Jorgovanka Tabaković, Governor Of The National Bank Of Serbia

The National Bank of Serbia has been achieving its best results these days, which is coinciding with the completion of the five-year term of the NBS Governor Jorgovanka Tabaković. Inflation is lower than previously forecast, so its target is reduced by one percentage point.

At the same time, in the last five years, the dinar has never been stronger compared to the euro. Also, the number of non-performing loans in the economy has been decreasing, which is extremely important for both companies and enterprises on the one hand, and the central bank and commercial banks on the other.

Financial and price stability is a serious indicator that Serbia has reached a more peaceful stage, marked by stable development and an increased credit rating.

Because of all these indicators, we asked the NBS Governor Jorgovanka Tabaković for an interview, in which she explained how these results have been achieved.

In what way will this dinar value reflect on the economy and investors, and what does it mean for ordinary people? Until when do you expect the dinar to gain strength?

During the last five years, the National Bank of Serbia has achieved and preserved financial and price stability, fulfilling in this way its objectives defined by law. It has also helped achieve a more stable business environment, which has been beneficial for both the population and economy. One of the factors of overall stability that we have succeeded in achieving since August 2012 is a relative stability of the exchange rate. The situation we were facing at the beginning was making our job much harder, and this is best illustrated by exact data – inflation nearing 13%, dinar depreciation of more than 30%, inappropriate spending of foreign currency reserves and strong challenges coming from the international environment.

Due to the recovery of investment credit in the last two and a half years, the time periods of credit portfolios have been extended, and in June credits with an original period over 2 years made up 64% of the credit claims by businesses.

We were able to answer these challenges thanks to the strengthening of the resilience of the domestic economy and our financial system, a cautious monetary policy, and interventions on the foreign exchange market – in the last five years, up to July, in interventions on the foreign exchange market the total net sale effected was €765 million, with a nominal depreciation of the dinar to the euro of 1.5%. This is consider¬ably less than the €5.7 billion of net sale in the five-year period before that, when the nominal depreciation of the dinar was 33.2%.

Preparing in peaceful times the defence system for the impending pressures and investing in stability in turbulent times, the gross foreign currency reserves of our country were maintained at an appropriate level measured by all criteria, while in the net amount they were increased – from €6.6 billion at the end of 2012 to €8.4 billion at the end of 2016. Confidence in the dinar has been returning and the level of dinarisation, i.e. dinar-based transactions and the role of the dinar compared to that of foreign currencies, is growing.

The NBS’ results and the stability achieved are important for the economy, investors, and for all of us, since we have helped achieve a more stimulating business environment, and contributed to reducing risk premiums to the lowest level and the improving of the credit rating of our county and its rank on the competitive Doing Business list. The inflow of foreign direct investment in the last two years amounted to 5.5% of GDP, and it was more than sufficient to cover the deficit in the balance of payments current account. Financing investment growth was enabled by better results in the economy, where the contribution of lower costs for company borrowing and the relative stability of the dinar was evident – in Serbia no one has to be worried any more or face uncertainty when they look at the foreign exchange rate lists.

Exchange rate fluctuations are impossible to forecast. We expect those factors that have contributed to stability in the foreign exchange market in recent times to continue to have a stabilizing effect. In the last quarter it is common to see a certain increase in the demand for foreign currency, but significant changes in exchange rates are not expected.

Due to the recovery of investment credit in the last two and a half years, the time periods of credit portfolios have been extended, and in June credits with an original period over 2 years made up 64% of the credit claims by businesses

The new inflation projection for this year and the following year is 3%ffl 1.5% at an annual level. What have been the key reasons for its decrease?

Inflation in Serbia has been low, stable, and predictable for four consecutive years now. Starting from almost 13% in the autumn of 2012, we succeeded in reducing it to 2.2% in less than a year, and to keep it low. Low inflation pressures since 2013 are due to the relative stability of the exchange rate, limited inflation expectations, and the impact of fiscal consolidation. When it comes to the price stability achieved, Serbia is now comparable to other European countries – since the beginning of this year inflation has been moving within the boundaries of the new, lower targets, and in July it was 3.2% year-on-year. The basic inflation rate has been around 2% this year, and in July it was 1.7% year-on-year.

JP Morgan included dinar securities in its trading lists, and they even decided to buy them themselves. Would you like to comment on that a bit?

I think this is the best illustration telling us that the overall endeavours of the NBS in the last five years have brought results, which I believe people will also feel more and more as the days go by.

Our public debt is now around 65% of GDP. What is your comment on this fact and what will the annuities amount to this year and next year?

Within the framework of the agreement with the IMF, the measures of the economic policy supporting a fast recovery of the Serbian economy were implemented consistently. And this brought results – the fiscal deficit in 2016 amounted to 1.3% instead of the projected 4.7% GDP. It is certain that the fiscal result will be more favourable than planned in 2017 as well.

Due to the fiscal adjustments achieved, the participation of the public debt in GDP has already been reduced in 2016, i.e. one year ahead of the projection, to 73% of GDP (compared to 74.7% at the end of 2015).

Lower inflation pressures and the reduction of the risk allowed us to reduce the key policy rate from 8% at the end of 2014 to the current 4%. In return, this allowed the interest paid by the state for borrowing in dinars to drop considerably. At the same time, much better microeconomic performance and economic prospects resulted in the reduction of risk premiums for our country and more favourable conditions for external financing.

This year, the participation of public debt in GDP has dropped additionally, and at the end of July 2017 it amounted to 65.2% of GDP, confirming that it’s on the decrease.

When it comes to maturity, it is important to stress that the state’s way of financing is such that each year, several billion euros of debt are due on various grounds and that most of the maturing debt is refinanced according to more favourable conditions.

The NBS has been quite active in the FX market. What is the score there and will the foreign exchange rate policy stay the same?

The NBS has diligently analysed on a daily basis the potential impact of all factors on the FX market, and it has reacted as required, to mitigate excessive short-term volatility of the exchange rate. Appreciation pressures on the dinar have been present since April due to several factors, all of them based on improvements in the microeconomic circumstances in Serbia.

The dinar has strengthened against the euro by 3.5% since the beginning of the year, and in August it reached its highest value in relation to the euro since November 2014. Since the beginning of the year, the National Bank of Serbia has intervened on the interbank foreign exchange market by selling EUR 345 million, and by purchasing EUR 875 million, i.e. by a net purchase of EUR 530 million.

The NBS is devoted to resolving the problem of NPLs. Is their percentage decreasing due to bank write-offs as well?

A legacy of the global financial crisis and the ”overheating” in credit activity is the increase of NPLs, which has been a burden on the Serbian economy. In order to define a systemic solution for non-performing loans, and in cooperation with the Government of the Republic of Serbia, we have developed the NPL Resolution Strategy in 2015, with accompanying action plans.

The National Bank of Serbia has implemented all activities within the deadlines, so NPLs have dropped by 7 percentage points. Corporate NPLs are at the lowest level in the last nine years.

The achieved microeconomic stability and NPL resolution has significantly helped reduce new NPLs in our system, together with the broad implementation of the write-off policy and abandoning claims as dominant channels for resolving NPLs.

Whether a job is well done or poorly done, the failure to achieve results or good performance is something that makes a clear difference, it makes one qualified or inadequate for the job. Your first sentence in this interview was that the NBS has not recorded such good results in a long time… I am very pleased about that

Commercial banks record increased credit activity, and consumption is higher than before. What are loans being used for the most?

Loan demand has also increased in 2015 and 2016, due to considerably lower interest rates on the dinar and euro-indexed credits, the acceleration of economic activity, and the recovery of the labour market. Growth was recorded despite the fact that a considerable amount of subsidised loans was maturing in 2015, while in 2016 credit activity was affected by intensive efforts of banks to resolve NPLs. In 2017, y-o-y growth of loans has resumed, and in June it amounted to 4.5% (6.7% excluding the effects of NPL write-offs). Bearing in mind further economic growth, past monetary policy easing which was the National Bank of Serbia’s contribution to a significant reduction in interest rates on dinar loans, and low-interest rates in the international money market, we expect that the growth of credit activity will continue for the rest of the year.

Since the beginning of 2015, the approval of the new investment loans has intensified, and their total amount in 2015 and 2016 was at the level of total approved new investment loans in the four-year period 2011-2014. In the segment of newly approved corporate loans, companies mostly use loans as working capital (60%) and for investment (22%). When it comes to households, housing loans have grown by RSD 5.7 billion (excluding exchange rate effects). The recorded growth of housing loans in the second quarter of 2017 is at the same time the greatest quarterly growth since the subsidised housing loan programme (in the third quarter of 2011). In the structure of the newly approved household loans, the greatest part is that relates to dinar cash loans and refinancing loans.

Only recently several banks went bankrupt, and the damage is estimated at nearly a billion euros. Is there any possibility of us hearing such unpleasant news again?

The banking system of the Republic of Serbia is stable, highly liquid, and adequately capitalised according to all reference criteria. The stability of the banking system is also reflected by the increase of interest on the part of the foreign investors to come to the banking market in Serbia, which is confirmed by the arrival to our market of the Bank of China, the fifth-largest bank in the world. We work con¬tinuously to implement measures for the preservation of the stability of the financial system, which is also evident in the amendments and the supplements to the Law on the National Bank of Serbia and the Law on Banks from February 2015, which have improved the framework for the recovery and resolution of banks in accordance with the principles and rules prescribed in Directive 2014/59/EU (the so-called Bank Recovery and Resolution Directive).

What is also important is that the results of the special diagnostic studies conducted in 2015 and the results of stress testing of the banks and sectors, which is conducted on a quarterly basis, confirm that the stability of the sector has been on the rise over the last several years.

People are no longer afraid that high inflation will decrease the real value of their earnings and pensions, and the business community can plan its operations

What is your vision of the Serbian banking sector in the near future?

The Serbian banking sector is functioning according to all postulates characteristic for banking markets of developed countries. Specifically, due to its energy, the Serbian banking sector is treated as one of the most attractive sectors for potential foreign investors. The conditions for their arrival to the Serbian banking market are clear and transparent, and the criteria for their evaluation are prescribed in detail in the internal acts and procedures of the NBS, which supports the arrival of solvent investors in the banking sector in Serbia. In cases of changes in the ownership structure of banks, we decide on each request in accordance with the legally prescribed procedure, taking into account the stability of the banking sector and the protection of depositors’ funds.

You have been leading the NBS for five years. Are you expecting a new term?

Even though I appreciate the fact that investors dislike instability, the population dislikes uncertainty, and the market dislikes upheavals, I do not think about the position. I think about the job, how to do my job in the best possible way, to achieve visible and unquestionable results. Whether a job is well done or poorly done, the failure to achieve results or good performance is something that makes a clear difference, it makes one qualified or inadequate for the job. Your first sentence in this interview was that the NBS has not recorded such good results in a long time… I am very pleased about that.