INTERVIEW - Serbia's C-bank Should Cut Key Rate Further To Match Slowing Inflation - Banking Association

“In Serbia, the inflation rate stands at around 8.0% and that could be a parameter for the lowering of the repo rate,” Dugalic told SeeNews in an interview. The Association of Serbian Banks, UBS, comprises 33 out of the 34 commercial banks operating in Serbia.

The central bank, NBS, on Wednesday said it decided to keep the key repo rate unchanged at 12% to reflect current economic developments. It did not elaborate but the head of the Sector for Economic Analysis and Research at the NBS, Branko Hinic, said earlier this month there was still room for monetary policy easing given low demand, the stability of the Serbian dinar currency, the freezing of salaries in the public sector and the government's expectations that the growth of regulated prices will be considerably slower in the second half of 2009, Hinic said.

Yet, the repo rate is not the most important factor concerning the operation of commercial banks.

“What’s more important is the interest rate on Treasury bills sold by the Finance Ministry. There are no risks, no mandatory reserves requirements,” Dugalic said.

“The interest rate on T-bills, currently at around 12%, is still attractive as it is 4.0 percentage points above the level of inflation, which is profitable for buyers. Now, if the interest rate is too low, no one will want to buy them. If it is too high, money will go towards buying T-bills and not to lending activities.”

Serbia holds scheduled auctions of six-month T-bills every week on Thursdays and of three-month T-bills on Tuesdays with accepted interest rate oscillating at around 12%. It held a debut auction of 12-month T-bills last month and a second one earlier this month in a bid to narrow the yawning budget gap. 

Last month the International Monetary Fund (IMF) agreed to a rise in Serbia's 2009 budget deficit forecast to 4.5% of GDP from the 3.0% set initially under a 3.0 billion euro ($4.4 billion) loan deal which the government in Belgrade signed with the lender in March.

The NBS expects Serbia's consumer price index (CPI) to grow 9.0% in 2009. CPI will remain flat in the third quarter of 2009 compared to the previous quarter. Regulated prices grew 14.9% in the first eight months of this year compared to the government's projection for a full-year gain of 13%, plus or minus 2.0%.

Serbia's July CPI fell 0.9% month-on-month after remaining flat in June. On an annual basis, July inflation accelerated to 8.5% from 8.3% in June.

Dugalic said that Serbia’s banking system is stable despite the global financial crisis.

“We learned from the experience we had in the 1990s. Officially, one dollar was equivalent to 1.8 billion dinars. In the black market, one dollar was equal to 8.5 billion dinars,” Dugalic explained.

Serbia’s inflation reached staggering heights during the violent breakup of former Yugoslavia and ensuing international economic sanctions in the 1990s. Since then Serbia's banking system has improved considerably.

“We closed four banks that were the biggest money-losing operations. We completed the privatisation and brought in a completely clean, fresh capital. The regulative role of the central bank has been boosted. The regulations of the banks have been changed since and we have adopted regulations that were harmonised with those of the European Union."

"We are also applying international standards in preparing the financial reports,” Dugalic said, adding that Serbia was one of the few countries in the world in which the banking sector has mitigated the impact of the global credit crunch.

“What helped us was that we have the largest capital adequacy ratio in Europe, and probably in the world,” he said and added that this indicator measured 28% at the end of August 2008.  

“The Basel accord prescribes 8.0%, our law says 12% and we have 23%. This is a fantastic indicator that shows that banks can resist temptations and problems if crisis situations arise, that banks can, with their own capital, make up for a loss that may arise.”

“The maximum indicator for the foreign exchange risk is 30%, and in our banking sector it is 9.4% Some 70% of bank loans are rated A and B, which means minimum risk.”

Dugalic also said that Serbian banks struggle with the rising costs of borrowing abroad and the growing delays in repaying loans by banks' clients.

“Foreign loans are increasingly expensive. Banks are forced to take out short-term loans abroad and then sell loans long-term locally. This is very expensive. Short-term loans have higher interest rates compared to long-term loans,” Dugalic explained.

“As for increased delays in paying off loans to banks – it is still not as dramatic. We are doing far better than banks in other countries,” he said.

Serbia closed Beobanka, Beogradska Banka, Investbanka and Jugobanka in 2001 during the restructuring of its banking sector following the fall of Yugoslav strongman Slobodan Milosevic.

($=0.6831 euro)