
  combination of
• Macro stability and structural reforms in the
  context of very strong external anchors
• IMF programmes
• EU accession perspective
• Very favourable external conditions
• Rapid global economic growth
• Ample liquidity in financial markets enabling
  strong capital inflows that fuelled mainly
  consumption, and less investment

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Slowdown or faul, but not Armageddon

• The future is not necessarily a simple extension
  of the past
• The crisis, although delayed, is now affecting
  the region
• Capital inflows slowing dramatically parent
  banks
• Deposit withdrawals, but without bank failures
• Very substantial currency devaluation
• Prospects
• No radical sudden stop of foreign capital
  inflows, but reduced and more expensive financing
  of still large external imbalances
• Harsh adjustment in the real economy
• Do we have a plan for the future (if you fail to
  plan, you plan to fail)
• Action plan depends on our weak spots, but
  achievements as well

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Some Weak Spots

• ...limit policy response to crisis
• Dependence on the capital inflow
• High level of euroization leaves fiscal policy as
  the only/key short term policy instrument
• External imbalances (high level of private
  external debt) limit the scope for Keynesian
  fiscal stimulus policy response

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Some Good Achievements

• Recent achievements of the Serbian economy, such
  as
• Low sovereign debt level (regardless significant
  depreciation)
• Comfortable level of FX reserves
• Strong profit, capital and liquidity position of
  the banking system (no bank failures)
• Banks exceed not only the BIS regulatory minimum
  ratio, but also the NBSs more conservative 12
  floor, for regulatory capital as a share of
  risk-weighted assets
• generally conservative and well-regulated
• Domestic financial institutions without
  substantial exposure to the U.S. sub-prime
  mortgage-linked toxic assets
• Low direct exchange rate risk exposure in the
  banking sector
• will help the economy to adjust in an orderly
  manner
• Shallow domestic capital markets protected the
  Serbian economy from the abrupt capital flight
  experienced by other emerging market economies

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Crisis manageable, but needs to be managed

• It is easy to be pessimist
• Our first priority is to make the current crisis
  as short as possible
• There is a fairly wide consensus among economists
  that fiscal stimulus in the form of large
  spending bill is the way to go
• And there is a clear consensus that putting money
  into economy, to counter the recession and help
  people, is the right thing to do

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How Much is the Government Doing

• The first package with a goal to preserve trust
  in financial sector, the Government adopted in
  November 2008
• In fact, the Government
• Increased deposit guarantees from EUR 3,000 to
  50,000
• Suspended the tax on interest income and taxes in
  securities trade, namely on capital gain and
  transfer of ownership

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• The second one, adopted in February is focused
  mainly on encouraging credit channel to work. In
  fact, through banks, the Governmnent
• Subsidized interest rate
• for companies
• on liquidity / investment loans
• for households
• on consumer loans
• Extended subsidies to households for cars and
  tractors, based
• on the principle old for new
• c) Extended guarantees
• for investment loans with a 30 Development Fund
  component, for the 75 of the rest of the loan
• to the NBS for liquidity loans granted to banks

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• The Government is active in mobilization IFIs
  funds to provide some stimulus to growth
• What is encouraging
• The coordination of IFIs (IMF, WB, IBRD, EIB) in
  considering / providing packages of equity and
  credit lines to support priority projects with
  focus on infrastructure, SMEs, energy efficiency,
  financial sector
• We agreed on support of
• one billion euro for Koridor 10
• 250 million fro NIP
• 300 million for SMES
• 300 million for the budget
• 120 million for Komercijalna bank

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• Serbian government asked for the support from IMF
• The IMF approved the SBA in amount of 3 billion
  for 2 years, that replaced a smaller package in
  January
• What is encouraging
• In its long history, IMF was in favour of hard
  money / tight budget
• The new Fund beleives in Keynesian policy
• Monetary easing and fiscal stimulus (looks like
  joke)
• This programme is important for Serbia, not only
  because of money, but because its role in
  organizing other donors given, the absence of EU
  shield
• This will bring some confort for investors both,
  local and non-resident
• The IMF deal has helped the country negotiate
  loans from other international creditors
• EIB announced series of loans worth over 1.4
  billion euros over the next two years
• WB agreed to provide the country 300 million USD
  for budgetary support

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• The main pillars are
• Fiscal adjustments
• Vienna agreement providing assurance from the
  parent banks to at least maintain their exposures
  to Serbia
• Financial Sector Support Program
• The start of a new T-bill program

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Fiscal Policy

• First, we are targeting large fiscal adjustment
• Running fiscal policy only within fiscal rules
• Lower fiscal revenue require prompt fiscal
  rebalancing exercises
• Lower revenues / expenditures ratio to GDP, but
  higher deficit - 3 of GDP, among the lowest in
  the globe
• Social and priority capital spending will be
  protected
• On the expenditure side, we will focus on
  tightening recurrent spending on wages, pensions,
  and discretionary spending at all levels In
  particular, we will
• (i) freeze all general government and public
  enterprise wages and salaries in nominal terms in
  2009 and 2010
• (ii) extend the nominal freeze of pension
  benefits to end-2010 and
• (iii) freeze hiring at all levels of government,
  including for temporary contracts, with only duly
  motivated and limited exceptions
• (iv) cut discretionary spending at all levels of
  Governments
• (v) dicretionary actions are to be focused on
  financial crisis
• (vi) safeguard medium-term fiscal sustainability

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Monetary Policy

• Monetary policy measures - addressing the FX
  market liquidity
• Allowing banks to use FX reserves to address the
  liquidity problems
• Reducing reserve requirements to facilitate
  borrowing from abroad (note that RRs are high by
  international standard accordingly, there is
  plenty of room for the CB to further foster
  liquidity on the back of RRR easing)
• Frequent interventions injecting FX liquidity and
  cushioning the speed of the FX adjustment
• however, the CB does not set any floor or ceiling
  for the currency in other words, it may lean
  against the wind of currency moves and it can
  smooth the process, but it does not fight
  currency trends by defending any particular
  currency level and trend
• Interest rates remaining high

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Vienna Agreement

• What is encouraging
• The coordination of IFIs in seeking agreements
  with government and parent institutions of
  Serbian systemic banks to prevent reducing their
  balance sheets (to maintain their exposures to
  Serbia)
• A system of written promises could soon be
  extended to Hungary, Ukraine, Bulgaria and other
  vulnerable countries
• IMF is initiating a regionally coordinated stress
  testing exercises

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Financial Sector Support Program

• Banks are obliged to assume some obligations
  like
• pre-emptive recapitalization should the stress
  tests results indicate the need (In general,
  banks with CAR less than 12 could be given
  additional 4 -6 months to raise their CAR to 12
  percent by the shareholders or new investors or
  the NBS could ask the Government to increase
  these banks capital)
• conversion of FX or FX-indexed loans to local
  currency, and
• facilitate restructuring of loans to clients
• In exchange for some facilities such as
• using the NBS dinar liquidity facilities at
  non-penalty interest rates, FX swaps facility and
  extension of zero mandatory reserve requirements
  on new external liabilities
• certain supervisory relaxations

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The start of a new T-bill program

• ...is a significant step in
• developing money markets
• improving monetary policy transmission
• promoting the use of dinar instruments by the
  banking sector and public
• The program has so far focused on issuing 3M
  bills at modest volumes, but the plan is to start
  issuing
• 6M bills
• 9M bills
• 12M bills
• T bond program
• T-bills are important source of collateral for
  inter bank transactions
• and also for the NBS new facilities under the IMF
  sponzored Financial sector support program

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Investments in Serbia bring many opportunities

• One of the largest markets in the region with a
  lot of development potential and unique
  geographical location making it the natural
  center of the region
• Many markets and market niches not occupied or
  saturated, giving advantages to early movers
• Existing markets can be easily developed and
  sophisticated further at low costs and risks
• Many business processes and networks are just
  being established, providing unique opportunities
  for business development and expansion
• Low competition provides good profit
  opportunities to be reaped
• Generally low labor costs (giving competitive
  advantage to traditional industries such as
  textiles)
• Cheap qualified labor  (in such areas like
  electrical engineering, IT, graphical design)
• Young generation eager to learn, work hard and
  advance fast

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with very few risks

• The future of Serbia in the European Union is
  known
• Its economic, legal and political convergence to
  Europe will follow trajectories similar to other
  Eastern European countries the risks are
  therefore known from the experiences of other
  countries and relatively contained
• The lessons learned by other countries can be
  used to avoid many unnecessary mistakes
• In sum, there is probably not another country
  with such a large development and market
  potential whose economic and political future
  would be so well anchored in Europe such as
  Serbia today
• I am very much aware, success depends on trust
• Trust doesn t depend on being perfect
• Trust depends on being honest, systematic and
  predictable

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• Thank you !
• Ministry of Finance
• 20, Kneza Milosa St., Belgrade
• kabinet_at_mfin.gov.rs