NATIONALBANK OF SERBIA
RESEARCH
D E PA R T M E N T
Economic Review
October 2004
NATIONALBANK OF SERBIA
RESEARCH
D E PA R T M E N T
Economic Review
October 2004
Economic Review
EDITORIAL BOARD
MARINA MLADENOVI]-KOMATINA, Editor in Chief
Members of the Editorial Board
IGOR BLA@EVI]
JELENA MARAVI]
JOVAN PETROVI]
MILICA STOJNI]
BRANKO HINI]
Dr MILAN [OJI]
The articles published in the NBS Economic Review represent author's own assessments, analysis
and projections. They by no means represent the official stand of the National Bank of Serbia.
Issued and printed by
The National Bank of Serbia
Belgrade, 12 Kralja Petra Street
Telephone: (381 11) 30-27-100
www.nbs.yu
E-mail: [email protected]
ISSN 1451-4710
Number of copies: 400
Published quarterly
Technical Editor
Nada Mizdrak
Graphic Design
Nikola Vu~kovi}
Computer Processing
Boris Vuki}evi}
Economic Review
CONTENTS:
BASIC ASSESSMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
MONETARY AGGREGATES, EXCHANGE RATE OF THE DINAR AND INTEREST RATES . . . . . . . . . . . . . . . . . . . . . . 7
MONEY CREATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Reserve Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Money Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
MONETARY AGGREGATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Reserve Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Money Supply M1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Money Supply M2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Money Supply M3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Household Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Bank Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
EXCHANGE RATE OF THE DINAR AND FOREIGN EXCHANGE RESERVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
INTEREST RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Retail foreign currency deposit and long-term lending interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Securities Trading in Serbia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Belgrade Stock Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Trading in NBS Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Trading in RS Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Retail Price Forecast until the End of 2004 and for the First Six Months of 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
PRICES, ECONOMIC ACTIVITY AND DOMESTIC DEMAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Price Movements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Inflation - Measuring Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Domestic Demand and Public Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
Investment Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
Comparative VAT Effects (Slovenia, Croatia, Macedonia, and Montenegro) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
INTERNATIONAL ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Economic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
Where does the World Capital Flow? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
Currency Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Stock Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Serbia and International Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
Foreign Direct Investment in the Central and East European Countries in 2002 and 2003,
with Forecasts for the Coming Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
INTERNATIONAL ECONOMIC RELATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
Balance of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
Serbia's Business Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
Economic Review
October 2004
BASIC ASSESSMENTS
Relative to the movements reported in the previous
year, in the first nine months of 2004 signs of recovery
have been reflected in Serbia's economic activity. The
estimates are that this year's GDP growth might exceed
7.5%. Such growth would mostly be supported by
domestic demand resulting from the increased private
and public sector consumption, as well as from foreign
direct and domestic investment.
Inflation reported in the third quarter, following the
trend prevailing in the first ten months of the year,
exceeded the projected range (8-9%). Retail prices rose
by 9.7% in the first ten months. To a considerable extent,
this was the result of continued price disparity
adjustments in the area of natural monopoly (electricity,
housing and utilities, etc.), in addition to the rising
prices of oil derivatives caused by surging oil prices in
the world market, as well as those of the world primary
products (basic metals). The growth of core inflation,
however, was relatively slower than the overall inflation.
In the last ten days of October, the agreement was
reached between the IMF mission representatives and
the representatives of the delegation of Serbia and
Montenegro regarding the current economic policy and
its elements for 2005 within the fourth review of the
existing three-year arrangement provided to the country
in May 2002. The agreement is expected to be approved
by the IMF Board which would enable Serbia and
Montenegro to have the new credit tranche of SDR 62.5
drawn in December. The talks particularly focused on
the need to reduce the budget deficit in this and next
year, to decrease the percentage of the public sector in
the country's overall economic activity, to cut down its
foreign trade deficit, to adjust the wage movements with
those relating with labor productivity, and to speed up
the process of privatization and restructuring of
economy and banks.
The third quarter saw a decrease in foreign trade
deficit, deficit on the balance of goods and services, and
current account deficit relative to the previous two
quarters. The trends resulted from the economic policy
measures taken to reduce the difference between the
domestic aggregate demand (based on narrowed budget
deficit and slower increase in wages) and the reported
domestic output, i.e. GDP. The country's total external
debt decreased with respect to the partly written-off
claims by the London Club of creditors.
The high surplus in the financial position of the
country's balance of payments is expected to prevail in
the remaining months of the year. Moreover, the
estimates are that the positive difference between such
surplus and the deficit on the balance of goods and
services will exceed the level reported in the previous
nine months with resulting effects on further upward
trend in foreign exchange reserves held with the
National Bank of Serbia. It is further estimated that the
trade deficit, the deficit on the balance of goods and
services, and the current account deficit, if measured by
the annual rate, will be lower than those reported in the
period January-September.
Monetary policy continued to be moderately
restrictive in the third quarter, as shown by the reported
movements in monetary aggregates. Moderate upward
trends, which had also marked the second quarter, were
further recorded with the reserve money, although the
balance as at the end of September was still below the
figures reported in December 2003, as the remarkably
high level with respect to the effects of seasonal factors.
The movements in the reserve money creation differed
relative to those reported in the second quarter. The
creation resulted from the growing net foreign exchange
reserves, as opposed to the second quarter marked with
the reserve money withdrawals. Reserve money
5
October 2004
withdrawals were reported within the net domestic
assets (NDA) in contrast to the creation in the second
quarter.
Lending activity of banks was somewhat
accelerated in the third relative to the previous two
quarters, particularly in July. Such relatively high
growth in lending, and the consequent money creation,
has largely resulted from funding provided by a number
of banks through international credit facilities. In line
with the relatively high monetary multiplier, upward
trends were further reported with the aggregate dinar
deposits, or the M2 money supply which increased by
7.6% in the third quarter, and its annual growth rate
stood at 11.0% compared to September 2003. A
relatively high growth was also recorded with foreign
exchange deposits, in particular, household foreign
currency savings. Foreign exchange deposits increased
in nominal terms by EUR 254 million, or 17.8% in the
third quarter, with the corresponding annual growth
(from September 2003) of EUR 503 million or 30.5%.
In its efforts to slow down the inflation which had
considerably accelerated due to the exceptional
increase in the world oil prices, and in order to preserve
the macroeconomic stability, additional measures were
taken by the National Bank of Serbia to sterilize the
excess liquidity of banks and to achieve the quantitative
targets set by the monetary policy. In this context, in
August the National Bank of Serbia increased the
reserve requirement from 18% applicable until then to
21%. At the same time, in order to prevent the practice
of some banks to use the required reserves for foreign
exchange buying transactions, the National Bank of
Serbia imposed the requirement whereby the daily
balance of allocated required reserves should be at
least equal to 80% of calculated reserves, both in dinars
and foreign currency.
6
Economic Review
Furthermore, the National Bank of Serbia also
endeavored to sterilize the excess liquidity of banks by
increasing the interest rate on its bills, although the
volume of sold NBS bills was somewhat lower than in
the second quarter, primarily due to the decrease in
excess funds after the increased reserve requirement had
been applied.
The reduced liquidity of banks resulted in the
declining foreign exchange demand and contributed to
the increase in the net foreign assets (NFA), i.e. the net
foreign exchange reserves of the NBS and the
consequent additional creation of reserve money. Credit
activity of banks had not been seriously affected by the
increased reserve requirement, although it was slowed
down to a certain extent.
Even though the third quarter saw the accelerated
inflation, variations in the weighted average lending
rate of banks were marginal relative to the second
quarter. Similarly, there were no significant changes in
deposit rates paid by banks. The absence of any
considerable changes in rates has most probably
resulted from the fact that the majority of loans made
available by banks are subject to foreign currency
clause or agreed upon with the principal to be
revaluated at the inflation rate, while the interest is
accrued on such restated outstanding debt.
In September, the real effective exchange rate of the
dinar was practically equal to the level reported in June,
and it was 2.9% lower relative to December 2003.
Irrespective of the high deficit on the balance of
goods and services, and the substantial current account
deficit, the country's international liquidity did not
deteriorate in the period January-September. It even
improved to a certain extent, as the level of foreign
exchange reserves held with National Bank of Serbia
exceeded by USD 40 million the balance reported at the
end of 2003.
Economic Review
October 2004
MONETARYAGGREGATES, EXCHANGE RATE
OF THE DINAR AND INTEREST RATES
Reserve Money Creation
(Cumulative changes in million dinars)
100,000
80,000
MONEY CREATION
60,000
Reserve Money
40,000
20,000
Upward trends continued with the reserve money
in the third quarter of 2004. In terms of its structure, a
moderate increase was reported with currency in
circulation relative to the previous quarter.
0
-20,000
-40,000
9
12
2002
3
6
9
2003
Net foreign assets
12
3
6
9
2004
Net domestic assets
Contribution of Particular Assets to the Reserve Money
Growth Rate
(In percentage points)
2004
Q1
-11.57
-6.28
0.18
-1.01
0.80
0.39
-6.47
-17.85
Net foreign reserves
Net domestic assets
Domestic credits
Net claims on government
Net claims on banks
Net claims on other sectors
Other assets, net
Reserve money
Q2
1.39
6.90
9.64
16.71
-6.91
-0.17
-2.74
8.29
Q3
19.38
-16.38
-11.22
-9.56
-1.11
-0.55
-5.16
3.00
Q1-Q3
6.82
-15.19
-1.88
4.22
-5.86
-0.24
-13.31
-8.37
Net Domestic Assets of the National Bank of Serbia
(In million dinars, end of period)
2003
Dec
Net foreign reserves
Net domestic assets
Domestic credits
Net credits to
government
Net credits to banks
Net credits to other
customers
Other assets, net
Reserve money
Currency in circulation
Bank reserves
Of which :
Excess reserves
Mar
2004
Jun
90,875
-220,879
82,777
-225,276
83,579
-221,311
-13,190
-13,061
-7,519
-331,511
-14,504
-13,362
-14,068
-4,458
-10,410
Sep
95,646
2,337
2,900
-1,073
-1,763
-2,165
-1,893
-1,988
-2,331
-7,689
69,996
42,979
27,017
-12,215
57,501
38,004
19,497
-13,792
62,268
40,347
21,921
-17,007
64,135
42,463
21,672
11,355
4,820
6,854
2,394
The reviewed trends in the reserve money point to
the creation within the NFA, and to the withdrawals
within the NDA. The NFA contributed to the increase in
the reserve money with 19.3 percentage points, as
opposed to the NDA negative contribution of 16.3
percentage points.
The increase in the NFA by EUR 117 million at the
current rate of exchange resulted from the lower volume
of the NBS interventions in the foreign exchange market
with respect to the higher required reserves allocated by
banks after the former 18% was in August replaced by
the rate of 21%. The NBS gross foreign exchange
reserves rose by EUR 127 million, however, a
considerable increase was also reported with the
external liabilities and those toward domestic banks.
Net claims on banks fell in September relative to
June, with respect to the reduced dinar credits to banks.
To comply with the NDA criteria agreed with the IMF,
the sale of the NBS bills was intensified in September,
however, it was still below the volume reported in June.
Net position of other sectors fell to a marginal
extent; there were no new credits disbursed, but a certain
increase was reported with deposits.
The compliance criteria in respect of the NFA and
NDA were met owing to the restrictive monetary policy
pursued in the third quarter.
According to the projections of the NBS Research
Department, in the last quarter of the year the reserve
7
October 2004
Economic Review
money is expected to be fully created within the NDA.
The assumptions are that further growth of exports in the
fourth quarter will be encouraged by the announced VAT
which is expected to be applicable as of the beginning of
2005. The growth in exports will in turn result in the
rising demand for foreign exchange, and a stronger
pressure on foreign exchange reserves forcing the NBS
to partly intensify its interventions in the foreign
exchange market.
Trends in Monetary Multiplier and Its
Components
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
12
2003
1
mm
2
3
4
GN/D
5
R/D
6
7
8
9
2004
Ro/D
The expectations are that the NDA growth in the
coming period will mostly be influenced by the increase
in the government net position with the NBS. Namely,
as estimated by the NBS Research Department, taking
into account the absence of the expected proceeds from
privatization, the coming period will see the government
withdrawing some of the funds held in accounts with the
NBS to cover the budget deficit.
Rs/D
Contribution of Particular Assets to the Growth Rate of M3
(In percentage points)
Money Supply
2003
Q1
Q2
Q3
Q1-Q3
Net foreign assets
-3.45
-3.30
11.22
5.05
Net domestic assets
Domestic credits
Net claims on government
Lending to other sectors
Households
Enterprises in dinars
Enterprises in foreign
currency
Other
Purchased frozen ex saving
bonds
Short-term government dinar
credits to banks
3.66
8.39
2.03
14.20
5.76
-0.68
6.03
1.58
4.23
12.89
4.39
8.81
3.31
3.68
9.81
-2.09
11.45
4.73
5.64
29.00
1.52
26.93
9.88
13.71
0.35
1.84
1.04
3.30
-0.13
-0.02
0.04
0.04
0.38
-0.28
0.45
0.58
0.03
-0.04
-0.01
-0.02
Other assets. net
-2.10
-4.50
-7.78
-14.80
Money supply (M3)
0.21
5.09
13.25
19.26
Net Domestic Assets of Banks
(In million dinars, end of period)
Net foreign assets
2003
Dec
Mar
2004
Jun
Sep
172,664
164,494
156,648
184,641
Net domestic assets
64,270
72, 934
92,854
97,921
Domestic credits
153,356
166,997
197,593
222,075
Government, net
-23,586
-25,203
-14,778
-19,986
Other sectors
172,284
186,579
207,501
236,080
Of which:
Enterprises in
dinars
Other assets, net
8
100,334
109,146
123,218
-94,063
-104,739
-124,154
236,934
237,428
249,502
282,562
Dinar deposits
117,040
105,553
112,612
121,218
Foreign currency
deposits1)
119,894
131,875
136,890
161,344
Total deposits (M3)
1)
90,730
-89,086
Excluding frozen foreign currency savings of households.
In the third quarter of 2004 the growth of money
supply M1 was more rapid than the growth reported
with the dinar reserve money. Such more intensive
growth was the result of the increased monetary
multiplier from 1.51 in June to 1.56 in September. Its
increase was supported by the lower ratio of bank excess
reserves to demand deposits, as opposed to the higher
reserve requirement which had a decreasing effect on
the multiplier. In this context, the effect of the lower
excess reserve ratio prevailed over the effect resulting
from the higher reserve requirement, which
consequently caused the monetary multiplier to
increase.
The growth rate reported for the money supply M3
in this period considerably exceeded the M1 growth,
with respect to the more intensive increase in foreign
currency deposits relative to dinar deposits. The M3
growth mostly resulted from money created by the NFA
flows, with the considerably lower contribution reported
for the NDA of the banking sector. The situation appears
to be different if the whole period of nine months is
taken into account: in this case, the NDA contribution to
the M3 growth exceeds the contribution reported for the
NFA, as money withdrawals in the first six months were
influenced by the NFA.
The NFA of the banking sector at the current rate
of exchange increased by nearly CSD 28 billion or EUR
292 million in the period January-September. The NFA
growth was also reported if applying the fixed exchange
rate prevailing in December 2003. The increase included
both the NBS foreign exchange reserves and those of
Economic Review
commercial banks. On the other hand, the NBS reduced
its short-term external liabilities to a certain extent, as
opposed to considerably increased liabilities of
commercial banks. The trends differed relative to the
first six months of the year which had seen a decrease in
the aggregate foreign exchange reserves and the NFA of
the banking sector.
The NDA of the banking sector rose by 5.5% in the
third quarter, much less than in the first six months of
the year. Banks reported an intensive increase in
lending, however, money withdrawals were reported in
their relationships with the government contrary to the
first two quarters. In addition, money withdrawals
recorded within other net assets in absolute terms were
somewhat higher than those in the first six months of the
year.
The M3 growth reported in the third quarter, which
stood at 13.3%, was mostly contributed to by the NFA of
banks (11.3 percentage points) compared to the much
lower NDA contribution (2.0 percentage points).
As opposed to the first two quarters which had
seen the government reducing, i.e. spending its deposits,
both foreign currency and dinar government deposits,
primarily with the NBS, significantly increased in the
period July-September. Credits extended to the
government by commercial banks rose to a certain
extent. Such movements resulted in a largely reduced
net government position in this period and,
consequently, in the compliance with the criteria set by
the IMF. At the same time, banks increased their
investments in the government foreign currency savings
bonds by over CSD 1 billion.
Upward trends in bank lending continued in the
third quarter at the rate equal to the growth of the
monetary aggregate M3. The prevailing portion of loans,
as in the previous period, was made available to
corporate and retail clients. Bank loans provided to
clients rose by 13.8% or by 37.0% from the beginning of
the year.
October 2004
Banks’ Newly Approved Loans to Customers
(end of month balance, in million dinars)
2003
Total investments
Total dinar investments
Short-term investments
O/w:
Economy
Households
Long-term investments
O/w:
Economy
Households
Total foreign currency investments
2004
Dec
Jun
Sep
201,617
125,563
81,650
393,780
291,379
213,595
521,430
399,191
294,830
69,218
11,209
43,913
182,716
28,659
77,784
254,161
37,636
104,361
24,683
17,295
76,054
42,140
33,296
102,401
52,431
49,288
122,239
Dinar Bank Credits by Sector
September 2003
Economic sector
62%
Households
18%
Government
19%
Non-economic
sector
1%
September 2004
Economic sector
60%
Households
28%
Government
11%
Non-economic
sector
1%
The first nine months of the year saw
approximately CSD 320 billion of new loans disbursed
to clients. Thereof, short-term facilities mostly to
corporate clients accounted for 77.9% of the overall
dinar lending. This reveals the fact that short-term loans
are actually revolving, i.e. they are repaid and the funds
are further relent. In September, client lending absorbed
18% of the GDP compared to, for example, 42% in
Hungary, 33% in the Czech Republic, and 28% in
Bulgaria.
An increase was reported with corporate dinar
loans, although foreign currency lending also rose to a
certain extent even at the fixed rate of exchange
(December 2003). The growth recorded with corporate
9
October 2004
Economic Review
lending mostly related to the liabilities for the Paris Club
and London Club of creditors, while the growth of shortterm loans resulted from actual increase, i.e. loans
disbursed both to public companies and other corporate
clients.
Bank Dinar Reserves
(In million dinars, end of period)
35,000
30,000
Retail lending rose by approximately CSD 12
billion in the third quarter relative to the increase by
CSD 23 billion reported from the beginning of the year.
This points to the much more vigorous credit activity of
banks in the period July-September. The growth was
mostly contributed to by long-term retail lending, with
over CSD 6 billion absorbed by long-term consumer
loans.
25,000
20,000
15,000
10,000
5,000
0
9
2002
12
3
6
9
2003
Required reserves
12
3
6
9
2004
Excess reserves
Reserve Money
Overdue loans further increased in the third
quarter, from CSD 17.6 billion at the end of June to CSD
20.4 billion at the end of September, however, banks
also increased their provisions for such loans (from
CSD 14.3 billion to CSD 18.5 billion) which resulted in
the net balance of overdue loans reported at CSD 1.9
billion as at the end of September.
(In million dinars, end of period)
80,000
70,000
60,000
Lending is expected to grow further in the last
quarter, particular in the area of corporate loans, mostly
through the purchase of agricultural products. On the
other hand, no major decrease is expected to occur with
the public sector deposits, which would also result in
money creation within the net public sector position of
banks. With this taken into account, it may be expected
that money creation by the end of the year will mostly
be influenced by the NDA flows of banks, but also by
the NFA to a less extent.
50,000
40,000
30,000
20,000
10,000
9
2002
12
3
6
9
2003
Currency in circulation
10
Over CSD 58 billion of new retail loans were
disbursed in the same period which results in the modest
amount of USD 126.4 per capita, or USD 478.3 per each
of the employed. The average is similar to the situation
in Bulgaria where retail loans reported in 2003 stood at
approximately USD 180 per capita, but it is still far from
the figures reported in the same year, for example, in the
Czech Republic or Hungary (USD 820 and USD 1,138,
respectively). In this context, it should be taken into
account that there are still few people in the country
earning enough to be capable of borrowing.
12
3
6
Bank dinar reserves
9
2004
Economic Review
MONETARY AGGREGATES
Reserve Money
In the third quarter the reserve money increased by
3% or much below its growth reported in the previous
quarter. The reserve money was fully created by the
increase in net foreign exchange reserves, with respect
to the reduced NDA in the observed period.
The composition of the reserve money reveals that
currency in circulation rose by over CSD 2 billion. Bank
reserves fell to a certain extent. As the result of the
higher required reserve ratio, allocated required reserves
rose by over CSD 3.5 billion, and caused a considerable
drop in excess reserves reported in August and
September. At the end of September, the level of excess
reserves was exceptionally low, below CSD 3 billion.
Further growth in the reserve money is expected in
the coming period, partly with respect to the seasonal
factors, and partly as the result of the higher required
reserve ratio. Taking into account the apparent seasonal
effects on currency in circulation, its continued increase
is expected in the fourth quarter.
October 2004
Demand and Time Dinar Deposits by Sector
September 2003
Economic
sector
36%
Other sectors
10%
Households
15%
Government
39%
September 2004
Economic
sector
52%
Other sectors
12%
Government
22%
Households
14%
The reported increase in the reserve money, as
estimated, would still be insufficient to reach the level
recorded at the end of 2003.
Composition of Reserve Money
Money Supply M1
The upward trends in the money supply M1
reported in the second quarter of 2004 continued in the
third quarter. However, with respect to the relatively
high decrease in the first quarter, it was only at the end
of September that the M1 exceeded (by 1.7%) the level
reported at the end of 2003. In the third quarter, with the
government deposits fully excluded, the M1 rose by
CSD 5,742 million or 6.1%, and reached CSD 99,876 by
the end of September. In real terms, if deflated by the
retail price index, the M1 increased by 2.3% and 3,0%
in the third and second quarter, respectively. The
coverage of the money supply by the NBS foreign
exchange reserves stood at 218.7% in June relative to
213.5% in September.
With respect to the money supply composition, a
relatively high increase was reported with both
monetary forms. Currency in circulation rose by CSD
2,116 million or 5.2% to reach CSD 42,463 million at
the end of September. Deposit money increased by CSD
Currency in
circulation
62%
September 2003
Overnight
dinar deposits
by banks
6%
Excess
reserves
7%
Currency in
circulation
67%
September 2004
Overnight
dinar deposits
by banks
1%
Required
reserves
25%
Excess
reserves
3%
Required
reserves
29%
11
October 2004
Economic Review
3,626 million or 6.7%, and stood at CSD 57,413 million
at the end of the third quarter. The reported drop in the
percentage of currency in circulation within the money
supply was marginal - from 42.9% in June to 42.5% in
September.
Composition of the Money Supply
(In million dinars, end of period)
120,000
100,000
Broken down by sectors, the highest growth in the
M1 was reported with corporate sector (CSD 3,156
million or 7.8%) which was followed by households
(CSD 2,225 million or 4.5% including currency in
circulation). The increase in the money supply reported
by other sectors stood at CSD 361 million or 8.9%.
80,000
60,000
40,000
Money Supply M2
20,000
0
9
2002
12
3
6
9
2003
Currency in circulation
12
3
6
9
2004
Deposit money
Money Supply (M1) by Sector
September 2003
Economic
sector
42%
September 2004
Economic
sector
43%
12
Households and
currency in
circulation
54%
Other sectors
4%
Households
and currency in
circulation
53%
Other sectors
4%
The monetary aggregate M2 which, in addition to
the M1, includes savings, time and other dinar deposits,
as well as securities, increased by CSD 8,606 million or
7.6% in the third quarter and reached CSD 121,218
million at the end of September. The M2 increased more
rapidly compared to the M1 as the result of a more
intensive increase in dinar time deposits.
Money Supply M3
The increase by CSD 33,060 million or 13.3%
reported with the monetary aggregate M3 in the third
quarter considerably exceeded the growth recorded for
other aggregates. The M3 stood at CSD 282,562 million
at the end of September.
The M3 growth, which was above the increase
reported for the M1 and M2 both in absolute and relative
terms, resulted from rapidly increasing foreign currency
deposits, in particular, savings deposits. The coverage of
the M3 by the foreign exchange reserves of the NBS was
77.3% at the end of the third quarter relative to 80.5%
reported at the end of the second quarter. The M3
composition revealed considerable changes compared to
the second quarter: the percentage of M1 fell to 35.3%
at the end of September against 37.7% in June; the
percentage of term dinar deposits marginally increased,
from 7.4% in June to 7.6% in September; and the
increase in the percentage of foreign currency deposits
was more significant - from 54.9% in June to 57.1% in
September.
Economic Review
Household Savings
At the end of September 2004 dinar and foreign
currency household savings stood at CSD 3.6 billion and
CSD 94.5 billion, respectively. When compared to the
same period of 2003, dinar savings fell by 14.4%, and
foreign currency savings rose by 53% taking into
account the changes in the exchange rate.
In the third quarter of the year the total household
savings increased by CSD 9.9 billion, with the overall
growth absorbed by foreign currency savings, while the
level of dinar savings remained unchanged since the end
of June.
With respect to the stock of savings deposits, the
difference increased in favor of foreign currency which
accounted for as much as 96.3% of the aggregate
savings. Euro and U.S. dollar savings accounts absorbed
87.98% and 8.6%, respectively.
Translated to euro, foreign currency savings
reached EUR 1.3 billion at the end of September and
rose by EUR 88 million or 7.5% relative to the end of
June against the increase by EUR 69 million reported in
the second quarter.
Dinar savings term structure reveals that the
highest growth was reported with the savings deposits
for the period of one year. The second position is held by
the dinar time savings for the period of six months,
followed by the three-month savings deposits.
October 2004
Household Savings
(In million dinars)
Dinar
Foreign
currency
Total
2003
Dec
Jun
2004
Jul
Aug
4,233
3,637
3,484
3,776
3,627
69,738
84,568
87,916
90,423
94,472
73,971
88,205
91,400
94,199
98,099
Sep
Household Savings
(In million dinars)
4,400
100,000
4,200
90,000
4,000
80,000
3,800
70,000
3,600
60,000
3,400
50,000
3,200
40,000
3,000
9 11
2002
1 3
5
7
Dinar
9 11 1
2003
3
5
7
9
2004
Foreign currency (new)
Excess Dinar Reserves
Bank Liquidity
(In million dinars, end of period)
15,000
Liquidity of banks was affected by different factors
in the third quarter. On one hand, with respect to the
NFA of the National Bank of Serbia, bank liquidity
increased, and on the other, it decreased taking into
account the NDA. These effects were very similar in
absolute terms and resulted in no significant changes as
to the liquidity. The growing currency in circulation,
however, had a declining effect in respect of excess
liquid assets of banks which resulted in considerably
reduced liquidity at the end of September relative to the
end of June.
14,000
The average daily balance of excess reserves
reported by banks in the third quarter was CSD 6,269
million and exceeded by 2 percentage points the level
recorded in the previous quarter. Within the excess
reserves, available bank giro account balances stood at
CSD 688 million. The balances reported in the previous
period were lower by CSD 475 million and, therefore,
5,000
13,000
12,000
11,000
10,000
9,000
8,000
7,000
6,000
4,000
3,000
2,000
9
2002
12
3
6
9
2003
12
3
6
9
2004
13
October 2004
Economic Review
Bank Liquidity
(In million dinars, end of period)
2003
Dec
2004
Jun
Mar
Sep
11,355
4,820
6,854
2,934
Giro account balances
(net)
1,563
-911
1,396
-1,263
Vault cash
4,097
3,451
3,419
3,463
Banks’ Overnight dinar
deposits
5,695
2,280
2,039
734
Calculated required reserves
with NBS
15,662
Excess dinar reserves
%
14,677 15,067 18,738
Average Bank Liquidity Ratio
18
17
16
15
14
13
12
11
10
9
8
7
6
9
2002
14
12
3
6
9
2003
12
3
6
9
2004
the upward adjustment of the required reserve ratio had
no effect in terms of narrowed difference between the
giro account balances and allocated required reserves,
which points to the improvements in treasury policies of
commercial banks. Compared to the previous quarter,
the reported level of average overnight deposits and
vault cash was also lower.
The record daily liquidity of banks was recorded in
July. It was accompanied by the highest net sale of
foreign exchange, however, the increased liquidity of
banks was also influenced by their declining interest in
the purchase of NBS bills and the reduced government
deposits held with the NBS. In August banks were very
active in the foreign exchange market and invested their
liquid assets, which resulted in the lowest average dinar
liquidity irrespective of their decreased investments in
the NBS bills. A high demand for foreign exchange was
also reported by banks in September, particularly close
to the end of the month, along with the decrease in the
government deposits with the NBS and with the
increasing liquidity of banks, which was directed to the
intensified purchase of foreign exchange. With the
payments made by the respective clients to settle their
fiscal obligations, and with the growing currency in
circulation, the liquidity of banks decreased.
High liquidity of banks and, consequently, the
growing demand for foreign exchange in the interbank
foreign exchange market, as well as the intensified
lending activity of banks, were the aspects taken into
account by the NBS when it decided to increase the
required reserve ratio from 18% to 21%, in addition to
the requirement to maintain the daily reserve balance at
least equal to 80% of calculated required reserves. The
interest rate applicable to the facilities for daily liquidity
against pledged securities was increased by the NBS
from 200% to 250% of the discount rate (in addition to
the pledged NBS bills, facilities may also be provided to
banks against pledged government bills and bonds
issued by the Republic of Serbia). With interest rates
applied to its bills and its exchange rate policy, the NBS
proved to banks that a short-term dinar investment was
the most attractive way to invest liquid assets thus
encouraging banks to direct their excess liquidity to such
investments. Under the circumstances of continually
excessive foreign exchange demand relative to supply,
both in the interbank foreign exchange market and
otherwise, after it had increased the required reserve
ratio, the NBS reduced the sale of foreign exchange,
while commercial banks increased the volume of their
direct buy/sell transactions. Nevertheless, the increase in
liquid assets in the third quarter was mostly influenced
by foreign exchange transactions, as the NBS was the
net buyer of foreign exchange.
Economic Review
October 2004
At the end of September the volume of the NBS
bills stood at CSD 5,263 million and fell by CSD 511
million relative to the end of the previous quarter which
resulted in the increased liquidity in the observed
quarter. At the end of June the prevailing bills bought by
banks were those with 30-day maturity and the weighted
average interest rate of 15.82%; in the following quarter,
they started reducing the amount and maturity of
purchased bills. In late September, with the increasing
weighted interest rates, the NBS bills bought by banks
were mostly those with 7-day maturity and the weighted
average interest rate of 15.9%.
At the end of the third quarter currency in
circulation exceeded the level reported in the previous
quarter by 5%, with negative effects on liquidity of
banks. Broken down by months, and with respect to the
seasonal factors, currency in circulation increased in
July and September.
Foreign exchange risk ratio stood at 8.21% at the
end of September, and deteriorated by 1.38 percentage
point relative to the end of the previous quarter due to
the increase in open currency position and reduced
capital of banks. Banks have complied with the
requirement whereby the ratio of assets to liabilities
should not exceed 30% of their capital. The average
foreign exchange reserves in September were CSD
14,795 million or 33% above the average reported in
June. Required foreign exchange reserves allocated at
the end of September stood at CSD 15,495 million and
reflected a significant increase resulting from the higher
reserve requirement. A number of banks have
continually been unable to comply with credit rating
requirements due to the failure to allocate the daily
amount of calculated required reserves.
Nominal Exchange Rate 1)
(December 2000 = 100)
In September, the average liquidity rate of banks
measured as the ratio of their average excess reserve
balances to their short-term liabilities rose from 6.5%
reported in June to 7.5% which typically occurs in this
period.
EXCHANGE RATE OF THE
DINAR AND FOREIGN
EXCHANGE RESERVES
Depreciation trends in respect of the effective
nominal exchange rate of the dinar continued in the third
quarter of 2004. No significant variations were recorded
120
120
115
115
110
110
105
105
100
100
95
95
90
90
85
85
80
80
75
75
9 12 3 6 9 12 3 6 9 12 3 6 9
2001
2002
2003
2004
12 3
2000
Nominal effective exchange rate
CSD/EUR
CSD/USD
1)
Index below 100 implies a depreciation and above 100 an appreciation
of the exchange rate.
15
October 2004
Economic Review
by the real effective rate of exchange relative to the
previous quarter.
From late June until the end of September the
nominal exchange rate of the dinar fell by 3.3% or by
9.4% relative to the end of 2003. The real effective
exchange rate of the dinar remained practically
unchanged in September compared to June, and it
decreased by 2.9% relative to December 2003.
The third quarter saw a continued depreciating
trend in the value of the dinar against the major world
currencies. The depreciation was lower than in the first
six months of the year, except with the euro where it was
somewhat higher. From late June to the end of
September the value of the dinar fell against the euro by
3.8% (or by 8.9% since the end of 2003); against the
U.S. dollar by 2.5% (or 10.2%); against the Japanese
yen by 0.2% (or 6.7%); against the British pound by
1.8% (or 11.9%); and against the Swiss franc by 2.2%
(or 9.4%).
The movements in the foreign exchange demand
and supply ratio were the decisive factor in setting the
exchange rate of the dinar. Foreign exchange supply
which exceeded the demand, with respect to the increase
in the NBS foreign exchange reserves by approximately
USD 200 million from late June to the end of
September, suppressed the depreciating tendency with
the real exchange rate of the dinar which had marked the
first six months of the year. At the same time, the
depreciation of the dinar slowed down against a number
of currencies, excluding the euro, in spite of the growing
domestic inflation.
Real Effective Exchange Rate 1)
(December 1994 = 100)
160
140
120
100
80
60
40
20
0
1
1)
16
5
9 1
1996
5
9 1
1997
5
9 1
1998
5
9 1
1999
5
9 1
2000
5
9 1
2001
5
9 1
2002
5
9 1
2003
5
9
2004
Market exchange rate of the dinar; index below 100 implies a depreciation and above 100 an appreciation of the exchange rate.
Economic Review
The trends which had prevailed in the previous
three years and narrowed the relative difference between
the real and nominal effective exchange rate of the dinar,
i.e. between the domestic and external inflation, were
suppressed in 2004. In September 2004 the difference
stood at 7.2% (December 2003=100) against 4.0% in
September 2003 (December 2002=100). The rising
domestic inflation in 2004 relative to 2003 is explained
by this year's extensive growth of the country's import
prices caused by the surging prices of imported raw
materials, primarily oil, and the real depreciation of the
dinar, as well as by somewhat more pronounced increase
in currency in circulation.
The country's foreign exchange reserves with the
NBS rose from USD 3,550.1 million, as reported at the
end of 2003, to USD 3,590.3 million at the end of
September 2004, or by 1.1%. The increase by USD 40.2
million in foreign exchange reserves implies that the
surplus equal to such increase was recorded in the
country's balance of payments in the first nine months.
The surplus was reported irrespective of the high deficit
on the balance of goods and services. The increase in
foreign exchange reserves is equal to the amount by
which the surplus resulting from the financial position
exceeds the deficit on the balance of real sector (goods
and services) within the country's international
economic relations.
The inflows to the NBS foreign exchange reserves
were mostly influenced by exchange transactions (USD
1,285.0 million, net); provisional foreign currency
payment transactions with Montenegro, and Kosovo and
Metohija (USD 341.0 million, net); international credit
facilities and grants (USD 94.6 million, net); the
insurance funds deposited with the NBS for new
personal foreign currency savings held with commercial
banks (USD 83.5 million); and foreign currency
required reserves of banks (USD 81.0 million).
The outflows within the NBS foreign exchange
reserves were primarily caused by its selling
transactions in excess of buying transactions in the
foreign exchange market (USD 1,504.8 million, net);
payments for frozen personal foreign currency savings
and economic development bond issue (USD 238.6
million), and interest payments (USD 106.4 million).
Intercurrency changes, mainly due to the rise in the
value of the U.S. dollar to the euro, were reflected in the
decrease in the NBS foreign exchange reserves by USD
23.2 million.
October 2004
NBS Forex Reserves
(Cumulative changes in million USD)
9,000
9,000
8,000
8,000
7,000
7,000
6,000
6,000
5,000
5,000
4,000
4,000
3,000
3,000
2,000
2,000
1,000
1,000
0
0
9 12
2001
3
6
The discount rate of the NBS was set at 8.5% at the
beginning of 2004 and remained unchanged until the
end of the third quarter.
3
6
9 12
2003
3
6
9
2004
Forex reserve inflow
Sales in the Interbank foreign exchange market
Changes in forex reserves
Nominal Interest Rates
(Annual, in %)
2003
2004
Dec
Jul
Aug
Sep
9.00
8.50
8.50
8.50
14.81 15.26
14.59
15.39
Short-term
15.48 16.07
15.12
15.80
Long-term
10.87 11.68
12.73
13.87
Official discount rate
Weighted lending rate,
overall
Weighted deposit rate,
overall
Households
Enterprises
INTEREST RATES
9 12
2002
2.74
3.48
3.60
3.72
2.14
2.15
2.15
2.09
2.86
3.72
3.97
4.10
Interest margin
12.07 11.78
10.99
11.67
Belgrade Stock
Exchange rates
27.14 31.40
31.40
33.08
RS bills
22.71 22.38
22.53
20.96
NBS bills
10.63 16.02
16.21
16.15
17
October 2004
Economic Review
The monthly weighted average lending rate of
banks moderately increased in the third relative to the
previous quarter; it stood at 1.18% in September
(15.39% p.a.) and was equal to the level reported in
December 2003.
Weighted Bank Lending Rates
%
1.6
1.5
The weighted average fee charged and accrued by
banks for disbursed loans was also slightly higher in the
third compared to the second quarter; in September the
weighted average lending fee was 0.43% per month
(5.37% p.a.).
1.4
1.3
December 2002
September 2004
1.2
1.1
December 2003
1.0
0.9
0.8
0.5
1.0
1.5
2.0
2.5
3.0
3.5
- in years-
Long-term credits
Short-term credits
Moderate upward trends continued in the weighted
monthly deposit rate of banks for overall deposits
reported in the third quarter. It varied from 0.28%
(3.47% p.a.) in June to 0.30% (3.72% p.a.) in September
and, in real terms, remained in the negative zone.
Discount Rate and
Bank Lending Rates
%
Movements in short- and long-term lending
interest rates still point to the inversion of the yield
curve. The slope of the curve considerably decreased in
the third quarter as the weighted average long-term
lending rate rose by 3.26 percentage points in the same
period, as opposed to the drop by 0.99 percentage point
p.a. reported with short-term lending rate. The scope of
short-term facilities is still far beyond the volume of
long-term lending; in September short-term facilities
exceeded long-term loans by 4.3 times.
(Annual)
25
The weighted average interest rate paid by banks
on retail dinar time deposits stood at 0.95% per month in
September (12.23% p.a.), i.e. somewhat lower (by 0.54
percentage point on annual basis) than at the end of the
second quarter.
20
15
10
After its moderate increase in the second quarter,
the interest margin, as the difference between the
interest receivable and payable, fell down to 11.67
percentage points p.a. (0.88 per month) in September. In
December 2003 the interest margin stood at 12.07
percentage points (0.95 per month).
5
0
-5
-10
Retail foreign currency deposit and long-term
lending interest rates
-15
9
2002
12
3
6
9
12
3
2003
Discount rate (nominal)
Discount rate (real)
Weighted lending rate (nominal)
Weighted lending rate (real)
6
9
2004
Weighted Average Interest Rates Applied to Forex
Savings in 8 Banks
Time forex savings
Sight deposits
1,58%
18
3 months
6 months
Annual
2,99%
3,77%
4,63%
Deposit interest rates vary both from bank to bank
and also depend on the term of deposit. Interest rates
paid on foreign currency demand savings deposits range
from 0.7% to 3% p.a. Foreign currency time deposits for
the period of one year earn interest ranging from 1.1%
to 5.5%, and the interest from 3% to 6% is payable on
those for the period of 36 months.
On the other hand, lending rates are apparently
much higher than rates paid on foreign currency savings.
Interest rates applied to, for example, long-term car and
Economic Review
housing loans exceed two times those paid on deposits
with the longest term and the highest rates payable
(approximately 12% p.a.). These rates are compatible
with interest paid on foreign currency deposits as,
irrespective of the fact that loans are disbursed in dinars,
the repayments are subject to currency clause.
Furthermore, there are minor differences among banks
in respect of interest rates and loan maturities. The
actual long-term lending interest rates are even higher
compared to those payable on deposits, as they include
front-end fees ranging around 1%, in addition to the
required guarantee deposit (mostly equal to 20% of the
loan) which earns much lower rate than the lending
interest payable (mostly 2%).
October 2004
Interest Rates on Households‘ Time
Deposits with Banks
(Monthly)
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
Securities Trading in Serbia
-1.5
-2.0
Belgrade Stock Exchange
9 11
2002
The volume of trading reported by the Belgrade
Stock Exchange (BSE) in the third quarter of 2004
reached CSD 8.84 billion and 37.5 thousand
transactions. The trading volume and the number of
transactions rose by 26.8% and 22%, respectively,
relative to the second quarter.
Stocks - equity shares absorbed the major portion
(67.8%) in the third quarter. The volume of trading in
these securities had been growing since April and stood
at CSD 5.99 billion in the third quarter.
As far as the foreign currency savings bonds are
concerned, a gradually falling trend in the yield for all
maturities appeared to be apparent over the period. The
weighted average yield on these bonds ranged from 6.6
to 8.4% on annual level. The volume of traded bonds
accounted for 26.6% of the overall trading reported by
the BSE in the third quarter, and reached CSD 2.35
billion or EUR 31.99 million.
The volume of traded short-term debt securities corporate bonds and commercial paper still reflected a
clear downward trend in terms of their percentage in the
overall BSE trading. The weighted average interest rate
on short-term securities increased by 2.83 percentage
points on annual level. In September it stood at 33.08%
p.a. (2.37% per month).
The average maturity of investments was 18 days
in September. The reported monthly average in the third
quarter was 25 days, or lower than in the previous
quarter (34 days).
1
3
5
7
9 11 1
2003
Weighted (nominal)
Weighted (real)
3
5
7
9
2004
7
9
2004
Bank Interest Rates and Margins
(Monthly)
1.8
1.6
1.4
1.2
1.0
0.8
Margins
0.6
0.4
0.2
0.0
9 11
2002
1
3
5
7
9 11 1 3
2003
Weighted lending rate
5
Weighted deposit rate
19
October 2004
Economic Review
Weighted Interest Rates on Short-Term
Securities (Annual)
%
40
Short-term securities on the Belgrade Stock
Exchange
35
35
30
30
25
25
Republic of
Serbia
bils 1)
20
20
15
10
NBS bills
5
9 11
2002
1
3
5
7
9 11
2003
1
3
5
7
5
9
2004
1)
The Republic of Serbia bills were first issued on April 15,
2003.
Yield Curves of FX Savings Bonds
%
11.00
10.00
Annual yields to maturity
The third quarter saw a lower volume of trading in
the NBS bills relative to the previous three months: it
stood at CSD 21.93 billion (as opposed to CSD 22.95
billion in the previous quarter). In terms of maturity,
banks prefer to buy bills with shorter (7- and 14-day)
maturity, and are least attracted by those with 60-day
maturity.
The weighted average interest rate on the NBS
bills rose in the third quarter relative to the previous one:
in September it was 16.15% p.a.
15
10
December 2003
9.00
8.00
September 2003
7.00
Maturity dates
31.5.16.
31.5.15.
31.5.14.
31.5.13.
31.5.12.
31.5.11.
31.5.10.
31.5.09.
31.5.08.
31.5.07.
31.5.06.
31.5.05.
6.00
20
Trading in NBS Bills
40
Trading in RS Bills
The weighted average yield on the RS bills
reported in auctions held in the third quarter was
somewhat below the level recorded in the previous
quarter. It reached the highest value in August (22.53%),
and the lowest in September (20.96%).
Economic Review
October 2004
Retail Price Forecast
until the End of 2004 and for the First Six Months of 2005
Using the inflation model described in the previous issue of Economic Review (July, 2004) the retail price index
forecast was developed for the end of the current and the first quarter of the following year.
∆pt = 0.407∆pt-1 + 0.112∆et + 0.064∆mt-2 + 0.073(∆nt-6+∆nt-7+∆nt-8)/3 +
(0.049)
(0.032)
(0.028)
(0.024)
+ 0.069(gt-6+gt-7)/2 + 0.069∆st + 0.059∆prt-2 + 0.154d – 0.075ut-1
(0.017)
(0.016)
(0.022)
(0.018) (0.036)
R2=0.79
dw=1.96,
where:
ut = pt − 0.862 − 0.355mt − 0.319et − 0.445*dd,
gt − Output gap (percentage variance of the reported from the potential industrial output);
nt − Logarithmic transformation of the Ural oil prices (expressed in dinars);
pr − Logarithmic transformation of the base world price indexes for primary products (expressed in dinars);
d − Impulse artificial variable taking non-zero value in October 2000 (sudden liberalization);
s − Logarithmic transformation of electricity prices.
The controlled variables for 2004 were varied as follows:
1) Yearly growth (December 2004 to December 2003) of the money supply M1 ranging from 9-10%;
2) Exchange rate in December 2004 ranging from 77.8-80.0 dinars against the euro.
Based on this model, under the assumption of unchanged prices of electricity until the end of the year and the data
fully updated until October 2004, this year's inflation forecast ranges from 12.2 to 12.7%. The mean forecast is 12.4%.
21
October 2004
Economic Review
Achieved and Projected Cummulative Retail Prices Growth
in 2004 (in %)
14.0
14.0
12.2-12.7
12.0
12.0
10.0
10.0
9.7
9.2
8.0
8.0
7.3
6.6
6.0
6.0
5.2
4.0
4.0
3.7
2.6
2.0
2.0
1.8
1.4
0.4
0.0
0.0
1
2
3
4
5
6
7
8
9
10
11
12
The following assumptions were used in forecasting the next year's inflation:
1) The increase in prices of electricity by 5% in the first six months;
2) Prices of primary products in the world market (expressed in euro) unchanged until April 2005 relative to
October;
3) The VAT effect on the retail price index, after it has been introduced as of January, will result in two percentage
points (see Comparative Analysis of VAT Effects in this issue);
4) The Ural oil prices (expressed in euro) unchanged until the end of the year relative to October;
5) Positive output gap in the last quarter of the current year.
Applying the model for 2004, the following variables were varied:
1) Yearly growth of the money supply M1 (May 2005 to May 2004);
2) Exchange rate.
Under the above assumptions, and taking into account the model described, the rise in retail prices would be
expected to range between 5.8 and 7.9%. The mean forecast, with the expected movements in controlled variables, is
6.8%. With the assumed fluctuations in the exchange rate of the dinar in line with the movements in retail prices, the
inflation would be 6.2% in the first six months of 2005. It should be noted that the estimates for the next year include
the VAT effects, after it has been introduced as of January (two percentage points), and the increased price of electricity
(0.5 percentage point). Consequently, taking into account the above assumptions, the inflation is expected to be higher
in the first than in the second quarter of 2005. In this context, the conclusion may be that the next year's objective to
have the inflation kept at the level of a single-digit figure appears to be feasible, in particular, with respect to the fact
that the world oil prices are expected to fall in the coming period after all, as they are currently far beyond the long-term
balance level.
22
Economic Review
October 2004
PRICES, ECONOMIC ACTIVITYAND
DOMESTIC DEMAND
This year's economic activity has recorded upward
trends accompanied with the accelerated inflation. The
growing overall domestic demand and consumption
have encouraged the domestic economic activity,
however, not in linear terms, which has intensified the
structural imbalances reflected through inflation and
relatively huge foreign trade deficit. The improved
economic activity is also proved by the composite index
measured in the NBS Research Department, including
the real changes in the money supply M3 in the first nine
months.
Taking into account the analyses conducted by the
NBS Research Department, this year's GDP growth may
realistically be expected to exceed 7.5% relative to
2003.
The industrial activity, wholesale and retail
merchadise trade, agricultural production, transport
turnover, as well as a part of the tertiary sector
increased relative to the same period of 2003.
Although the relevant data are not fully available
yet, it may be concluded that the third quarter saw
continued unfavorable trends in foreign trade, as
imports were persistently increasing and considerably
exceeded the growth of exports, in addition to the rising
current account deficit. As shown by the latest available
data, the foreign trade deficit was reported at USD 4.96
billion in the first nine months of the year.
Economic Activity Composite Index (KI)
(2002 = 100)
150
140
130
120
110
100
90
80
70
60
50
6
2000
12
6
2001
12
Composite Index
6
2002
12
6
2003
12
6
2004
12
Seasonally adjusted real M3
KI rise in August 2001 was the result of increased agriculture production and purchase of agricultural products.
Estimated data for September-December 2004.
23
October 2004
Economic Review
With respect to the unexpectedly strong impact
caused by factors originating from the environment, and
their effect coupled with domestic factors, the inflation
in the third quarter, as in the first ten months of 2004,
was more rapid than projected (8.5%). Retail prices rose
by 9.7% in the first ten months. To a considerable extent,
this was the result of continued price disparity
adjustments in the area of natural monopoly (electricity,
housing and utilities, etc.), in addition to the rising
prices of oil derivatives caused by surging oil prices in
the world market, as well as those of the world primary
products (basic metals). The growth of core inflation,
however, was relatively slower than the overall inflation.
Real GDP Growth Rate in Serbia
9
7.5
8
7
- in % -
6
5.7
5.7
5
4.0
4
3.0
3
2
1
0
2000
2001
*Assessment: NBS-RD.
24
2002
2003
2004*
Economic Review
October 2004
Price Movements
The inflation accelerated in the third quarter of
2004, to a considerable extent due to the surging oil
prices in the world market. As reported by the official
statistics, retail prices rose by 3.8% (by 0.5% in
October). Core inflation stood at 2.9% in the third
quarter.
Measured by retail prices, the inflation reported in
the first nine months of 2004 was 9.7%. Prices of goods
and services rose by 10.0% and 8.8%, respectively. The
highest growth was recorded with the prices of the
following groups of products: meat (31.3%); fruit
(19.9%); milk and dairy products (19;4%); eggs
(33.6%); processed and canned meat (17.3%); bread and
pastry, building material (14.1%); liquid fuels (20.921.3%); and electricity intended for households
(10.1%). In the area of services, the highest growth was
reported with the prices of compulsory automobile
insurance (35.8%); a part of personal services
(hairdressing services by 18.4%; laundry and
dressmaking services by 13.8%); and housing and
utilities related services (12.2%).
Goods and services contributed to the overall retail
price index in 2004 by 7.3 and 2.4 percentage points,
respectively. In the area of goods, industrial foodstuffs
(cereal products, meat and milk) accounted for the total
of 2.5 percentage points, and industrial non-foodstuffs
for 3.9 percentage points (thereof, electricity, and liquid
fuels and lubricants absorbed 3.0 percentage points).
Should retail prices continue to rise in the last
quarter at the pace similar the one reported in the past
period, in 2004 the inflation rate would reach 12.4% or
considerably above the growth projected for this year.
To the largest extent, such growth resulted from the
increased world prices of oil (approximately 42% until
the end of September) and of other primary products.
The external effect on the rate of inflation recorded so
far is estimated at approximately 3 percentage points.
Price Movements
(Monthly growth rates in previous month in %)
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
9
2002
12
3
6
9
2003
12
3
6
9
2004
Retail prices
Cost of living
Industrial producer prices
Core and Overall Inflation in the Republic of Serbia
(Growth rates in %)
Dec 2003
Dec 2002
Retail prices
Overall inflation
Core inflation
Cost of living
Goods prices
Services prices
Industrial producer prices
Agricultural producer
prices 2)
June 2004 Sep 2004
Dec 2003 June 2004
Oct 2004
Dec 2003
7.8
5.4
8.1
6.7
16.9
5.2
4.4
6.6
6.5
7.0
3.8
2.9
2.8
3.1
1.6
9.7
8.7
10.7
11.0
9.4
4.6
6.6
3.0
9.8 1)
7.4
2)
3.4 2)
11.0
-33.7
Source: NBS (Research Department), FSO and RSO.
1)
Data for January-September 2004.
2)
Data for January-July 2004.
25
October 2004
Economic Review
Core1) and Overall Inflation in the Republic of Serbia
(Dec 2000 = 100)
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10
1996
1997
1998
1999
2000
2001
2002
2003
2004
Core inflation
1)
Overall inflation
Until December 2000 date relate to Serbia-Montenegro.
Prices Excluded from Core Inflation
(Dec 2000 = 100)
350
350
330
330
310
310
290
290
270
270
250
250
230
230
210
210
190
190
170
170
150
150
130
130
110
110
90
90
3
6
9 12 3
2001
6
9 12 3
2002
6
9 12 3
2003
Energy
Bread and flour
PTT
Drugs, utility and transport services
26
6
9
2004
In terms of the level of general retail prices, the
third quarter exceeded the second quarter (3.3%) and the
first quarter (1.8%). Broken down by months, in July
retail prices rose by 1.4%, in August by 0.6%, and in
September by 1.7%. A 0.5% drop in retail prices was
reported in October.
Core inflation stood at 8,7% in the first ten
months. Reviewed by quarters, the highest growth was
reported in the third quarter (3.0%) which was followed
by the second quarter (2.9%), and the lowest growth was
recorded in the first quarter (1.5%). In October, the
prices of tradable goods and services rose by 1.1%.
In the observed period a 10.7% growth was
reported with non-tradable goods and services which
contributed to the overall retail price growth with
52.6%. In other words, in the first ten months of 2004
these prices accounted for 5.1 percentage points in the
overall retail price index (9.7%).
In the group of non-tradable goods, in the first ten
months the price growth was mostly contributed to by
the rising prices of energy sources (electricity, coal,
bottled gas, and power-generating fuels). This group of
products accounted for 30.9% or 3,0 percentage points
in the overall price growth.
Economic Review
October 2004
The highest monthly rates of inflation were
reported in June and July (1.4% each) and in September
(1.7%). Prices of electricity and fuel were adjusted in
these months. In September alone the increase in prices
of petrol and diesel fuel was directly reflected in the
overall price growth (1.7%) by 0.77 percentage points.
With the world oil prices still on the high side, the
pressures in this area could hardly be expected to lessen
to any considerable extent in the current year.
Relevant Goods & Services Price Growth Breakdown in 10
Months of 2004
Total
Administered goods and
services
Energy sources
Housing and communal
services
Transport, postal
services
Basic foodstuffs
Cigarettes
Medicines
Unadministered prices of
goods and services
9.7
9.7
Share in
retail price
growth rate
(in %)
100.0
10.7
14.4
5.1
3.0
52.6
30.9
9.9
0.7
7.2
3.6
11.6
12.2
-0.7
0.4
0.6
0.4
0.0
4.1
6.2
4.1
0.0
8.7
4.6
47.4
Price
growth
(in %)
Share in retail price
growth rate (in
percentage points)
Source: Re-calculated based on RSO data.
Movements in Dinar Exchange
Rate and Prices
Log
10,000
(Dec 1995 = 100)
1,000
100
10
1
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7
1996
1997
1998
1999
2000
2001
2002
2003
2004
Real effective exchange rate
Nominal effective exchange rate
Retail prices
The cost of living rose by 10.7% in the first ten
months whereof goods and services accounted for 11%
and 9.4%, respectively, exceeding by 1% the growth of
retail prices. The highest increase was reported with
food (13.6%); dwelling costs (10.3%); costs of hygiene
and health care (9.6%); and tobacco and drinks (9.2%).
Broken down by quarters, the increase in the cost
of living was somewhat slower in the third (2.8%)
relative to the second quarter when the growth reached
4.7%. In terms of monthly movements, the cost of living
matched the trends reported with retail prices: they
increased by 0.8% in July, by 0.3% in August, 1.8% in
September, and 1.0% in October.
27
October 2004
Economic Review
In the first nine months the industrial producer
prices rose more rapidly than retail prices. In September
2004 they exceeded by 9.8% the level reported in
September 2003. Within the overall price growth in this
area, the prices reported in extractive industry increased
by 12.3%, those in processing industry by 9.5%, and the
prices in electricity, water and gas production by 11.5%.
Broken down by purpose, the highest growth was
recorded with intermediate goods (13%), which will
also be reflected in the movements of prices in the
coming months, while the prices of investment goods
and personal goods rose by 7.1% and 7.3%, respectively.
Within the overall industry, relatively higher
growth was reported with the prices of cellulose and
paper, metals and metal products, means of
transportation, liquid fuels and lubricants, and farming
machinery and tools.
Agricultural producer prices, as reported by the
official statistics, fell by 3.8% in July relative to the
previous quarter, which was the usual seasonal drop. In
the period from January to July 2004, these prices rose
by 3.4% or less than retail prices and the cost of living.
This was undoubtedly supported by high crops and the
abundantly supplied domestic market with agricultural
products. Compared to the same period of 2003, these
prices rose by 13.8%, and their average monthly growth
in the period July 2003-July 2004 ranged around 1%.
Oil price movements
1999-2004
(in USD)
55.00
50.00
45.00
In September 2004 prices of catering services in
Serbia rose by 6.4% compared to December 2003.
Within the overall price growth in this area, soft drinks
accounted for 8.8%; food for 7.2% (hot and cold starters
11.6% and bread 9.2%); and alcoholic drinks 5.8%.
High demand and, to a certain extent, the unstable
global geopolitical situation in the past few months have
largely contributed to the rise of oil prices and their
persistently high level in the world market. These
circumstances coupled with the fact that the level of oil
supply is relatively low resulted in the record oil prices.
In October oil prices were beyond USD 50 per barrel,
and the country's import prices in October, including
related costs, exceeded USD 46 per barrel.
40.00
35.00
30.00
25.00
20.00
15.00
10.00
9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9
1999
2000
2001
2002
2003
2004
Source: Future trading charts.
28
In the first seven months of 2004 a rise in prices
was reported with the last year's corn crop (31.1%);
cattle for slaughter (beef cattle 14.2% and swine 25.9%);
fruit (6.5%); and vegetables (7.9%). Falling trends were
recorded with other agricultural producer prices.
Seasonal growth of agricultural producer prices is
expected in the fourth quarter.
The daily average oil output reported by the OPEC
members in the third quarter ranged around 29.5 million
barrels, or considerably over the output recorded in the
Economic Review
October 2004
same period of 2003. The growth was mostly supported
by the Middle East countries. At one of their meetings
the OPEC member countries (excluding Iraq) agreed
that their daily output rate would increase to 27 million
barrels as of November. The decision was primarily the
result of the excessive market fluctuations, record
prices, relatively low stocks, and expected increase in
demand over the coming winter months.
The extensive growth in demand for oil (the
highest ever seen in the last 25 years) recorded over the
past few months was caused by the overall economic
recovery, above all, in North America, Latin America,
China, and South Asia. These trends are expected to
continue in the coming period, particularly taking into
account the winter season ahead.
Serbia's economy was also affected by the
movements seen in the world oil market. High prices of
oil, as undoubtedly the country's major imported
product, resulted in adverse effects in terms of its
balance of payments, with further direct or indirect
impact on the retail price index.
The world prices of primary products recorded
cyclic movements in the period 1994-2004 coupled with
the clear upward trend. In particular, this trend was
apparent in 2004. In the first nine months of 2004 the
USD prices of primary products in the world market
rose by 26% and reached the highest level ever reported
in the observed period.
Primary products price indices
(1995 = 100)
180
160
140
120
100
80
60
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: IMF Webpage, Oct. 2004
Industrial Output
in the Republic of Serbia
(2003 = 100)
Economic Activity
After the last year's drop by approximately 3%, the
past months of 2004 have seen considerable growth of
industrial activity. In the first nine months, as reported
by the official statistics, industrial production rose by
6.9% relative to the same period 2003, with the increase
in physical volume of production recorded by
processing industry (9.8%), while a drop was reported
by the production and distribution of electricity, gas and
water, and the production in extractive industry (1.8%
and 0.2%, respectively).
According to the data reported by the RSO, in
September 2004 the stocks in processing industry were
11.1% below the level reported at the end of 2003, as
opposed to the 5.6% increase recorded in extractive
industry (increasing winter coal reserves, etc.).
120
120
110
110
100
100
90
90
80
9 12
2001
3
6
9 12
2002
3
6
9 12
2003
3
6
80
9
2004
Seasonally unadjusted
Seasonally adjusted
Trend
29
October 2004
Economic Review
INFLATION − MEASURING METHODS
Price stability is one of the main objectives of monetary policies pursued by most central banks. It is
achieved by comprehensively analyzed price movements. The purpose of the analysis is to have long-term
price movements reliably identified as early inflatory or deflatory warning signals. Even in the countries
where the monetary policymakers opted for inflation targeting in their monetary policies, with the clearly
defined target (retail price index or cost of living index), it appears that the implementation of monetary
policies may be improved by controlling (supervising) some other inflation measures in order to achieve the
price stability.
The retail price index computed by the official statistics is not an adequate measure of inflation in terms
of the operation of monetary policy, as it may frequently be exposed to occasional or transitory price
movements (seasonal fluctuations). Moreover, external shocks (such as the rising prices of oil or other
primary products in the world market) make a considerable impact on price movements (see Economic
Review, July 2004). That is why the core inflation is increasingly used in the world as the indicator of inflation
affected by monetary policies which does not take into account any temporary or occasional price changes.
There are two underlying approaches in measuring core inflation. The first measures it with respect to
the analyzed time series of retail price index, also taking into account other macroeconomic variables (GDP,
interest rates …). The other method involves the analysis of components making the aggregate index (cross
section analysis) where the issue is the aggregating level used for measurement, i.e. whether groups of
products or particular products should be taken into account.
The most widely known methods for measuring core inflation are:
− Exclusion-based method
− Limited influence estimator method
− Double weighting (DW) method
− Structural VAR models.
The exclusion-based method is most widely used in measuring core inflation. The components that are
systematically excluded each month are mainly the prices of electricity and food, as they are generally the
most volatile prices. In some cases the whole groups of these products are excluded, and sometimes the
exclusion only involves particular components within such groups. The effect of oils prices in the world
market, as well as the seasonally varying prices of agricultural products, make one of the reasons to use this
model. Sometimes, it is because of the administratively controlled prices including the prices of transport
services, utilities, and PTT services, etc.
The limited influence estimator method removes from the overall retail price index all components
with the lowest or extreme price changes relative to the average in the same month and, therefore, the
excluded group of products varies from month to month. Two methods should be noted within this approach;
symmetric and asymmetric trimmed mean. The symmetric trimmed mean (TM) method uses the following
formula in measuring core inflation:
30
Economic Review
πα =
October 2004
1
α i∑
1 − 2(
) ∈I α
100
ωiπ it
The measure π α is determined by distributing the retail price index components π it with their respective
weight ω. i The set of components to be averaged ( Iα ) includes the prices of products for which the cumulative
weights Wi = ∑ ω i χ i range between α/100 and 1−α/100. The percentage of products to be excluded for
measurement (in addition to the zero weight) is determined by the parameter α. With α=0 the weighted mean
is derived, and with α=50 it is the weighted median.
In computing the asymmetric trimmed mean, the assumption is that the asymmetry exists in the data
and the components generating the overall index are, therefore, asymmetrically excluded:
π α 1 ,α 2 =
1
ωiπ it ,
α + α 2 i∈∑
1− ( 1
) I α 1α 2
100
where the set of components to be averaged ( I α1 ,α 2 ) includes the prices of products for which the
cumulative weights Wi = ∑ ω i χ i range between α1/100 and 1−α2/100. With α1=α2, the trimmed mean is
derived.
The DW method modifying the existing weights depending on the variability of individual index
components combines the existing weights ω i with those reflecting the variability of a given component
over time ηi . Namely, the existing weights are modified depending on the variability of a given component
and, consequently, the weight will be lower as the variability of a given component increases.
n
πt =
∑ω η π
i =1
N
i i
∑ω η
i i
it
∑ω π
i∈ I α
i
it
, with
1
σi
ηi = N
1
∑
i =1 σ i
where π it is the i-th component price index in a given month, ω i the existing weight of the i-th aggregate
index component, σ i the i-th component standard deviation.
With the structural VAR models core inflation is measured taking into account other macroeconomic
indicators. Core inflation is the SVAR model residual which, in addition to inflation, also uses the series of
industrial production, interest rates, etc. …The method highlights the independence of price movements
relative to the overall economic growth and supply shocks (e.g. growth of industrial production or changes in
oil prices).
31
October 2004
Economic Review
The qualities of the core inflation indicator should be:
− Useful in forecasting the future inflation rate in short and long term;
− Immune to supply shocks;
− Variable to the least possible extent;
− Highly correlated to the chosen monetary aggregate;
− Clear guideline for monetary policymakers;
− Neutral relative to economic growth in the long run.
The choice of the core inflation measurement method depends on the purpose for which the analysis
would be used, and on the needs of monetary policymakers.
If the results are to be disclosed in public, the exclusion-based method appears to be most appropriate as
it is transparent and easily explained. The use of SVAR models is helpful to the extent that they allow
forecasts, however, on the other hand, the monthly value of core inflation varies with each new information
captured. Trimmed mean requires each monthly information to be thoroughly analyzed, and it lacks
transparency as the excluded components vary from month to month. Moreover, the method itself could
hardly be understood by general public.
After core inflation has been measured for the particular period, it is compared to some of the long-term
trend measures of overall inflation. The centered 12-month or 24-month moving average is mainly used for
these purposes. The best measure is determined by using the RMSE (root mean square error) statistics.
Core Inflation in Serbia
Retail prices are prices at which retailers, individual farmers and service providers sell their products and
services to final consumers including the sales tax. The retail price index measures the changes in retail prices
and is computed taking into account 533 types of goods and services, with goods further divided to
agricultural and industrial products (industrial products, foodstuffs, tobacco, drinks and industrial nonfoodstuffs). The index is derived by using Laspeyres' formula:
Ρn
∑Ρ ω
Ι=
∑ω
0
0
0
where Pn is the current month, P0 the base period price, and ω 0 the value of products sold in the base
period. Irrespective of the reporting base, the price index is computed taking into account the weights
reflecting the value structure of products and services sold with a year in each trading stage. The weights
computed in this manner are used for 4-5 years, while they are adjusted for the previous year's relative price
changes at the beginning of each year.
∗ ∗ ∗
The data series for retail prices in the period from January 1997 to September 2004 have been used in
computing the core inflation index in Serbia. The asymmetry was apparent in the data relating to this period.
Namely, if the positive asymmetry exists (longer right tail on the histogram), the arithmetic mean exceeds the
median. This is one of the reasons why the weighted arithmetic mean (as the official statistics measurement
method) is an imperfect price change indicator.
32
Economic Review
October 2004
Histogram
Series: Retail prices
Sample 1997:01 - 2004:09
Observations 93
35
30
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
25
20
15
10
5
0
100
105
110
115
120
125
Jarque-Bera
Probability
The centered 12 month movable retail price index (RPI (12))1 was used as the benchmark model by which the
inflation movements are best approximated in long term. In further analysis all core inflation measurement methods were
compared to this model.
Retail Price Movements
(growth rates, %)
28
24
20
16
12
8
4
0
-4
1
5
9
1997
1
5
9
1998
1
5
9
1999
1
5
9
2000
1
5
9
2001
1
Original data
5
9
2004
1
5
9
2003
1
5
9
2004
CMA(12)
In measuring core inflation by the trimmed mean method, the lowest data aggregating level was used (individual
products and services), as well as the respective current weights.2 After α was varied in the range from 11% to 17%, the
resulting measures were compared to the centered 12 month moving average. Taking into account the RMSE statistics,
the conclusion is that the 12% trimmed mean minimizes the observed statistics.
1
The 12 month centered moving average was chosen with respect to the short period for which data are available.
2
Current weights are adjusted core weights based on relative price changes.
33
October 2004
Economic Review
RMCE
Symmetrical Trimmed Mean
11%
12%
13%
14%
15%
16%
17%
Exclusion percentage
Within this exclusion percentage (12%) the asymmetric tail trim percentage was varied to compute the asymmetric
trimmed mean. Based on the RMSE statistics, the best option appeared to be the exclusion of 6.5% products with the
highest and 5.5% products with the lowest price growth.
The special symmetric trimmed mean case was also computed, with α= 50% (25% products with the highest and
25% with the lowest price growth), and resulted in the weighted median.
By modifying the existing price index component weights one more measurement of core inflation was produced
(DW). In terms of products, the highest variability related to seasonal fruit and vegetables, which were followed by PTT
services. The price growth components were associated to the new weights3 which are lower than those existing if the
variability of a component is higher and vice versa. The arithmetic mean was then computed.
The NBS Research Department uses the exclusion-based method in measuring core inflation. Controlled prices
are excluded from the retail prices index. The following products are excluded: bread and flour; fresh milk; tobacco;
household electricity; liquid fuels and gas; pharmaceuticals; petrol and gas oil; utilities and housing services; transport
and PTT services; children and youth welfare services. The choice is not to exclude seasonal fruit and vegetables
(although their prices vary to a considerable extent) as, in such case, the percentage of excluded products would be too
high. The percentage of controlled prices in retail price index ranged around 45% in the last two years.
The annual retail price indexes and core inflation rates measured by applying different methods are shown in the
table and chart below:
Annual growth rate
Retail prices
Exclusion method
Modified weights method
Trimmed mean 12%
Asymmetrical Trimmed mean
Weighted median
1998
1999
2000
2001
2002
2003
2004 4
44.4
47.9
50.5
33.0
31.8
6.4
45.4
72.3
53.4
37.3
35.6
2.8
111.9
104.8
124.5
76.8
73.4
8.0
40.7
22.8
45.8
15.4
14.3
4.0
14.8
6.0
17.7
6.6
6.0
4.6
7.8
5.4
9.0
4.0
3.5
4.5
9.2
7.5
8.9
6.3
6.0
3.4
3
Variability or standard deviation was measured for the entire observed period. It is possible to measure it for a shorter observation time interval (e.g. six months) and to
modify the existing weights by such measure.
4
34
Growth in September 2004 relative to December 2003.
Economic Review
October 2004
Annual Growth Rates of Various Inflation Parameters
140
120
100
80
60
40
20
0
1998
1999
2000
2001
2002
2003
2004
Retali prices
Exclusion method
Modified weights method
Trimmed mean 12%
Asymmetrical trimmed mean
Weighted median
It may be noted that the double weighting method constantly overrates the inflation measured by retail prices, while
the value of weighted median is lower than retail prices in all observed years. In this context, these two measures should
not be taken into account in monitoring core inflation.
To assess which of the described methods would be the best in measuring core inflation in Serbia, the assumed
inherent qualities of such measure were considered.
In particular, if the RMSE statistics is pointed out, it is obvious that the asymmetric trimmed mean results in the
lowest value of such statistics. This means that the asymmetric trimmed mean produces the lowest mean square error or
that it reflects the lowest deviation from the long-term inflation trend (measured by 12 month centered moving average).
It may be concluded that this method provides the best explanation of inflation movements in long term.
The weighted median appears to be varying to the least extent which is only logical, as it excludes as much as 50%
of products (25% of products with the highest and 25% of those with the lowest price growth) in the observed month.
The most variable inflation measuring method (following retail price index) is the exclusion-based method.
Inflation calculation method
RMSE
Exclusion method
Modified weights method
Trimmed mean 12%
Asymmetrical Trimmed mean
Weighted median
3.1664
2.9302
2.9317
2.9295
2.9997
3.2967
Exclusion method
STDEV
3.693
3.597
3.092
3.041
2.701
3.778
One of the attributes of the core inflation measure should be its quality to be useful in forecasting the future
inflation rate. For this purpose, regressions were developed using the equation:
πt+h - πt = α + β(πtcore - πt) + εt ,
where π is the overall inflation measured by retail price index; πcore is the core inflation indicator. The parameter h is the
forecasting time interval. The forecasting capacity of the computed inflation measures was tested for the interval of three
and six months.
35
October 2004
Core inflation calculation method
h=3
Exclusi on method
Modified weights method
Trimmed mean 12%
Asymmetrical Trimmed mean
Weighted median
h=6
Exclusion method
Modified weights method
Trimmed mean 12%
Asymmetrical Trimmed mean
Weighted median
Economic Review
R2
Coefficient
t-sstatistics
0.24
0.01
0.01
0.01
0.01
0.37
0.2
-0.01
-0.01
-0.01
5.31
0.62
-0.19
-0.25
-0.79
0.37
0.01
0.01
0.01
0.01
0.82
0.03
0.01
0.01
-0.01
7.12
0.39
0.20
0.13
-0.51
As shown in the tables, it may be concluded that the exclusion-based method has the best forecasting capacity. Not
only the regression explanation ( R2) has the highest value, but this is also the only core inflation indicator where the β
coefficient is statistically significant. Granger's causality test was also conducted for this purpose. It shows that, if the
correlation only exists in one direction (changes in core inflation preceded by changes in overall inflation, but not vice
versa), then the overall inflation forecasts are possible based on core inflation. The test showed that all measuring
methods, except the double weighting method, may be useful in forecasting inflation.
The computed highly correlated money supply to all core inflation measuring methods is one more reason for
monetary policymakers to analyze price changes which exclude any seasonal, external and other factors uncontrolled by
monetary policy. The double weighting method appears to be most correlated to the money supply M1 indicator.
Core inflation calculation method
Correlation coefficient against M1
Exclusion method
Modified weights method
Trimmed mean 12%
Asymmetrical Trimmed mean
Weighted median
0.925
0.968
0.924
0.919
0.907
The presence of unit root was also tested in the observed series. Dicky Fuller's test showed that all observed series
were non-stationary, except for the data produced by the weighted median method. This measuring method appears to
be the best in excluding seasonal effects. By excluding 50% of products with the highest and lowest price growth each
month the series breaks are lost, while they exist in the original data, which makes the computed series stationary, least
variable and least affected by seasonal factors. The seasonality is most pronounced in the core inflation series measured
by the exclusion-based method.
∗∗∗
As demonstrated by the analysis, there is no the unique and "best" measure in computing core inflation. Depending
on the purpose for which the measured core inflation is to be used, its measuring method should be chosen. The NBS
Research Department has opted for the exclusion-based method for a number of reasons. Above all, because the method
is clear and easily understood by general public. The list of excluded products remains unchanged and identical every
month. Any significant increase in a number of excluded controlled prices is anticipated well in advance (e.g. electricity
prices) which partly facilitates the overall inflation forecasts based on core inflation. Moreover, this measuring method
has proved to be effective in terms of its forecasting capacity.
36
Economic Review
Broken down by purpose of different groups of
products compared to the 2003 average, the increase
was reported in the production of capital goods (21.3%);
production of intermediary goods, except energy
(12.7%), whereas a decrease was recorded by the
production of durable and non-durable consumer goods,
and energy production. The considerable growth
reported in the second quarter (May and June) was
followed by a slowdown in industrial production caused
by seasonal factors in July and August. The estimates are
that the utilization rate in industrial capacities is still on
the low side, in particular in most of processing
branches of industry where it hardly exceeds one third of
installed capacities. On the other hand, the utilization
rate considerably increased in electric power supply
industry. Industrial production is expected to continue
its further growth in the coming months and, as
estimated, it should reach 6.5% by the end of the year.
The latest reports point to the high growth recorded
by the production in agriculture following the last
year's drought and other adverse weather conditions.
This year's high crops were largely favored by weather
conditions, particularly with cereals, vegetables and
fruit. The overall wheat crop exceeded 2.5 million tons,
with the average of over 4 tons per hectare. A significant
increase was reported in this year's production of
raspberries, sour cherries, cherries, apricots, and grapes.
The estimates are that this year's corn yields and
market surpluses will exceed 7 million and 2.5 tons,
respectively. Yield per area is also expected to be high.
The overall sown area reached approximately 1.3
million hectares, and the estimated average yield of
more than 5.5 tons per hectares would be considerably
above the average reported in the last 13 years. This
year, sunflower was sown on 230 thousand hectares, and
the yield is expected to exceed 450 thousand tons
including sufficient quantities intended for exports.
Most sown areas produced more than 2 tons per hectare.
Some 85% reaped sunflower fields produced more than
410 thousand tons of stored crop. Domestic vegetable
oil works are this year expected to export approximately
100 thousand tons of sunflower and soya oil which
would make the supply in the local market less
excessive.
The domestic market supply of beef cattle and
swine is still insufficient with respect to the livestock
devastation following last year's droughts, but the
increasing fodder output will contribute to the gradual
recovery of cattle breeding production and the expanded
supply of cattle breeding products, as well as to the more
effective replenishment of commodity reserves in the
coming period.
October 2004
Finished Products Stocks
(indices, 2003 = 100)
108
106
104
102
100
98
96
94
92
9 12
2001
3
6
9 12
2002
3
6
9 12
2003
3
6
9
2004
Finished products stocks
Trend
Non-seasonal data
Real Volume of Retail Trade
(2003 = 100)
130
120
110
100
90
80
70
60
9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9
2001
2002
2003
2004
Seasonally unadjusted
Seasonally adjusted
37
October 2004
Economic Review
According to the preliminary statistical data, retail
trade reported in the first three quarters rose by 14.8%
relative to the same period of 2003. This year's
significant growth of trade was supported by increased
exports, particularly consumer goods, and the real rise in
wages. Introduced cash registers aimed at creating the
conditions to legalize trade and, consequently cash
flows, also gave an impetus (though one-off) to the
growth of trade in the third quarter. The implementation
of cash registers is already under way with the first and
second group of taxpayers. The objective is to have the
retail market effectively fiscalized by the end of the year
when the Value Added Tax Law will come in force.
Turnover in Trade and Transport
(2003 = 100)
145
135
125
115
105
95
85
75
65
9 12
2001
3
6
9 12
2002
3
6
9 12
2003
3
6
9
2004
Physical volume of retail trade
Freight transport (in km)
Passenger transport (in km)
In the first six months of the year, construction
activity (measured by effective hours worked) rose by
5% compared to the same period of 2003. The aggregate
cost of completed construction works reached CSD 21
billion, and increased by 43.2% or 32% in nominal or
real terms, respectively. The growth of overall
construction activity and the launched structural reforms
in this sector resulted in the increasing number of
workers employed on construction sites in the period
January-June which exceeded by 15.4% the number
reported in the same period of 2003. The estimates are
that the construction activity had the same trend in the
third quarter of 2004.
Effective Work Hours on Construction
Sites
(indices, 2003=100)
125
115
105
95
85
Construction industry is undoubtedly far below the
resources of the Republic of Serbia, due to the
substantial administrative barriers still existing in the
process of obtaining approvals and building permits,
which takes much longer than it should taking into
account the applicable regulations.
75
65
55
45
6 9
2001
12
3
6 9
2002
12
3
6 9
2003
12
Original data
Trend
Non-seasonal data
38
Transport and telecommunications activity rose
by approximately 15% in the first six months of the year
relative to the same period of 2003. The increase was
reported in all three types of transport: land (0.2%),
inland water (14.9%), and air (3.6%). The volume of
services in passenger and freight transport increased by
1.5% and 0.7%, respectively. The overall growth in
terms of physical volume of services in these industries
was particularly contributed to by post and
telecommunications services (the first half of 2004 saw
a 30.5% increase compared to the same period of 2003).
As estimated by the NBS Research Department, the
trends reported in the third and fourth quarters have
pointed to continued growth of transport services.
3
6
2004
In the first nine months tourist trade (measured by
reported overnights) in the Republic of Serbia fell by
0.7% relative to the same period of 2003. An increase by
8.3% in overnights and by 16.2% in arrivals was
recorded with foreign guests as opposed to domestic
guests with the reported 5% and 1.9% decrease in
arrivals and overnights, respectively.
Economic Review
The draft Tourism Law prepared in compliance
with the EU legislation was adopted by the Government
of Serbia. It should encourage the development of
tourist industry and govern the operations in this area.
As provided by the draft Law, the former dual pricing
system (higher prices for foreign guests) would be
abandoned, and a special tourist fee introduced, with
20% directed to the budget, and 80% retained by the
local government. Furthermore, the draft provides for
the tourism development fund which would be created
to facilitate intensified investment in the area of tourist
trade through less expensive loans. The fund will be
financed from revenues generated by the tourist fee and
from the budget of the Republic of Serbia.
Foreign exchange proceeds earned by tourism in
the first nine months stood at USD 160 million. The
figure is expected to reach approximately USD 215
million by the end of the year, or 20% over the level
reported in 2003.
October 2004
Real turnover in catering industry and
overnight stay of tourists in Republic of
Serbia
(indices, 2003 = 100)
145
140
135
130
125
120
115
110
105
100
95
90
85
80
75
70
65
9 12
2001
3
6
9 12
2002
3
6
9 12
2003
3
6
9
2004
Tourists’ overnight stay – total, original series
Tourists’ overnight stay – total, non-seasonal
Real turnover in catering – constant prices
Domestic Demand and Public
Sector
*Note: Up to 2003 data includes all types of property ownership,
whereas from 2003 on, private property is excluded
The aggregate demand and final consumption
continued to grow in the past nine months of 2004, both
in nominal in real terms. As the increase in aggregate
demand was more intensive than in domestic supply, the
gap was covered by imported goods and services. This
is still one of the major structural issues in the economy
of the Republic of Serbia which needs to be gradually
balanced, as this would be the way to mitigate the
problem of foreign debt.
Total Public Income Movements
(indices, Dec 2000 = 100)
300
The used indicators of the trends recorded in real
aggregate demand relative to supply included the
reported movements in average wages, retail trade,
consumption taxes (turnover and excise taxes), and the
information on the overall volume of bank lending.
250
These indicators revealed that the real wages rose
by 11.7% in the first nine months relative to the same
period of 2003 (by no more than 0.1% in the third
against the second quarter); real revenues from turnover
and excise taxes increased by 10.6%; and the volume of
retail trade, as reported by the statistics, rose by 14.8%.
The preliminary NBS data as at the end of September
show that the overall bank lending exceeded by 5.1% in
real terms the level reported in September 2003.
150
The approved Revised Budget of the Republic of
Serbia for 2004 provides for the reduced budget deficit
from the original CSD 45.3 to 32.7 billion. The reduced
200
100
50
0
9 12
2001
3
6
9 12
2002
Nominal
3
6
9 12
2003
3
6
9
2004
Real
39
October 2004
Economic Review
budget expenditures should result in the narrowed fiscal
deficit by CSD 12.6 billion, or from the originally
projected CSD 374.6 billion to CSD 362.0 billion, while
the projected revenues should remain unchanged at CSD
329.3 billion. On one hand, the revised budget provides
for reduced expenditures by CSD 24.7 billion, as
opposed to the increase by CSD 12.1 billion in other
items. The highest reductions are planned under the
items of transfers to other government levels (5.6bn);
buildings and facilities (5.0bn); and subsidies (5.0bn).
The highest increase was planned under the items of
transfers to statutory social insurance organizations
(8.0bn) and external debt servicing (2.4bn). Taking into
account that some 70% expenditures under the (revised)
budget were reported in the first nine months, it may be
expected that the revenues and expenditures to be
recorded for the whole year will be at the projected
level. As planned in the revised budget, the deficit
should be funded by the proceeds from privatization
(5.5bn), international credit facilities and grants (8.9bn),
and net domestic financing (18.3bn).
Budgetary Incomes and Expenditures in
the Republic of Serbia
(in million dinars)
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
-5,000
9 12 3
2001
6
Incomes
9 12
2002
3
6
9 12
2003
Expenditures
3
6
9
2004
Deficit
Following the measures taken for the purpose of
more efficient collection of revenues, reduced
expenditures and other steps in the area of fiscal policy,
gross collected public revenues in the first three
quarters were much higher than in the same period of
2003. As reported by the Public Payments Agency, gross
allocated public revenues including social security
revenues stood at CSD 465.3 billion, i.e. 22.4% in
nominal terms or 12.1% in real terms over the level
reported in the first nine months of 2003.
Within the overall gross allocated public revenues,
public revenues accounted for CSD 335.2 billion, and
social security revenues for CSD 130.2 billion, and
increased in real terms by 12.1% and 15.7%,
respectively, relative to the same period of 2003. The
nominal growth of public revenues was mostly
supported by social security benefits (7.4 percentage
points); taxes on goods and services (7.3 percentage
points); and income, profit and capital investment taxes
(2.5 percentage points). Within the overall allocated
public revenues, relatively more rapid nominal growth
was reported with administrative and court duties
(36.7% and 36.1%, respectively); retirement and
disability benefits (41.4%); retirement and disability
benefits payable by the self-employed (52.2%); and
income from other sources.
The government has increasingly used the sale of
government bills to bridge short-term liquidity gaps in
the budget. Considerable proceeds have been generated
in this way since the beginning of 2004. Government
bills are issued with the maturity of 90 and 180 days, and
the yield rate (implicit interest rates) is generally in the
range of 22-25% p.a. accrued by conform method. The
40
Economic Review
October 2004
total debt resulting from bills sold from the beginning of
2004 to the last auction on October 26 rose by CSD 4.49
billion, i.e. CSD 3.42 billion for bills with three-month
maturity, and CSD 1.07 billion for bills with six-month
maturity. There were 12 issues of government bills in the
third quarter, and 29 in the period from January 1 to
October 26, 2004.
This year's last 29th auction on October 26 for bills
valued at CSD 1 billion (against bids amounting to CSD
1.54 billion), with the three-month maturity and annual
yield of 22.63% (conform method) was fully realized.
Earnings
In the third quarter of 2004 net wages again
recorded a moderate rise. As reported by the official
statistics, in September the average wage stood at CSD
14,444 against CSD 13,617 in June. The real increase
relative to September 2003 was 6.7%. In the period
June-September and compared to the same period of
2003, wages rose by 11.7% in real terms, although the
growth reported in the last few months was somewhat
less intensive. Real wages reported in the third quarter
were no more than 0.1% above those recorded in the
previous quarter. Taking into account this year's
estimated GDP growth of 7.5%, it is apparent that the
growth of productivity is still exceeded by the real
growth of wages to a certain extent, but the good news
is that the difference has narrowed. It would certainly be
desirable to eliminate the gap between the rise in wages
and the growth of productivity in the coming period, and
to achieve the prevalence of the latter.
As of July somewhat higher rates have been
applied to all types of social security benefits, i.e.:
retirement and disability insurance 11%; health
insurance 6.15%; and unemployment insurance 0.75%
with the resulting reduced percentage of net wage in
gross wage from 69.2% to 68.1%. With the changed
rates, the benefits payable by employers increased by
1.1% of gross wages paid to employees. At the same
time, the 3% wage fund allocation has been revoked
since July whereby the overall benefits payable by
employers have been reduced by 1.9% of gross wages
paid to employees. The overall reduction of labor costs
(under the assumption that net wage remains
unchanged) is no more than 0.4%. The rate could be
higher, however, with companies which had paid wages
below the previously applicable base for calculation of
benefits, as the minimum base was reduced for most
categories (except for the lowest level of qualification).
Net Earnings
(Dec 2000 = 100)
320
320
300
300
280
280
260
260
240
240
220
220
200
200
180
180
160
160
140
140
120
120
100
100
80
12 3
2000
6
9 12 3
2001
6
9 12 3
2002
6
9 12 3
2003
6
80
9
2004
Deflated by cost of life figure
Deflated by industrial products prices
in EUR
41
October 2004
Economic Review
Employment
Employed and Unemployed Persons in
Serbia
(in thousands)
2,080
1,500
1,400
2,060
Employment
1,200
2,020
1,100
2,000
1,000
1,980
900
1,960
9
12
2002
3
6
Employment
9
12
2003
3
6
Unemployment
800
9
2004
Unemployment
1,300
2,040
As reported by the National Employment Office, in
September the number of the unemployed stood at
2,039.5 thousand. The figure is preliminary as it is based
on the estimated number of the self-employed and
employed in small businesses and, therefore, it cannot
be taken as a reliable indicator for the purpose of
reviewing the developments by month. Taking into
account monthly reports excluding the self-employed
and the employed in small businesses, in the third
quarter the employment fell by 1.1% or by 3.7% from
the beginning of the year, i.e. by 4.9% relative to the
same month of 2003. With respect to the estimated
rising number of the self-employed and employed in
small businesses in the observed period, the drop of
overall employment was somewhat less intensive than
specified. The estimated decrease in the employed with
all businesses (excluding self-employed) was 1.6% in
the last twelve months.
According to the data of the National Employment
Office, the number of the unemployed stood at 946.5
thousand in September, or 0.2% over the level reported
at the end of 2003. Thereof, 842.8 thousand are the
unemployed actively looking for jobs. The difference is
absorbed by people temporarily or permanently unable
to work, whether by reason of disability, serving time in
prison, etc. The unemployment rate measured by the
ratio of the unemployed to the aggregate number of the
employed and unemployed was 31.7% in September
against 31.9% reported at the end of 2003.
Since the beginning of the year 313.8 thousand
available jobs have been reported to the National
Employment Office. There have been 277.8 thousand
newly employed people in the same period, although
there are no data showing whether those newly
employed were recruited for jobs reported as available
this year. Anyway, at least 36 thousand job vacancies
speak for the fact that the extremely high unemployment
rate is not solely caused by the underdeveloped
economy and slow progress with the employment in the
newly created private sector, but partly by the inefficient
labor market.
The indicators reported by the World Bank,
however, show that the situation in this area has
considerably improved, at least in terms of applicable
regulations. Flexibility of Hiring Index fell from 51 in
2003 to 28 in 2004, and this year's Employment Laws
Index (Hiring Index/Conditions of Employment/Flexibility
of Hiring Index average) stood at 23 against 56 reported
for 2003, with the lower indexes denoting higher
flexibility.
42
Economic Review
To resolve the problem of high unemployment, job
seeking clubs are currently being opened in Serbian
towns (EU funded project) to serve as an effective link
between employers and the unemployed.
Investment Activity
According to the preliminary estimates, this year's
overall investment activity has revealed moderate
growth though lower than projected, as the inflow under
foreign direct and other investments was lower than last
year. The total investment in the first six months of the
year is estimated at approximately 15.5% of the GDP, or
much less than the level necessary for economic
recovery and below the resources of the Republic of
Serbia. Even more so, taking into account the huge
technological gap relative to industrialized market
economies which ranges between three and four
technological (and investment) cycles.
The estimates of the NBS Research Department
are that Serbia would need investments at least equal to
20% of the GDP in the short term, and 25% of the GDP
and above in the period from 2006 to 2010. Last year's
foreign direct investment exceeded EUR 1.12 billion
and reached approximately 6.5% including those
materialized and paid for privatized socially- and stateowned companies, while they will probably be much
lower in 2004.
The increased imports of equipment should be
noted as a positive development reported in the first nine
October 2004
months. These imports reached USD 1.45 billion
including general machinery (398m); machinery for
specific industries (304m); electrical machinery and
devices (293m), and spare parts (126m).
Furthermore, the estimates are that the overall
investment in Serbia will grow more rapidly in the
fourth quarter of 2004 and in 2005 than in the past three
quarters, as the political climate has partly improved
after the elections along with the intensified
privatization of state- and socially-owned companies
and banks. Serbia has finally been given a credit rating
following the first repayment of debt to the London Club
of creditors in the first half of 2004. This is why foreign
direct investment is expected to flow in more intensely,
as well as concession based investments, BOT
investments, more substantial joint ventures, and other
forms of foreign investment.
These developments should particularly be
encouraged by legal benefits available to local and
foreign investors, as enacted in the first half of the year.
They are reflected in the fact that within the fiscal
system of the Republic of Serbia, corporation tax was
significantly reduced - to no more than 10%. It is
currently one of the lowest rates applicable to the profit
fiscal taxation in Europe. The regulations also provide
for free transfer of profits earned by foreign investors in
Serbia, as well as for the option to reinvest in the Serbian
economy. Special benefits are provided to investors who
make a single investment of at least EUR 10 million and
create a number of new jobs.
43
October 2004
Economic Review
COMPARATIVE VAT EFFECTS
(Slovenia, Croatia, Macedonia and Montenegro)
• The VAT had a one-off effect in terms of the growing inflation, which was reported only in one month after it had
been introduced in Croatia, Macedonia and Montenegro, and in three consecutive months in Slovenia.
• It appeared that the insufficient liquidity of businesses, after the VAT had been introduced, was reported only within
a short period.
• Taking into account the macroeconomic indicators, no long-term effects occurred (either negative or positive). The
only thing that could be noted is that in the VAT introducing year Slovenia and Macedonia were in the upper band,
and Croatia in the lower band of the economic cycle.
• Tax revenues generated by the VAT exceeded the expectations and were in all cases above those resulting from
turnover tax.
• Structural reforms in the area of monetary policy were pursued in parallel to the reforms in the area of fiscal policy.
Monetary policy measures in the VAT introducing year were not taken to respond to the VAT, but were a number
of tools aimed at the objectives in the area of price movements, exchange rate or monetary aggregates.
VAT rate
Country
Introduced
1Jul. 1999
Slovenia
Croatia
Changes in
2001
and 2002
Standard
Special
19%
8.0%
20%
8.5%
22%
-
1Apr. 2000
19%
0% and 5%
Changes in
April 2003
18%
0% 3) and
5% 4)
Macedonia
1)
17%
Response
by Ministry of Finance
Exports
In April 2001 and October 2002 the
standard VAT rate increased from
19% to 20%, and the special rate
from 8% to 8.5%.
– Accounting period: one month
1)
1Jan. 1998
Montenegro 1Apr. 2003
VAT exempted
0% 5)
On 1Nov. 1999 a special 0% VAT
rate was introduced; accounting
Renting income; banking
period was extended from 15 to 30
services; insurance services;
days.
health services; educational – Accounting period: one month or
and cultural services
quarter (for companies with less than
HRK 300,000 total turnover,
including VAT)
On 1Apr. 2003 the standard VAT
rate reduced from 19% to 18%.
Banking services; insurance
– Accounting period: one month or
services, and financial
quarter (for companies with less than
services
MKD 25,000,000 total turnover)
Food; pharmaceuticals;
textbooks; banking, financial,
post, health and other
services; cultural services,
etc.
– Accounting period: one month
Applicable to food, pharmaceuticals, housing construction, hotel accommodation, and books.
Applicable to exports, bread, milk, pharmaceuticals, and books.
Applicable to exports.
4)
Applicable to agricultural products, electricity and transport. transport.
5)
Applicable to exports, import and export related services, and fuel for specific purposes.
2)
3)
44
Country
CROATIA
Real developments
Monetary developments
LOANS AND DEPOSITS
PRICES
- Overall lending in 1998 halved relative to 1997;
- One-off VAT introducing effect on inflation – retail prices in January rose by
2.4% relative to the previous month, and then remained stable;
- Retail lending increased by 37.3%, and corporate
lending by no more than 14.8%;
- Retail deposits rose by 11.3%, and corporate
deposits feel by 15.8% as the result of low liquidity
of businesses;
- Expanded secondary liquidity sources (option to use
bills of exchange of the Republic of Croatia and
treasury bills as collateral for Lombard loans).
- Average annual inflation was 5.7%.
Central bank activities
- The central bank reduced the required reserve ratio
to 29.5%, and expanded the allocation base to
foreign currency deposits;
Economic Review
COUNTRIES AND DISTINCTIVE EVENTS IN THE VAT INTRODUCING YEAR
- As of June 1998 the central bank started issuing its
bills in foreign currency.
OUTPUT
- 2.5% GDP growth in 1998, positive in the first three quarters, negative in
the fourth.
EXPORTS, IMPORTS
- Increased exports of goods and services by 4.5% (goods by 9.5%); Imports
of goods and services fell by 6.5% (goods by 7%).
TAX REVENUES
- Tax revenues rose by 34% in the first eight months of 1998 relative to the
same period of 1997, and expenditures increased by 19%. VAT revenues
were much higher than expected. The first external current account surplus
recorded since 1994.
MONTENEGRO
LOANS AND DEPOSITS
PRICES
- In 2003 corporate lending increased by 63%, and
retail lending by 116%;
- One-off VAT introducing effect on inflation – retail prices in April rose by
3.2% relative to the previous month, and then remained stable;
- Corporate deposits, after a 19.4% drop in April, start
increasing moderately over the next two months to
reach the overall growth by 26% in 2003;
- Average annual inflation was 7.8%.
- Retail deposits rose by 99%.
- The first effect was a 11.3% drop of output in April relative to April 2002.
Recovery followed and the output in August exceeded by 6.9% the level
reported in August 2002; 2.5% GDP growth in 2003.
OUTPUT
- In April the central bank reduced the required
reserve ratio from 50% to 23%, and expanded the
allocation base by 75%, which initially reduced the
amount of allocated required reserves by 19%
(EUR 6.6 million;
- To support the liquidity, banks were allowed to
deposit 25% of required reserves in government
bills of the Republic of Montenegro (maximum 10%
until then).
EXPORTS, IMPORTS
- Exports remained unchanged, and imports rose by 1% relative to 2002. A
considerable increase (33%) in imports had been reported in the last month
before the VAT was introduced relative to February, but in the following
month (April) they already fell by 79.5%.
TAX REVENUES
October 2004
- In 2003 tax revenues rose 52.3 34% relative to the previous year. VAT
revenues accounted for 38% of the total tax revenues.
45
46
MACEDONIA
Real developments
Monetary developments
LOANS AND DEPOSITS
PRICES
− As opposed to the downward trend on 1999 and the
first quarter of 2000, the introduction of VAT was
followed by the increase in overall lending in denars;
− One-off VAT introducing effect on inflation – retail prices in April rose by
4.8% relative to the previous month, and then remained stable;
− After the VAT had been introduced, downward trends
were reported with corporate deposits until August,
and then they started growing again.
− Average annual inflation was 10.6%.
Central bank activities
− In April the central bank reduced the discount rate
from 8.9% to 7.9% p.a.;
October 2004
Country
− Interest rate for Lombard loans reduced by 2
percentage point in May (17.5% p.a.).
OUTPUT
− 4.5% GDP growth in 2000, although the highest growth was reported in the
first three months.
EXPORTS, IMPORTS
− A considerable increase (75%) in imports had been reported in the last
month before the VAT was introduced relative to February, but in the following
month (April) they already fell by 58%.
TAX REVENUES
− VAT revenues were higher than expected;
− Percentage of VAT revenues (turnover tax) in total budget revenues rose
from 19.7% in 1999 to 27.7% on 2000;
− Budget surplus reported in 2000 was 3.5% of the GDP (as opposed to the
expected 1%).
SLOVENIA
LOANS AND DEPOSITS
PRICES
− Intensified bank lending activity after the VAT was
introduced, in particular, in respect of short-term
corporate loans;
− VAT introducing effect on prices was apparent in the first three months
(inflation rate 3.4%);
− Commercial banks increased their deposit rates
immediately after the VAT had been introduced.
− In the period April-June the central bank allowed
daily overnight facilities to commercial banks; they are
otherwise only available to commercial banks on
particular days.
− Average annual inflation was 8%.
OUTPUT
− 4% GDP growth in 2000, although the highest growth was reported in the
second quarter preceding the VAT introduction.
EXPORTS, IMPORTS
− A considerable increase in imports of capital and consumer goods had been
reported in the last month before the VAT was introduced (Jun).
TAX REVENUES
− VAT revenues (turnover tax) rose by 25.4% relative to the previous year.
Economic Review
− VAT revenues were much higher than expected, and resulted in the lower
budget deficit relative to projections;
Economic Review
October 2004
C o r e m a cr o e co n o m ic in d ica t o r s
Slovenia
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
(proj ec ti on)
Real GDP growth rate
4.1
3.5
4.6
3.8
5.2
4.6
3.0
2.9
2.2
3.5
Infl ati on grow th (av erage)
Fo re i g n t ra d e b a l a n c e
(export -iimport)
B udgetary defi c i t s urpl us
(i n % of GD P )
M2 (annual grow th)
13.5
9.9
8.4
7.9
6.1
8.9
8.4
7.5
5.6
3.7
-954
-826
-775
-792
-620
-841
-1.118
-
-0.3
-0.2
-1.7
-1.4
-0.9
-1.3
-1.2
-2.9
-1.0
-
28.1
20.5
24.3
19.8
13.2
15.3
30.4
25.1
5.23
-
35.1
13.2
14.2
22.4
19.3
16.7
16.9
12.6
11.4
-
1995
1996
1997
1998
1999
2000
200 1
2002
2003
Real GDP growth rate
6.8
5.9
6.8
2.5
-0.9
2.9
4.4
5.2
4.3
2004
(proj ec ti on)
3.4
Infl ati on grow th (av erage)
Fo re i g n t ra d e b a l a n c e
(export -iimport)
B udgetary defi c i t s urpl us
(i n % of GD P )
M2 (annual grow th(
2.0
3.5
3.6
5.7
4.2
6.2
4.9
1.7
1.8
2.5
D omes ti c l oans (annual grow th)
-1.235 -1.139
Croatia
-2.834 -3.140 -5.120 -3.758 -3.496 -3.455 -4.481 -5.818 -12.942
-1.4
-1.0
-1.9
-1.0
-6.5
-7.1
-6.7
39.3
49.1
38.3
13.0
-1.2
28.9
45.2
35.3
33.1
65.7
29
-0.8
12
23.8
1995
1996
1997
1998
1999
2000
2001
2002
2003
Real GDP growth rate
-1.1
1.2
1.4
3.4
4.3
4.5
-4.5
0.9
3.2
2004
(proj ec ti on)
4
Infl ati on grow th (av erage)
Fo re i g n t ra d e b a l a n c e
(export -iimport)
B udgetary defi c i t s urpl us
(i n % of GD P )
M2 (annual grow th)
15.9
3
4.4
0.8
-1.1
5.8
5.5
1.8
1.2
2.8
-223
-315
-386
-515
-496
-690
-526
-804
-851
-
-1.2
-0.5
-0.4
-1.7
0.0
2.5
-6.1
-3.5
-1.1
-
-
-1.1
22.9
14.4
29.7
24.4
66.3
0.3
19.5
-
-48.8
-11.5
6.8
-31.7
12.8
-10.7
-15.0
7.2
17.6
-
D omes ti c l oans (annual grow th)
-4.6
-
-4.7
-4.6
9.5
11
-
32.8
19.7
-
Macedonia
D omes ti c l oans (annual grow th)
S o u rc e : Tra n s i t i o n re p o rt E B R D 2 0 0 3 . a n d w e b s i t e s o f C e n t ra l B a n k s .
47
Economic Review
October 2004
INTERNATIONAL ENVIRONMENT
The prospects of the global economic growth in the
current and next year appear to be very favorable. As
estimated by the IMF, the global economic growth will
reach as much as 5% in 2004, and similar forecasts have
been made by independent economists and institutes.
The background for the sound economic growth is
primarily created by the highly industrialized economies
of the U.S.A., with this year's growth of approximately
4%, and of Japan which, irrespective of the weaker
performance in the second quarter, leaves the decades of
recession behind, and even by the European economies
where the growth has been somewhat faster than
expected at the beginning of the year. The global growth
has also been largely supported by extremely vigorous
economies of China, India and Russia.
Notwithstanding the bright prospects of economic
developments, there are risks that from time to time may
slow down the global economic growth. Oil prices, for
instance, once they went beyond the psychological
barrier of 50 dollars per barrel, have easily reached 55
dollars meaning that this year alone has seen an
increase by over 60%. The rise in oil demand has been
the highest reported in the past 25 years.
The current "oil crisis" reflected in high prices of oil
was not caused by supply factors, but by the growing
demand for oil and oil derivatives. Oil crises in 1973,
1979 and 1990 were caused by supply "shocks".As
revealed by most economic analyses, in the past year the
rise in oil prices was mainly driven by the Chinese
consumption coinciding with the growing demand in the
U.S.A. and some Asian countries, such as India.
of payments and budget) which might cause the dollar to
decline sharply, as well as the Chinese economy to "cool
down".
The Fed further pursued its steadily tightened
monetary policy launched at the end of the second
quarter of 2004.The cycle of gradually increased
interest rates should end in late 2005 when they are
expected to reach a neutral level. No changes were made
in monetary policies of other leading central banks,
except for the Bank of England which increased its base
rate by 0.25 percentage points; it is now at the level of
4.75% and is the highest central bank's rate in
industrialized countries.
The period was marked by exceptionally stable
exchange rates. Notwithstanding the high U.S. deficit in
balance of payments, the dollar is stable and ranges
from 1.20 to 1.25 against the euro, and the confidence of
investors in the U.S. currency has not declined. The
current deficit has been largely covered by the net
capital inflow since the beginning of the year, and the
steady value of the dollar is also favored by the rising
interest rates, i.e. the fact that they are approaching the
level of those in the euro zone. The Japanese yen, though
most exposed to high oil prices, remained stable and
varied within the narrow range from 108 to 112 against
the dollar.
In real terms, oil prices are still far below those
prevailing in late seventies, and the current oil needs per
GDP unit are halved relative to those years. Hence the
high nominal rise in oil prices has not given cause for
deep concern among economic policymakers.
The major world stock exchange indexes stagnated
or moderately declined both in the third quarter and in
2004 as a whole. The trends resulted from high
geopolitical risks and surging oil prices which made the
production more costly and gave reasons for
expectations that businesses might perform less
successfully. Consequently, investors choose safer assets
to invest in (bonds or cash) or, in pursuit of high returns,
opt for stock exchange investments in expanding
markets with the two-digit growth of indexes.
Apart from oil, the economic growth may be affected
by the risk coming from the U.S. twofold deficit (balance
Favorable economic developments experienced by
the countries which are Serbia's major foreign trade
49
October 2004
partners should have rewarding effects in terms of its
increased exports but, on the other hand, its balance of
payments and, in turn, the rise in retail prices are
affected by surging prices of oil, as the country's main
imported item. Whether Serbia will take advantage of
the global economic growth to increase its output and
exports will depend, above all, on its competitiveness.
50
Economic Review
Taking into account the latest ranking reports published
by well-known economic forums and financial
magazines, structural reforms in Serbia which are vital
for its enhanced competitiveness have not progressed at
the expected pace.
Economic Review
October 2004
Economic Developments
The overall economic growth in 2004, by all
accounts, will justify the promising forecasts. As
reported by Economist Intelligence Unit, the overall
GDP growth will reach 4.9% in 2004, but will drop to
4.2% in 2005. The IMF research has also confirmed the
2004 projections of economic growth as justified and,
according to their data, it will be 5.0%.
The growth will mostly be supported by economies
of China, Japan and the U.S.A., as well as those in the
euro zone - German and French. The projection of
growth expected in 2005 was, on the other hand, revised
from 4.4% to 4.3%. In their latest statements, after the
IMF and WB General Meeting in Washington, the
position taken by the IMF economists was that, with
respect to the most recent rise in oil prices, the current
projection of overall economic growth would be revised
to 4%. The research has shown that the economic
growth in the U.S.A. and China will not be high as
expected, and that only Japan's growth will match the
original projections.
The GDP growth reported by the U.S.A. in 2004
was also contributed to by the reduced taxes and
stimulating monetary policy. The average GDP growth
is expected to be 4.3%. The Fed's monetary policy was
more restrictive in June and August and now, after the
elections, interest rates are expected to rise further with
no more tax reductions. This will slow down the
economic growth to a certain extent, and the growth rate
is expected to be 2.8% in the period 2006 - 2008. The
administration has projected the percentage of budget
deficit in the GDP to fall down to 2,1% in the fiscal year
2008. According to the forecasts of Economist
Intelligence Unit, however, the budget deficit will
continue to grow, as well as its percentage in the GDP to
reach 4.7% in 2008. In terms of the current account and
budget deficit, continued pressures on the dollar are
expected, as well as its depreciation until mid 2005
when it should start gradually appreciating against the
euro since the dollar interest rates would exceed those
applied to the euro.
Achieved and Projected Macroeconomic Indicators
Annual growth
in %
Actual
2003
Projected
2004
GDP (world)
Industrial countries
U.S.A.
Japan
Germany
U.K.
Euro zone
Asia (newly
industrialized
countries)
Latin America
Brazil
Central and Eastern
Europe
World trade
Oil prices1) (in U.S.
dollars)
Consumer prices
3.9
2.1
3.1
2.7
-0.1
2.3
0.4
5.0
3.6
4.3
4.4
2.0
3.4
2.2
Independent
economists
4.9
2.6
4.3
4.3
1.5
3.4
1.9
3.0
9.1
-0.2
5.5
9.0
4.0
4.5
7.3
5.5
7.3
5.1
8.8
Industrial countries
U.S.A.
Euro zone
Japan
1.8
2.3
2.1
-0.2
2.1
3.0
2.1
-0.2
1.2
2.3
0.1
1.6
2.2
0.1
IMF
Projected
2005
4.3
2.9
3.5
2.3
1.8
2.5
2.2
Independent
econom ists
4.2
2.4
3.4
2.2
1.7
2.7
1.9
6.4
8.9
3.8
4.0
7.5
3.5
5.3
8.1
3.5
5.0
7.0
4.8
6.6
4.5
5.8
IMF
7.2
1.7
2.6
2.1
-0.1
2.1
3.0
1.9
-0.1
1.7
2.2
1.7
0.1
Libor – 6 months (%)
Dollar deposits
Euro deposits
Yen deposits
3.4
2.8
0.3
Source: IMF World Economic Outlook, September 2004, Economist Intelligence Unit
(monthly forecasts).
1)
The average of the prices for U.K. Brent, Texas oil and oil from the UAE. The average
oil price per barrel was $28.89 in 2003. The forecast for 2004 and 2005 is $37.25 per
barrel.
Significant GDP growth was reported by the euro
zone in the first half of year - the highest in the past three
years. Though clearly expansive, the economic growth
was much lower than the level reported in the U.S.A.
and Japan. Moreover, the growth reported by the euro
zone resulted from the increased foreign demand,
particularly the growing exports to the U.S.A. and Asia.
Domestic demand - household consumption,
investments and public consumption rose by no more
51
October 2004
Economic Review
Where does the World Capital Flow?
As reported by the IMF, with their current account deficit the U.S.A. are by far the world biggest
capital importer. More specifically, over 70% of the world net capital import flows to the U.S.A. In
addition to the U.S.A., the largest net capital importers are Great Britain, Australia, Spain, and Italy.
The leading net capital exporters are Japan and Germany. However, it is interesting that the
increasing number of developing countries are among capital exporters, such as China, Russia,
Saudi Arabia, Malaysia, and Taiwan.
The fact speaks in favor of the conclusion that most of the U.S. huge current account deficit
is no more financed by the surplus of the EU countries and Japan, as it used to be in the eighties
and nineties, but that it is increasingly funded by the surplus created by developing countries.
The unusual situation, with developing countries as net capital exporters while they would
normally be expected to import capital in the first place, is explained by the IMF by the fact that
in mid nineties and at the beginning of this century, due to the severe financial crises, quite a few
developing countries directed their economic policy strategies to increased exports in order to reduce
their foreign trade deficit. Moreover, to avoid any further financial crises and to act preventively,
most of developing countries improved the stability of their financial systems by actively preserving
the competitive rates of their national currencies, most frequently with the support of enlarged foreign
exchange reserves of central banks. Many of these countries reduced their external debt, while
foreign direct investment by industrialized countries decreased partly due to the economic stagnation,
and partly to avoid the investment risk.
The IMF experts, however, do not expect this situation to last much longer, as further progress
of developing countries strengthens their domestic demand. A slowdown should also be seen in
terms of further growth of foreign exchange reserves which would in turn result in lower surplus
reported in current accounts of developing countries. Foreign direct investment by industrialized
countries is also expected to grow in developing countries, and the current situation may prove to
be temporary.
The drop in foreign direct investment was also confirmed by the latest UNCTAD World
Investment Report 2004 showing that 2003 was the third consecutive year in which the FDI level
decreased. The record USD 1,388 billion worth of foreign direct investment in 2000 was followed
by the sharp drop to USD 818 billion in 2001. In 2002 FDI stood at USD 679 billion, and fell further
down to USD 560 billion in 2003. The main reason, of course, had been the declining global
economic activity and the resulting mergers and acquisitions which, some four or five years ago,
gave an impetus to the extensive growth of investment.
52
Economic Review
than 1.2%, and the low level of domestic demand is the
major problem of the euro zone. The growth of
household consumption was reported in some markets,
but it was still insufficient to be relevant, and the level
of investment considerably declined. Businesses lacking
financial strength and burdened by high (tax) expenses
and costly labor produced additional effects toward
declining investments and job opportunities.
The general picture, however, does not reflect the
economic developments in all euro zone countries. Two
outstanding euro zone economies are those in Germany,
with the reported 1.5% GDP growth, and in France, with
the last year's growth of 3%. Besides their GDP growth,
these two are very different with respect to other areas of
economic performance. Since 1996, the overall
household consumption rose by 22% in France, as
opposed to 8% in Germany. Capital investment was
lower in Germany, while its exports were much higher
than French exports. The French economic growth
resulted from the domestic demand, and the growth in
Germany was the result of its net exports. With the
economy oriented in this way, Germany's economic
growth would be even lower relative to France, should
any slowdown occur in the U.S. and Chinese economies
(as expected). The increase in employment and wages,
as well as in the rate of inflation, is much higher in
France. However, the lower inflation in Germany means
that the real interest rates are higher which in turn
reduces the volume of investment.
Although Japan's economic growth was slower in
the second quarter than in the first, this year's GDP
growth is still expected to reach the record level of
4.2%. This would be the period of the highest growth
reported by the Japanese economy in the past 14 years.
The driving force of Japan's economic growth is its high
level of exports, as the result of the increasing U.S. and
Chinese demand. In addition to foreign demand, the
reported growth was largely supported by domestic
demand.
The Asian developing countries also reported
remarkable economic growth in the current year,
although it is expected to slow down in 2005. The
regional GDP growth was mostly supported by China
and India. Taking into account their comparative
advantages, on one hand, other countries in the region
will have to restructure their own economies in order to
benefit from the growing economies of China and India.
On the other hand, excessive investment in some sectors
is typical for these two economies, which requires
tighter policies in these areas to avoid any investment
"bubbles". This would help reduce domestic demand in
the coming years.
October 2004
Intensive growth in 2004 was also reported by the
transition countries in East Europe and the former Soviet
Union. Their growth was supported by high oil prices,
rising demand for imports in the euro zone countries,
and foreign investments by western companies. Further
growth in the countries of the former Soviet Union,
however, may be slowed down in 2005 and 2006 when
the increase in oil output is expected to be less intensive
along with gradually declining prices.
Interest Rates
In the third quarter of 2004 the U.S. Fed held two
meetings of their Federal Open Market Committee and
on each occasion increased the interest rate on overnight
loans between banks (Fed Funds Rate) by 0.25
percentage points to the current level of 1.75%. In this
way, the Fed continued to pursue the policy of gradually
increased interest rates which create no adverse effect on
the economic expansion, and at the same time prevent
any rising inflation that may be caused by surging prices
of energy sources. The Fed's monetary policy is
generally seen by economic analysts as being in line
with the real developments in the U.S. economy, while
they believe that the Fed Funds Rate should gradually be
raised from the historically low 1% applicable for as
long as twelve months (from June 2003 to June 2004) to
avoid any threats of surging rates caused by either more
rapid economic growth than expected or any stronger
inflatory pressures.
Regardless of its three successive increases, the
Fed Funds Rate is still negative in real terms, and the
Fed's monetary policy may nevertheless be qualified as
highly expansive and stimulating for the economic
growth. The Fed's main objective is to remove the threat
of excessive liquidity in economy by gradually raised
rate to make it reach a so-called neutral level which is
neither high enough to dampen economic activity, nor
low enough to allow the inflation moving upward.
After the presidential elections on November 2,
there are two Fed meetings scheduled until the end of
the year, and at least one of them is expected to raise the
rate by further 0.25 percentage points and set it at 2% by
the end of the year. Economic analysts say the Fed will
continue pursuing the same course in its monetary
policy in 2005. This will again depend on the reported
inflation and economic growth and, consequently, by the
end of 2005 the Fed Funds Rate might reach the level
ranging from 3.5% to 4% which is considered neutral.
53
October 2004
Economic Review
The European Central Bank has kept its 2%
refinancing rate unchanged since June 2003 when it was
lowered down by 0.5 percentage points for the last time.
The ECB experts, guided by the main objective to
preserve price stability, believe that the objective has
fully been accomplished and that the inflation slightly
exceeding the targeted 2% may be explained by surging
price of energy sources. Taking into account that other
prices (above all, food and services) are falling, there are
no reasons to raise the base rate. The euro zone inflation
was 2.1% in September, measured on annual level, and
it slowed down relative to 2.3% reported in August.
While being low, the inflation is still above the targeted
level and, therefore, the ECB has no room for any
further decrease in base rate which may stimulate more
rapid economic growth in the euro zone. The ECB
officials strongly believe that its base rate is sufficient to
stimulate the economic growth and that it is at the
historically low level. The fact is that the euro zone
economic growth has moved from the standstill in the
current year, and that it will exceed the projections in
2004, while the ECB has not made any further
downward adjustments in interest rates. They are
expected to remain unchanged until the end of the year,
and the forecasts say they may be raised in mid 2005.
LIBOR on Three-Month Deposits in
2001-2004
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2001
2002
2003
2004
USD
GBP
YEN
Source: British Bankers' Association.
CHF
EUR
The Bank of Japan continues its ultra-expansive
monetary policy in line with market expectations
anticipating that it will further maintain the existing
liquidity in the financial system, to encourage the
launched economic recovery. Irrespective of the clear
signs of recovery coming from the Japanese economy
after ten stagnant years (growth of industrial output and
corporate profits, increased exports and domestic
demand), the Bank of Japan still has concerns about
deflation, or ongoing fall in prices over a longer period
which may cause the economic activity to decline and
reduce profits. Japan has reported deflation for the past
five successive years, and the Bank of Japan has no
intentions of changing anything in its monetary policy
until the rise in prices is clearly reported and this, in the
opinion of its official, could hardly happen soon. The
measures taken by the Bank of Japan and aimed at the
stability of the financial system have also been proved as
effective by its decision made in late September 2004 to
cease buying stocks of the Japanese commercial banks.
The purpose of the extraordinary decision made by the
Bank of Japan in September 2002 had been to increase
the liquidity of the financial system and to prevent the
collapse threatening the financial market.
Looking at other leading central banks in the third
quarter, a decision to raise the base interest rate by 0.25
percentage points was made in early August by the
Monetary Board of the Bank of England. The current
base rate is 4.75% and considerably above those set by
54
Economic Review
October 2004
the U.S. Fed, ECB and the Bank of Japan. The monetary
policy pursued by the Bank of England, in addition to
the targeted inflation relating to the rise in retail prices,
takes into account the rising prices of other assets, such
as securities and real estate, and it had been the
excessive growth in these prices that made it start raising
interest rates.
Currency Markets
No significant changes have been reported in
international currency markets over the few past
months.
Downward trends continued with the value of the
dollar against the euro, with relatively narrow
fluctuations (1.20-1.24/EUR). These developments in
international currency markets also reflect the current
situation in the country as proved by the performance of
the U.S. economy.
High oil prices (over 53 dollars per barrel), the
U.S. high current account deficit, fears of new terrorist
attacks, and the pre-election uncertainties are the main
issues currently shaping both exchange rates and
decisions made by investors in international currency
markets.
The record high oil prices have adversely affected
the U.S. economic performance, primarily because they
are among the biggest net oil importers. Should upward
trends in oil prices continue for a longer period, the
effects on the U.S. economy might slow down its growth
and push prices up.
On the other hand, the recovered U.S. economy
gives an additional impetus to the demand for imported
products which, in turn, increases the already high
foreign trade deficit. In the opinion of some analysts, the
U.S.A. need a daily foreign inflow of approximately
USD 1.5 billion to finance the deficit. Although to a
lower extent, foreign investors are still highly interested
in financing it. The deficit is currently largely covered
from the U.S. government bonds bought by central
banks, above all, China and Japan, but also by Hong
Kong, Taiwan, South Korea and Singapore whose
foreign exchange reserves stood at USD 1,100 billion in
late August, or 22% above the balances reported at the
end of 2003.
Nominal Effective Exchange Rates of
Major World Currencies
(1990 = 100)
150
140
130
120
110
100
90
80
70
9
2002
12
EUR
3
6
USD
9
2003
JPY
12
3
CHF
6
9
2004
GBP
Source: Bank of England.
The analysts believe that the recovery of the U.S.
economy could hardly be strong enough to permanently
attract foreign investors to the extent that the huge
current account deficit might be covered. However,
should the growth be otherwise encouraged, the dollar
would probably start rising in the short term.
55
October 2004
The expectations nevertheless are that the dollar
will probably be falling in the medium and long term,
and some estimates are that its value will range around
1.25-1.30 against the euro. The fact that it has avoided
any further drop should be attributed to the dollar
interest rates which are approaching those in the euro
zone.
After more substantial fluctuations in the first six
months of the year, the Japanese yen continued to vary
but also within narrow range against the dollar (JPY
108-112/USD). Unusually quiet international currency
markets are primarily explained by uncertainties as to
Japan's economic growth which have also been reflected
in the financial market.
Namely, a considerable drop was reported with
foreign investment in the Japanese economy, while the
domestic investors choose to invest overseas thus
helping net capital outflow to be created.
The economy of Japan, as one more large oil
exporter, is highly sensitive in the periods of surging oil
prices, and the yen is believed to be the currency mostly
affected by high oil prices. Most economists expect that
the next three months will not see any substantial
fluctuations in the yen against the dollar, and that the
high current account surplus will be more than sufficient
to make up for the private sector capital outflow in the
coming period. Further occasional interventions by the
Bank of Japan are also expected which would slow
down, but not prevent the appreciation of the yen. The
forecasts are that the yen will considerably strengthen in
the period of about six months to reach some JPY
105/USD. These forecasts mostly rely on the general
weakening of the dollar expected in the medium term.
Economists do not expect the next year's exchange
rate of the yen against the dollar to exceed JPY
130/USD.
There have been no major changes in the British
pound over the past few months. The currency was
traded within rather narrow margins of GBP 0.66-0.68
against the euro. The economic indicators which were
weaker than expected have led to additional pressures on
the British pound and brought it down to the level of
GBP 0.68/EUR which is also the lowest rate reported
since February 2004.
Although the Bank of England has kept its interest
rate at the level of 4.75%, the spread relative to the euro
zone, as well as to the U.S. dollar, is still high and also
supports the British pound, but the point stressed is that
there are no other resources to make the currency
stronger. In this context, it should be more or less
expected to keep its current level in the next six months.
56
Economic Review
Discussions are still are under way in respect of
China's foreign exchange regime including the
enormous pressure on the Chinese authorities to change
and relax their exchange rate policy. However, no
significant changes should be expected yet.
As pointed out by the Chinese authorities, they are
aware of the need to launch a more flexible exchange
rate regime, but before that they have to make all
necessary preparations, to wrap up the commenced
restructuring of the banking sector, and to "clean out"
the economy by removing inefficient state-owned
companies which report high losses and are highly
dependent on the government support.
The Chinese authorities are also criticized by their
own economists.
A country with huge foreign exchange reserves,
China also has to restructure its foreign exchange
reserves, which are almost fully held in dollars, and to
increase the euro percentage at the expense of the dollar.
Such changes would certainly be most rewarding for the
single European currency and its enhanced credibility.
Stock Markets
Stock market movements in the third quarter of
2004 were basically marked by further stagnation or
drop of major indexes in the leading industrialized
countries coupled with maintained two-digit values of
stock exchange indexes in developing and transition
countries. On some of the latter stock markets, e.g. the
Czech and Polish among the transition countries, or the
Peruvian and Venezuelan in the group of emerging
markets, stock market indexes have gone up by over
30% since the beginning of the year. Different
movements in stock market indexes of industrialized
countries and those in emerging markets are best
illustrated by the fact that a 40% overall growth of stock
market indexes was reported in emerging markets from
the beginning of 2002 to August 2004, while one of the
leading U.S. indexes, Standard&Poor dropped by 4% in
the same period. The year of 2003 was particularly
successful for stock market indexes in emerging
markets. The illustrative detail is that the market
capitalization, i.e. the aggregate asset value of all
companies listed on the Russian stock exchange, rose
from USD 140 billion in August 2003 to USD 250
billion in August 2004. The figures undoubtedly speak
for the rapidly growing value of assets in emerging
markets and the high interest expressed by domestic and
foreign investors.
Economic Review
This year's major stock exchange indexes in the
industrialized world have either stagnated to a
considerable extent or have moderately dropped relative
to the end of 2003. Last summer, particularly August,
saw extensive selling activities on stock markets, but
most of the leading indexes rose in September after all.
It was, however, a short-lived recovery and could rather
be explained by briefly adjusted months-long negative
trends than by the continued growth dating back from
2003, and the major U.S. stock exchange indexes
dropped again in the last week of September. The period
since the beginning of the year has seen remarkably
decreasing values of the leading U.S. indexes Dow
Jones (by 3%) and NASDAQ (by 5.5%), as well as the
German DAX (by 1.1%), along with a very moderate
increase in the British FTSE 100 (by 2.5%) and the
Japanese Nikkei (by no more than 1%). The weak results
reported by the leading world stock exchanges since the
beginning of the year, and in the past quarter, were
mainly caused by concerns of investors relating to the
possible increase in production costs and decrease in
consumer demand, as the result of the excessively high
oil prices. Taking into account these developments and
continued uncertainties about further changes in oil
prices, improvements in labor market and ongoing
terrorist threats, it is doubtful whether the major stock
exchange indexes will recover to any significant extent
by the end of 2004. These forecasts are also confirmed
by the reported warnings coming from many companies
included in the major indexes (in particular, Dow Jones)
which do not expect their performance in 2004 to match
the projections, due to the adverse geopolitical and
economic trends, while foreign investors have started
gradually withdrawing from some stock exchanges, e.g.
in Tokyo.
October 2004
World Stock Exchange Indexes in 2004 Q3
2004
Sep 31,
U.S.A.
(Dow Jones)
(S&P)
(Nasdaq)
Japan
(Nikkei 225)
Germany
(Xetra Dax)
U.K.
(FTSE 100)
France
(CAC 40)
Italy
(BCI)
Switzerland
(Swiss Market)
Changes in %
2004
Highest
Lowest
Dec 31, 20031)
10,136.2
10,737.7
9,814.6
-3.0
1,114.8
1,893.9
1,157.8
2,153.8
1,063.2
1,752.5
0.3
-5.5
10,786.1
12,163.9
10,365.4
1.0
3,920.4
4,151.8
3,647.0
-1.1
4,588.1
4,608.4
4,287.0
2.5
3,682.7
3,811.4
3,465.3
3.5
1,327.2
1,340.3
1,239.5
5.6
5,531.4
5,934.4
5,309.8
0.8
1)
Change in the value of stock exchange indexes is shown in the national
currency.
Source: The Economist, London, September, 2004.
Texas Oil Price per Barrel
(In U.S. dollars)
54
52
50
48
46
44
42
40
38
36
34
32
30
28
26
Serbia and International
Environment
Bright prospects of the global economic growth
both in the current and next year, and the projected
growth rates in the countries which are Serbia's major
foreign trade partners open up opportunities for the
Serbian economy to increase exports and, consequently,
improve its trade balance. On the other hand, the effects
of high prices of oil, as one of the country's main
imports, lead to the growing trade deficit and the rise in
prices exceeding the projections.
24
22
9
2002
12
3
6
9
2003
12
3
6
9
2004
Source: Economist Intelligence Unit.
57
October 2004
This issue presents the latest ranking reports
published by recognized economic institutes and
financial magazines which, taking into account their
reputation and importance, perhaps describe Serbia's
current position within the international economic
environment in the best way.
As reported in the latest Global Competitiveness
Report 2004-2005 of the Geneva-based World
Economic Forum, Serbia holds the 89th position among
104 ranked countries. Compared to the last year, when it
had ranked 77th, it was downgraded by as many as 12
positions. Among the neighboring transition countries,
Croatia also went down by 8 places, but it still ranks
much higher than Serbia and holds the 61st position. The
countries perceived by Serbia as less successful, e.g.
Bulgaria and Romania, improved their ranking by 5 and
12 positions, respectively, and now hold the 59th
(Bulgaria) and the 63rd position (Romania). The top
position is held by Finland, and the first 10 countries
include as many as 5 Nordic countries. The latest
competitiveness ranking of Serbia is a warning signal of
its increasingly lagging pace and shows that the crucial
structural reforms have not yet borne fruit to the extent
that they would enable it to have sustainable economic
growth and catch up with the countries once equally
ranked as Serbia.
The other ranking published by the well-known
financial magazine Euromoney, which measures a
country's credit risk, could hardly make Serbia proud
either. Namely, it still holds the 166th place among 185
ranked countries, the same as six months ago.
Euromoney's ranking is based on nine indicators with
different percentage in measuring credit risks: political
risk (25%); economic performance (25%); external debt
indicators (10%); debt rescheduling and default (10%);
credit rating (10%); access to bank lending (5%); access
to short-term lending (5%); access to capital market
(5%); and forfeiting (5%). Serbia and Montenegro were
ranked best in terms of debt indicators but, with respect
to the high political risk and the absence of credit rating
and, consequently, inability to access international
financial markets, the country was placed close to the
lowest position by this internationally important
ranking. Among 28 ranked transition countries, Serbia
58
Economic Review
and Montenegro are ranked 27th and are followed by
Tajikistan.
To look at the side less gloomy than the picture
painted by international rankings, and to avoid any ideas
about the country being ranked low because it is
disfavored by those producing the rankings, it should be
noted that the London magazine The Banker included as
many as 5 Serbian banks in the list of 100 leading
Central European banks ranked by equity and assets.
The highest place (58th) is held by Delta banka awarded
as the most successful Serbian bank by The Banker in
2004. It is followed by Jubanka (61st), Komercijalna
banka (65th), for the first time Panonska banka (81st) ,
and Kulska banka (89th). Even without the recognition
given by the ranking, the fact is that the reforms of the
banking system have brought the most effective results
over the past four years. The reforms implemented in the
banking sector, of course, are not sufficient to ensure a
better place for Serbia in international rankings, as much
less progress has been made in launching reforms in the
area of public administration and reduced public
consumption, as well as in terms of accelerated
privatization and corporate restructuring.
Finally, a few words about the status of the Central
European countries aspiring to join the EU in the
coming decade which are currently going through
different stages of negotiations on accession to the EU
or have not started them yet. Bulgaria has successfully
completed the EU accession negotiations in June 2004
and January 1, 2007 has been confirmed as its entry
date. Romania plans to finalize the negotiations by the
end of this year and to become a full member together
with Bulgaria. Croatia was given a status of candidate
country in June 2004 and the negotiations for accession
should commence in the first quarter of 2005. Although,
in theory, Croatia's full membership could not follow
before 2007, 2010 appears to be more realistic. The
Republic of Macedonia is expected to become a
candidate country in January 2005. This means that after
2010 the non-EU countries in the Central and East
Europe would include Albania, Bosnia and
Herzegovina, and Serbia and Montenegro.
Economic Review
October 2004
Foreign Direct Investment in the Central and East European Countries in
2002 and 2003, with Forecasts for the Coming Period
Foreign direct investment is considered the safest and the most desirable source of financing,
as an important determinant of economic growth, particularly in developing countries.1
In parallel to capital inflow, FDI provide for the transfer of modern technology which also means
improved and developed labor skills. Furthermore, FDI contributes to enhanced cooperation between
foreign and domestic businesses, makes international markets more accessible to local companies
which, if they want to survive, have to upgrade their efficiency and productivity. All this leads to
advanced competitiveness of the entire economy, improved terms of trade, increased exports, etc.
In last September the new UN study World Investment Report was published, with analyzed
global FDI trends. The overall global FDI inflow recorded a drop by 18%, and the FDI outflow rose
by 3%.
A 9% increase in the FDI inflow was reported with developing countries, as opposed to the
drop recorded with the industrialized countries (25%) and Central and East European countries
(slightly over 30%). Last year's FDI inflow in the Central and East European countries was below
the forecasts, as it had been expected to increase.
These trends were mostly influenced by the final stage of privatization both in the Czech
Republic and Slovakia. The ongoing greenfield investments in these countries are not sufficient to
make up for the FDI drop relative to the inflow which had followed the process of privatization. It
should be taken into account, however, that these two countries have been the locations chosen
by two huge automobile industries - the Czech Republic by Toyota, and Slovakia by Hyundai Motors;
as the projects would be carried out in 2005 and 2006, these years should see substantially rising
FDI inflows.
Over the past year more than 9,300 new greenfield and FDI projects have been announced
worldwide. Their aggregate value is estimated at approximately USD 400 billion and most of them
relate to China, as the country currently perceived as most attractive by investors. The U.S.A. are
the major investor, and they are followed by Japan, Germany, Great Britain, and France.
Last year the FDI drop was also reported with the group of eight countries which had joined
the EU in May 2004.
In addition to the Czech Republic and Slovakia, the FDI inflow decreased in Poland, Hungary,
Estonia, Lithuania, Latvia, and Slovenia.
Figure 1 shows the comparative FDI inflows reported in 2002 and 2003 in the first ten Central
and East European countries ranked by the FDI inflow in 2003.
Serbia's FDI inflow was USD 1.4 billion in 2003, or 140% over the FDI of some USD 0.5
billion reported in 2002. The FDI recorded in the first nine months of 2004 stood at USD 547 million,
net. The estimates are that this year's FDI inflow will reach USD 800 million.
1
'FDI as a propeller of growth', in addition to the well-known 'export oriented growth'.
59
October 2004
Economic Review
Figure 1
Comparative Review of FDI in Central and East European
Countries in 2002 and 2003
(in USD bln)
Estonia
Russia
Bulgaria
Serbia & Montenegro
Ukraine
Romania
Croatia
Hungary
Czech Republic
Poland
0
2
4
6
2002
8
10
2003
In the period 2001-2003, Moldavia, Macedonia, and Serbia and Montenegro were the leading
countries in the region in terms of the ratio of the FDI to total capital, as shown in Figure 2.
Figure 2
Share of FDI Inflow and Outflow in Total Capital (%)
World
Central and Eastern
Hungary
Bosnia & Herzegovina
Croatia
Estonia
Czech Republic
Slovakia
Bulgaria
Serbia & Montenegro
Macedonia
Moldavia
0
5
10
15
Inflow
20
25
30
35
40
45
50
Outflow
Last year Slovenia became a net FDI exporter, above all, owing to the largest domestic
manufacturer of pharmaceuticals Lek which had been acquired by Novartis in 2003. With the plants
built and production launched in Poland and Romania, the company heads the list of Slovenian
businesses by the volume of investment made abroad.
60
Economic Review
October 2004
The main objective of Slovenian, as well as Hungarian large companies is their improved
competitiveness, primarily within the region, through investments largely directed to the low GDP
Central and East European countries, but also to developing countries.
The FDI outflow from the Central and East European countries rose by 42% in 2003, with 59%
thereof originating from Russia.
In 2002 Russia had been a net FDI exporter, but its position was even more remarkable in
2003 as it ranked 21st among the countries reported to be the largest investors.
In the period 2002-2003 most of the investments made by Russian companies were directed to
the sectors involved in the use of natural resources.
One of the main conclusions in the UN study is that the FDI inflow in the sectors involved in
services (banking, telecommunications, water, electricity, etc.) has been growing in the past few
years.
In the period marked by centralized planning in economies of the Central and East European
countries, services had been rather neglected, however, the level of services (including those export
oriented) has improved over time in most of these countries making these sectors more attractive
for FDI. The apparent trends, at least taking into account the largest countries in the region (Czech
Republic, Poland, Hungary, Russia), reveal the FDI redirected to services: with the Czech Republic
and Poland, services became dominant as early as the nineties, while in Russia the redirecting
process has been somewhat slower.
As estimated by analysts, the coming period should see a considerable increase in the FDI
inflow to the Central and East European countries, both with the new EU members, and with other
countries in the region. Poland and Czech Republic are expected to attract the highest FDI in near
future. They will be followed by Romania, Russia, and Hungary, with Germany and the U.S.A. as
the largest investors. The investments will mostly be directed to the production of food and drinks,
and automobile production, but also to the sectors providing services. Furthermore, eight countries
in the Central and Eastern Europe which joined the EU last May should expect to receive some
EUR 21.5 billion jointly funded by the EU in the period of three years (2004-2006). The amount will
primarily be intended to finance basic infrastructure, investment in human resources, developed and
improved competitiveness of businesses, as well as generally improved environment. If the funds
are properly used by these countries, they will certainly become more attractive in terms of foreign
investment and, consequently, this will largely improve the investment climate in the countries of
Central and East Europe.
Many countries have made efforts to attract FDI. Changed regulations and reduced taxes are
some of the measures taken by their governments. In Serbia, for instance, corporation tax was
reduced to 10% which is the lowest rate in Europe. Moreover, the Foreign Investment Law enacted
in 2003 provided the guaranteed legal safety to foreign investors, made the opening of foreign offices
less complicated (by more simple procedures), and allowed free transfer of financial and other
resources relating to foreign investments (unrestricted imports, tax and customs benefits).
61
Economic Review
October 2004
INTERNATIONAL ECONOMIC RELATIONS
The third quarter of 2004 saw a decrease both in
Serbia's foreign trade deficit, and the deficit on the
balance of goods and services, and in the current
account deficit relative to the previous two quarters. The
foreign trade deficit fell from USD 1,671 million and
USD 1,556 million reported in the first and second
quarter, respectively, to USD 1,556 million in the third.
In the same period, the deficit on the balance of goods
and services decreased from USD 1,545 million and
USD 1,681 million to USD 1,469 million, and the
current account deficit fell from USD 808 million and
USD 710 million to USD 424 million.
The developments resulted from the economic
policy measures taken to reduce the difference between
the domestic aggregate demand based on narrowed
budget deficit and slower increase in wages and the
reported domestic output. The estimates show that the
aggregate domestic demand in the first six months of the
year exceeded the GDP by 34%, as opposed to 26% in
the third quarter.
In the fourth quarter the percentage difference
between the aggregate demand and the overall
economic activity is even expected to be somewhat lower
than in the third quarter. This means that the above
deficits, if expressed at the annual rate, should also be
lower in the fourth quarter compared to the first six
months of the year.
The lower deficit on the balance of real sector of
the country's international economic relations (goods
and services), and the high surplus on the balance of
financial segment of these relations resulted in the
substantial surplus of USD 203 million in the overall
balance of payments reported in the third quarter. The
trends toward the surplus on the overall balance of
payments are expected to continue in the fourth quarter.
In the last ten days of October, the agreement was
reached between the IMF mission representatives and
the representatives of the delegation of Serbia and
Montenegro regarding the current economic policy and
its elements for 2005 within the fourth review of the
existing three-year arrangement provided to the country
in May 2002. The agreement is expected to be approved
by the IMF Board which would enable Serbia and
Montenegro to have the new credit tranche of SDR 62.5
drawn in December. The talks particularly focused on
the need to reduce the budget deficit in this and next
year, to decrease the percentage of the public sector in
the country's overall economic activity, to cut down its
foreign trade deficit, to adjust the wage movements with
those relating with labor productivity, and to speed up
the process of privatization, and restructuring of
economy and banks.
63
October 2004
Economic Review
Balance of Payments
Balance of Payments of the Republic of Serbia
(In million U.S. dollars)
I. CURRENT BALANCE
Merchandise Trade, net
Exports
Imports
Services, net
Exports
Imports
Interests, net
Current transfers, net
Public Grants
II. CAPITAL BALANCE
Foreign direct investments, net
Medium and long-term loans, net
Short-term credits and deposits, net
Commercial banks, net
Other, net
III. ERRORS AND OMISSIONS, net
IV. OVERALL BALANCE
(I+II+III)
V. FINANCING-CHANGES IN NBS
FOREIGN RESERVES (increase-)
Source: National Bank of Serbia.
2003
Jan-Sep
2004
Jan-Sep
-1,135
-3,236
2,036
-5,272
230
716
-486
-130
1,553
348
1,885
919
710
-4
-94
354
418
-1,942
-4,964
2,466
-7,430
269
1,029
-760
-99
2,517
355
1,466
560
681
193
-44
78
516
1,068
40
-1,068
-40
Merchandise Trade of Serbia,
January-June
(In million USD)
EXPORTS
Of which:
EU
EFTA
Central and Eastern
Europe
IMPORTS
Of which:
EU
EFTA
Central and Eastern
Europe
Source: RSO.
2003
Jan-Sep
2,036.6
2004
Jan-Sep
2,466.1
Index
121.1
1,018.5
13.1
1,253.6
17.7
123.1
135.0
718.8
874.5
121.7
5,271.5
7,429.9
140.9
2,875.3
127.9
4,004.9
133.7
139.3
104.6
472.8
710.3
150.2
In the period January - September 2004 high
deficits were reported both in foreign trade, and on the
balance of goods and services, as well as in the current
account. Moreover, all of them were higher than in the
same period of 2003.
On the other hand, a surplus of USD 40 million
was reported in the country's overall balance of
payments in the first nine months. The amount was
equal to the increase in the NBS foreign exchange
reserves from the end of 2003 to late September 2004.
Foreign trade deficit rose from USD 3,236 million
in the period September - January 2003 to USD 4,964
million in the same period of 2004, or by 53.4%. In the
same period merchandise exports increased from USD
2,036 million to USD 2,466 million (21.1%), and
imports from USD 5,272 million to USD 7,430 million
(40.9%). With respect to the less rapid growth of
merchandise exports relative to imports, the ratio of
exports to imports fell from 38.6% to 33.2%.
The overall foreign trade (exports plus imports)
recorded substantially increased in the observed period
and reached 35.4% (from USD 7,308 million to 9,896
million). This points to the higher percentage of the
external sector in the country's overall economic
activity, i.e. the strengthened openness of domestic
economy to the world. Taking into account the current
low level of investment in the GDP, the imported goods
were favorably structured by purpose as approximately
76.6% of total imports were absorbed by intermediate
goods and equipment, while consumer goods accounted
for 23.4%.
In the period January - September 2004 the major
importers of Serbia's goods were Bosnia and
Herzegovina (USD 452.0 million), Italy (USD 296.5
million), Germany (USD 260.2 million), Macedonia
(USD 188.2 million), and Russian Federation (USD
111.4 million). In the same period, Serbian imports
mostly came from Germany (USD 1,016.0 million),
Russian Federation (USD 912.0 million), Italy (USD
694.6 million), China (USD 341.9 million), and the
U.S.A. (USD 297.1 million). The major countries in
terms of the overall foreign trade (exports plus imports)
were Germany (USD 1,276.2 million), Russian
Federation (USD 1,023.4 million), Italy (USD 991.1
million), Bosnia and Herzegovina (615.9 million), and
Slovenia (378.8 million).
Divided by SITC sectors, Serbia's exports in the
period September - December 2004 mostly consisted of
goods grouped by material (USD 832.8 million),
different finished products (USD 396.5 million),
64
Economic Review
foodstuffs and livestock (USD 386 million). The
prevailing sectors in imports were machinery and
transport devices (USD 2,262.0 million), products
grouped by material (USD 1,448.5 million), and mineral
fuels and lubricants (1,090.1 million). With exports
structured by SITC sections, the highest amounts were
reported for iron and steel (USD 299.8 million), fruit
and vegetables (USD 173.5 million), and rubber
products (USD 136.5 million); the prevailing imports
included oil and oil derivatives (USD 658.5 million),
road vehicles (USD 589.0 million), and general
industrial machinery (USD 397.0 million).
The deficit on the balance of goods and services
rose from USD 3,006 million to USD 4,695 million, or
by 56.2%. Exported goods and services increased from
USD 2,752 million to USD 3,495 million (26.9%), and
imports from USD 5,758 million to USD 8,190 million
(42.2%). Although the balance of services has
traditionally recorded a surplus, as opposed to the deficit
on the balance of goods, the characteristics of Serbia's
foreign trade in goods and services are similar to
merchandise trade excluding services, with respect to
the low value of exported and imported services.
October 2004
Merchandise Trade of Serbia
(In million U.S. dollars)
2,600
2,200
2,600
Imports
2,200
Exports
1,800
1,800
Trade balance
1,400
1,400
1,000
1,000
600
600
200
200
-200
-200
-600
-600
-1,000
-1,000
-1,400
-1,400
-1,800
-1,800
I II III IV I II III IV I
2001
2002
II III IV I
2003
II III
The current account deficit rose from USD 1,235
million to USD 1,942 million, or by 54.2%. Although its
growth was high in relative terms, in the past months of
the year it has been considerably lower then the deficit
on the balance of goods and services in absolute terms,
mostly owing to the high net inflow of USD 2,517 under
current transfers mainly consisting of remittances and
exchange transactions.
Irrespective of the high deficit on the balance of
goods and services, and even the substantial current
account deficit, the country's international liquidity did
not deteriorate in the period January-September. It even
improved to a certain extent, as the level of foreign
exchange reserves held with NBS exceeded by USD 40
million the balance reported at the end of 2003.
Moreover, compared to the high deficit on the
balance of real sector (goods and services) in Serbia's
international relations, which in the period JanuarySeptember stood at USD 4,695 million, the country's
external debt - excluding the debt to the London Club of
creditors (reduced by approximately 62% write-off in
the meantime) - rose from USD 10,837 million to USD
11,248 million, or by USD 411 million. This was
contributed to by the high net inflow from the financial
sector of international economic relations, with the
neutral effect on the level of external debt - surplus
items current transfers of USD 2,517 million (mostly
exchange transactions and incoming remittances); net
capital import under FDI (USD 560 million); surplus
items errors and omissions (USD 516 million), and
65
October 2004
In million
U.S. dollars
Economic Review
NBS Forex Reserves
3,750
3,500
Imports in months
3,250
Reserves
Goods and
services
imports in
months
5.5
5.0
3,000
4.5
2,750
4.0
2,500
3.5
2,250
2,000
3.0
1,750
2.5
1,500
2.0
1,250
1,000
1.5
750
1.0
500
0.5
250
0
0.0
1 4 7 10 1 4 7 10 1 4 7 10 1 4
2001
2002
2003
2004
66
7
public grants (USD 335 million). The country's overall
external debt, with respect to the partly written off debt
to the London Club of creditors, fell from USD 13,575
million reported at the end of December 2003 to USD
12,328 million at the end of September 2004, or by
9.2%.
The trends toward the surplus in the financial
position of the country's balance of payments are
expected to continue in the remaining months of the
year. Moreover, the estimates are that the positive
difference between such surplus and the deficit on the
balance of goods and services will be higher in the
fourth quarter than in the previous nine months which
would lead to further increase in the NBS foreign
exchange reserves. The forecasts also point to the lower
deficits on the balance of merchandise trade, balance of
goods and services, and current account relative to the
period January - September.
Economic Review
October 2004
SERBIA'S BUSINESS ENVIRONMENT
Many reforms have been launched and are under way in Serbia. The most important, but also the most complex
one is the reform of legislation. The objective of reforms is to create a business environment which is attractive enough
to bring foreign investors to Serbia and to provide the sound background for further development of domestic businesses.
As reported in the latest Global Competitiveness Report of the World Economic Forum1, in 2004 Serbia held the
89th position among 104 countries2 ranked by the economic growth competitiveness index. The countries in the region
upgraded in the ranking based on this index are Bulgaria on the 59th place (64th in 2003) and Romania on the 63rd place
(75th in 2003). Similar to Serbia, Croatia fell from the 53rd place in 2003 to the 61st in 2004.
Has Serbia's business environment improved less than in other countries in the region, or has it become worse?
Indirectly, the reply to the question is provided by the business environment quality indicators reported by the World
Bank3 for 20044.
1. ENTERPRISE FOUNDING
Countr y
T im e r e q u ir e d
( in d a ys in 2 0 0 3 )
T im e r e q u ir e d ( in
d a ys in 2 0 0 4 )
Number of
p r o ce d u r e s
M in im a l ca p it a l
C o st ( % o f G D P p e r
r e q u ir e m e n t ( % o f
capita) 5)
GDP per capita) 6)
Turkey
38
9
8
26.4
Romania
27
28
5
7.4
0.0
0.0
Poland
43
31
10
20.6
237.9
Bulgaria
30
32
10
10.3
116.6
Greece
45
38
15
35.2
125.7
Czech Republic
88
40
10
10.8
44.5
Albania
47
47
11
32.2
41.3
Bulgaria
48
48
13
11.6
89.5
Croatia
50
49
12
14.4
24.4
Serbia & Montenegro
44
51
11
9.5
120.3
Hungary
65
52
6
22.9
86.4
Bosnia & Herzegovina
59
54
12
46.2
65.0
Slovenia
61
61
10
12.3
19.0
5)
Total administrative costs are presented as share in GDP per capita from 1999.
6)
Minimal capital deposit requirement necessary in order to obtain a registration number, shown as share in GDP per capita from 1999.
Compared to the starting a business indicators for 2003, the situation in Serbia has not improved. In 2004, apart
from the cost which is two times lower than the average in other observed countries, other items are considerably above
average. The number of days necessary to start a business rose from 44 to 51, and the number of procedures from 10 to
11. In terms of the days required to start a business, Serbia ranked fourth in 2003 among the same countries.
Within the starting a business process, in particular, the complexity of procedures is reviewed for the transfer of
ownership at the time land and buildings are bought in larger towns. In terms of the procedures for the transfer of
ownership, Serbia is on the average within the observed group (6 procedures), and slightly below the average in terms
of necessary days (186 relative to the average of 200).
The Global Competitiveness Report 2004-2005, World Economic Forum, Oxford University Press, New York, 2004.
1
2
In 2003 Serbia ranked 77th among 102 countries.
3
World Bank website; information on the quality of business environment in different countries in 2004.
Compared to the same business indicators reported by the World Bank for 2003, changes have been made to the methodology applied for 2004, or the indicators have been
changed in full. Therefore, some items were not comparable.
4
67
October 2004
Economic Review
2. EMPLOYMENT AND LAY-OFFS
Countr y
E m p lo ym e n t f le xib ilit y
in d e x in 2 0 0 4
E m p lo ym e n t le g a l r e g u la t io n in d e x in
2003
E m p lo ym e n t le g a l r e g u la t io n
in d e x in 2 0 0 4
Bosnia & Herzegovina
78
49
49
Greece
78
67
66
Romania
78
54
63
Croatia
61
65
57
Czech Republic
44
36
28
Turkey
44
55
55
Bulgaria
33
53
28
Bulgaria
33
50
38
Serbia & Montenegro
28
56
23
Slovenia
28
59
53
Albania
11
41
30
Hungary
11
54
40
Poland
11
55
34
With respect to the hiring and firing workers indicators, the situation in Serbia has improved compared to 2003.
The flexibility of hiring index fell from 51 to 28, and the employment laws index from 56 to 23. The lower values of
these indexes mean higher degrees of flexibility in hiring and firing, or temporarily employed workers.
3. LEGAL DISPUTES RESOLUTION
T im e r e q u ir e d
( in d a ys in 2 0 0 3 )
T im e r e q u ir e d
( in d a ys in 2 0 0 4 )
Number of
p r o ce d u r e s
C o st s
( in % d e b t va lu e )
Greece
315
151
14
12.7
5
Czech Republic
Bosnia &
Herzegovina
Turkey
270
300
22
9.6
6
630
330
36
19.6
2
105
330
22
12.5
2
Romania
225
335
43
12.4
2
Hungary
365
365
21
8.1
5
Albania
220
390
39
28.6
3
Croatia
330
415
22
10.0
4
Bulgaria
410
440
34
14.0
2
Macedonia
509
509
27
32.8
4
Poland
1,000
1,000
41
8.7
4
Slovenia
1,003
1,003
25
16.3
4
Serbia & Montenegro
1,028
1,028
36
23.0
3
Countr y
7)
7
D a t a a va ila b ilit y in d e x
Court costs in legal disputes resolutions are shown as share in total outstanding debt to creditors that is the subject of the legal dispute.
Enforcing contracts appears to be still inefficient in Serbia. The values of all three relevant indicators are above
the average of the observed group of countries. The number of days needed to have a dispute resolved is 1,028, or equal
to the number reported in 2003, while the number of procedures fell from 40 to 36. The number of days has apparently
not decreased with any of the countries in the group. With some countries, the number of days increased. The exceptional
decrease in this indicator was reported for Bosnia and Herzegovina, where the number of required days fell from 630 to
330 relative to 2003, and for Greece, where it fell from 315 to 151.
To provide better protection to investors, the analysis included the information availability index. Its value ranges
from 0 to 7, and the higher level implies that information regarding a company's ownership and financial structure is
more accessible.
68
Economic Review
October 2004
4. LENDING ACTIVITIES
L e g a l r e g u la t io n s in d e x
C o st o f p le d g e r e g ist r a t io n
( in % o f G D P p e r ca p it a )
Albania
9
0.3
0
Bulgaria
6
1
4
Czech Republic
6
0.6
5
Macedonia
6
15.9
2
Slovenia
6
3.2
3
Bosnia & Herzegovina
5
15.2
4
Hungary
5
13.5
3
Serbia & Montenegro
5
..
1
Croatia
4
..
0
Romania
4
1.1
3
Average
4
9.2
2
Poland
2
1.2
5
Greece
1
29.5
4
Turkey
1
19.9
4
Countr y
8)
8
L e n d in g d a t a a va ila b ilit y
in d e x
Pledge registration costs are shown as share in GDP per capita.
In 2004 credits have been the main source of financing new projects and additional investment in the existing
companies. The getting a credit indicators were expanded relative to those used last year.
The laws index shows to what extent the regulations governing collateral and the Law on Bankruptcy Proceedings
have facilitated the credit approval process. The index ranges from 0 to 10, and the higher level indicates a higher quality
of laws. This index is higher in Serbia than the average reported for the group.9
Collateral registration cost includes the costs of the created right of pledge and its registration with the relevant
registry, if any. Although the Law on the Right of Pledge in Respect of Registered Movable Property was enacted in
Serbia, no registry has been created yet.
The credit information accessibility index ranges from 0 to 6, and its higher level means more accessible
information on the current debt and credit history of individuals and companies, through the public or private credit
registry. Only the public credit registry exists in Serbia for the time being.
9
Law on the Right of Pledge in Respect of Registered Movable Property was enacted in 2003, and the Law on Bankruptcy Proceedings on August 2004.
69
October 2004
Economic Review
Balance Sheet of the NBS
(In million dinars, end of period)
2003
N et forei gn res erv es
Net foreign reserves in million euros
Gross foreign reserves1)
Gross foreign liabilities2)
N et domes ti c as s ets
Domestic credits
Net claims on government
Credits
Dinar credits
Foreign currency credits
Deposits (-)
Dinar deposits
Foreign currency deposits
Net claims on banks
Credits
Other dinar credits
Foreign currency credits
Foreign currency credits in
million euros
Deposits (-) of which
Voluntary NBS bills
Net claims on other sectors
Credits
Dinar credits
Foreign currency credits
Deposits (-)
Other assets, net
R es erv e money
Currency in circulation
Commercial bank reserves
Calculated required reserves
Required reserves allocated
-220,879
-13,190
-13,362
19,051
19,051
0
-32,413
-14,305
-18,108
2,337
5,490
3,774
1,716
2004
Mar
82,777
1,186
190,472
Jun
83,579
1,158
200,960
Sep
95,646
1,275
218,388
-107,695
-117,381
-122,742
-225,276
-13,061
-14,068
18,904
18,904
0
-32,972
-17,570
-15,402
2,900
5,329
3,507
1,822
-221,311
-7,519
-4,458
18,840
18,840
0
-23,298
-16,273
-7,025
-1,073
4,692
2,801
1,891
-331,511
-14,504
-10,410
18,646
18,646
0
-29,056
-19,343
-9,713
-1,763
3,560
1,607
1,953
25
26
26
26
-3,153
-2,223
-2,165
257
257
0
-2,422
-7,689
-2,429
-2,377
-1,893
242
242
0
-2,135
-12,215
-5,765
-5,720
-1,988
243
243
0
-2,231
-13,792
-5,323
-5,224
-2,331
243
243
0
-2,574
-17,007
69,996
42,979
27,017
15,662
57,501
38,004
19,497
14,677
62,268
40,347
21,921
15,067
64,135
42,463
21,672
18,738
16,212
13,321
Shortfall in RRs (+), excess RRs allocated (-)
-550
1,356
Excess reserves
Overnight deposits
Giro account and vault cash
Shortfall in RRs (-), excess RRs allocated (+)
11,355
5,695
5,110
4,820
2,280
3,896
6,854
2,039
4,815
2,934
734
2,200
550
89,211
-1,356
79,048
85,970
90,565
Reserve money (broad concept)3)
1)
Dec1)
90,875
1,330
193,967
103,092
Excluding frozen foreign reserves of the FRY and undivided foreign assets of the SFRY.
2)
Excluding long-term foreign liabilities and undivided foreign liabilities of the SFRY, but including foreign
currency denominated liabilities to domestic banks and residents.
3)
70
Including deposits by the non-banking sector and NBS securities.
Economic Review
October 2004
Monetary Survey
Consolidated bank balance sheet
(In million dinars, end of period)
2003
N et forei gn as s ets 1 )
Assets
NBS
Commercial banks
Liabilities(-)
NBS
Commercial banks
N et domes ti c as s ets
Domestic credits
Net claims on government
Credits
Dinar credits
NBS
Commercial banks
Foreign currency credits
NBS
Commercial banks
Deposits (-)
Dinar deposits
NBS
Commercial banks
Foreign currency deposits
NBS
Commercial banks
Short-term government dinar credits
to banks
Purchased frozen-currency bonds
Credits to the non-government
Sector
Households
NPISHs and others, in dinars
NPISHs and others, in foreign
currency
Economic sector in dinars
Economic sector in foreign currency
Other assets, net
Money s uppl y (M3)
Money supply (M2)2)
Money supply (M1)
Currency in circulation
Demand deposits
Dinar time deposits
Foreign currency deposits3)
1)
2004
Mar
164,494
238,849
190,472
48,377
-74,355
-59,926
-14,429
72,934
166,997
-25,203
23,257
23,134
18,904
4,230
123
0
123
-48,460
-29,862
-17,570
-12,292
-18,598
-15,402
-3,196
Jun
156,648
240,554
200,960
39,594
-83,906
-67,907
-15,999
92,854
197,593
-14,778
23,708
23,497
18,840
4,657
211
0
211
-38,486
-28,174
-16,273
-11,901
-10,312
-7,025
-3,287
Sep
184,641
274,941
218,388
56,553
-90,300
-65,462
-24,838
97,921
222,075
-19,986
24,517
24,360
18,646
5,714
157
0
157
-44,503
-31,382
-19,343
-12,039
-13,121
-9,713
-3,408
-239
-165
-262
-279
4,897
5,786
5,132
6,261
172,284
186,579
207,501
236,080
28,643
1,560
32,383
1,645
40,248
1,728
52,060
1,819
436
461
257
261
90,730
50,915
100,334
51,756
109,146
56,122
123,218
58,722
-89,086
236,934
117,040
98,223
42,979
55,244
18,817
119,894
-94,063
237,428
105,553
88,549
38,004
50,545
17,004
131,875
-104,739
249,502
112,612
94,134
40,347
53,787
18,478
136,890
-124,154
282,562
121,218
99,876
42,463
57,413
21,342
161,344
Excluding the frozen foreign currency reserves of the FRY and undivided foreign assets of the SFRY.
2)
3
Dec
172,664
242,348
193,967
48,381
-69,684
-59,731
-9,953
64,270
153,356
-23,586
23,250
23,130
19,051
4,079
120
0
120
-46,836
-25,677
-14,305
-11,372
-21,159
-18,108
-3,051
Total dinar deposits.
Excluding households’ frozen foreign currency savings deposits.
71