He also said that looking at adequacy of capital and liquidity Serbia is much better prepared than other regional nations for a worsening of the economic crisis.
These are the questions and answers:
Q. 2009 BUDGET: The Serbian government adopted a 2009 budget backed by the IMF. Do you think it is restrictive enough in view of the global crisis? Isn't the 3.5% growth target too high?
A. I fear that, during 2009, there will be a need for the revising of the targeted 1.5% deficit. How much will depend on our revenue. I project for the next year a much greater risk of lower revenue and therefore there cannot be bigger spending simply because there isn’t any money. I see a much greater risk in lower revenue than in greater-than-projected spending. And now we know that revenue from privatisation will be lower than initially planned.
I don’t think it’s realistic to adopt this budget and then start talks whether during the next year our revenue should turn out better than planned and then maybe revise the budget upward. One thing is for sure: this budget is far more likely to be revised downward i.e. smaller deficit.
[...] I think that, with the budget, the state has made a move in the right direction, especially from the point of restrictiveness. It’s important that, in these last rounds, during the government negotiations, the decision has been made not to raise Value Added Tax. It should be taken into account that this restrictiveness, arriving only a month after the government adopted the expansive budget [revision] for 2008, is a 180-degree turn in macroeconomic policy .
Q. INFLATION: What can the National Bank of Serbia (NBS) do to help the government meet the 2009 inflation target of 8.2% projected in the budget?
A. We would be very happy if in the next year we could ease the level of restrictiveness of our monetary policy, which would mean lowering of the reference rate, but that would mean that the state would have to play its part in it. That would mean that, if the state cannot increase significantly its payments, meaning salaries and pensions, it would have to do something to improve the standard of living for its citizens – which is to do its maximum in stabilising retail prices.
The state needs to step in to help that the prices of products that directly affect our citizens' budgets don’t go drastically up; electricity, water, different excises, and the cost of those things that are directly under government control. That will be key. And if the state does something here so that these administrative costs don’t go up during 2009 as fast as they have up until now, the bank will use the first opportunity to lower its repo rate.
Q. INTEREST RATES: The NBS left its repo rate unchanged at 17.75% in December and November after raising it by two percentage points in October. Do you believe there is room for tightening now, particularly if other NBS measures to support the stability of the dinar start to bear fruit? Also, you said earlier that citizens have withdrawn lower amounts of their savings from Serbian banks as a result of the global financial crisis than they did before the snap elections in the spring of 2008. Has the rate of drawing on bank deposits diminished now?
A. Certain banks are in the plus and others are in the minus. We notice, however, only one thing, and that is that, over the last two weeks, the banks have been giving us back more cash than they have taken from us. By the same token, the bulk of the cash in banks, which equalled four times the average level during 2007, meaning the foreign currencies which are kept in the banks’ vaults, has quadrupled compared to what was customary.
In addition to that, safe deposit boxes of banks`clients are full with cash as well. This means all of them [the banks] have filled up their safe deposits so that when the citizens come to them the banks are able to fork out their savings to them. Because, one thing is certain, few people in Serbia understand the meaning of the words solvency or liquidity. But everyone understands what it means to be able to withdraw their savings.
To sum up, a chunk of the savings has been withdrawn. But I am convinced that this chunk will be returned although I am sure that the time of return will be much longer than the time period of withdrawal. I would be happier if I wasn't right. But, I am afraid that, it will take at least six to 12 months for this chunk to be returned to the banks, although this will depend on what will be happening globally, and in Serbia, in the future.
In a nutshell, [by people withdrawing their savings] Serbia has sawed off the branch it sits on. In order for people to understand the relationship citizens of Serbia have with the banking sector, they need to understand what happened here seven years ago when two-thirds of the bank’s assets were withdrawn. And, as it happens, politicians try to tell citizens that nothing has changed.
But, of course, everything has changed. So, the ownership structure in the banking sector is now different, and not only from the perspective of ownership, but also from the structure of the strategic ownership and the international ownership. Seventy-five per cent of banks here are also found in the European Union. Also, the way banks do business has also changed. Again, in order for foreigners to understand why more savings have been withdrawn in Serbia than in other countries, they have to understand everything these people and this country have gone through.
Q. MINIMUM RESERVE REQUIREMENTS: Is there need for NBS to raise further the mandatory reserves on foreign currency deposits that banks have to maintain in dinars? Has the latest NBS move in this direction yielded enough support for the dinar?
A. Taking into account what is going on at present, all countries in the region are lowering their mandatory reserves requirements. I wouldn’t automatically dismiss that possibility, but given that no one can tell how long the tribulations on the international financial markets and global commerce will go on, I am, even if we were to do something, leaning more towards lowering it nominally and for a longer period of time.
Once again, we are nowhere close to considering raising the minimum reserves requirement, but exclusively considering to maybe lower it down the road. But, of course, we need to be very careful if we were to do this. Given what’s been going on in countries in the region, I am quite concerned about the state that some countries in the region find themselves in, compared to two months ago. Even though, looking at our adequacy of capital and liquidity, we are much, much better prepared compared to many countries in the region, once the crisis sets in deeper – despite it being a largely psychological phenomenon. We are very, very concerned that what is going on in the countries in the region will have a spill-over effect in our banking sector.
Q. BALANCE OF PAYMENTS: The IMF has repeatedly said that Serbia needs to expand its export base in order to cut its trade gap that widened 42% year-on-year through September, and hence its current account deficit. Strengthening dinar currency, however, does not stimulate Serbia's exports. Your comment?
A. For some people the dinar has crossed over a certain psychological limit, but even exporters will agree that it’s better for the dinar to remain on a stronger level. If the rate were the only thing factoring in on the exporting base then Serbia would probably over the past 40 years have become a world champion in terms of exports, because in no other country has the local currency fluctuated as significantly as it did in Serbia during the 90s. So, obviously there’s a lot of different things that can and should be done.
I am concerned whether, under the pressure of all these tribulations on the foreign exchange market at present, efficiency will be improved and whether the number of employees will be reduced – as that is the real measure that will improve the efficiency of our commerce and not the rate, which minimally affects one country’s exports.
