National Bank of Serbia

12/29/2020 | Press release | Distributed by Public on 12/29/2020 09:22

In 2020 the NBS remained the guarantor of monetary and financial stability, a responsible regulator and innovator

29/12/2020

In 2020 the NBS remained the guarantor of monetary and financial stability, a responsible regulator and innovator

In the year 2020, which saw the global pandemic-induced crisis, the NBS preserved price and financial stability, underpinned by the preserved relative stability of the exchange rate.

'The NBS achieved its statutory objectives even in these extraordinary circumstances. We kept inflation at a low level and thus preserved the real value of wages. The dinar remained relatively stable against the euro, providing businesses and citizens with necessary certainty in doing business and planning. The two-digit growth in dinar savings continued, reaching the highest levels on record. NPLs declined further, to their lowest level. Despite the pandemic, we continued with innovation to provide even higher quality financial services to citizens and businesses.

We adopted a large number of measures almost each month, whereby we ensured efficient functioning of the money market, liquidity support to all sectors, more favourable financing conditions, continued lending activity and support to the domestic real sector. By responding in a timely fashion, we fully supported the President and the Serbian Government in the struggle to mitigate the economic effects of the coronavirus pandemic, with the aim of preserving jobs and production capacities.

Key NBS measures to reduce negative effects of the COVID-19 pandemic and support the Serbian economy

Measure Goal
The key policy rate has been cut by 1.25 pp to 1.0%, its new lowest level in the inflation targeting regime. Enabling more favourable financing conditions in the local currency and encouraging dinar lending, thus contributing to faster economic recovery.
The NBS main interest rates corridor was narrowed from ±1.25 pp to ±1 pp, and then to ±0.9 pp relative to the key policy rate. Enabling additional monetary policy efficiency via the interest rate channel.
Banks' dinar and FX liquidity was increased by way of direct repo operations, swap auctions and bilateral purchases of dinar government bonds from banks. Efficient functioning of the banking system and more favourable lending conditions for corporates and households.
Inclusion of dinar corporate bonds of Serbian companies in monetary operations. Banks may sell corporate bonds to the NBS in the secondary market, and can also use them as a financial collateral for obtaining dinar liquidity from the NBS. Additional support to the recovery of domestic companies through an alternative source of financing to ease the burden on periodic money flows and initial stimulus to the development of the domestic capital market.
Introduction of the moratorium on the repayment of obligations under loans and financial leasing for all borrowers who opted for that, first for 90 and then for another 60 days. Extending the payment term for housing loans for five years at most and other loans to households for up to eight years. Helping citizens and corporates bear the burden of the crisis, increasing their disposable income and thereby reducing the negative effect of the pandemic on domestic demand and economic activity.
Lowering the mandatory downpayment for first-time flat purchases from 20% to 10%. Lowering the minimum level of completion of an object whose purchase may be financed by housing loans from banks. Enabling easier access to housing loans, thus supporting construction growth.
The Serbian Government's Guarantee Scheme introduced stimuli - banks approving dinar loans to clients under the Guarantee Scheme, at rates lower than the ceiling rate (which equals one-month BELIBOR + 2.5 pp) by at least 50 bp, will have a higher remuneration rate on the amount of mandatory reserve requirements in dinars by 50 bp, on the amount of loans extended under more favourable conditions. More favourable dinar lending conditions for micro, small and medium-sized enterprises and entrepreneurs, and in turn an increase in the degree of dinarisation and an additional boost to financial stability.
A pre-emptive repo line was established with the ECB which could provide additional euro liquidity to the domestic financial system, should the need arise. Ensuring another form of safety in conditions of pronounced uncertainty in the international financial market.
Adoption of new measures to facilitate loan repayment for borrowers stricken by the COVID-19 pandemic (in the form of rescheduling or refinancing existing obligations with a six-month grace period). Facilitating the settlement of obligations of borrowers who are faced with difficulties due to the COVID-19 pandemic and responsible management of credit risk of banks and financial lessors in the current circumstances.

In addition, by achieving our statutory objectives and looking ahead, with our measures we created preconditions to preserve overall stability in the coming period as well', said Governor Jorgovanka Tabaković, speaking about the NBS results in 2020.

We kept inflation at a low and stable level, and confidence that the NBS will continue to keep inflation low has also been preserved.

In 2020 as well, inflation in Serbia remained firmly under NBS control, even in the pandemic conditions. As at November, it equalled 1.6% on average. This helped maintain the continuity of desirable low inflation, which in the past seven years averaged below 2% y-o-y. The ensured relative stability of the exchange rate and full coordination of economic policies were and have remained an important factor of low and stable inflation. The anchored inflation expectations of the financial and corporate sectors, which confirm restored credibility of monetary policy in Serbia, also contribute to preserving inflation at a low level. In their reports, rating agencies emphasize that the earned credibility of monetary policy is one of the important factors for maintaining Serbia's credit rating at the level only a notch below investment grade, despite the negative effects of the pandemic.

According to the NBS projections, inflation will remain low in the next two years as well, and the NBS will continue to significantly contribute to the certainty of doing business and planning.

'By keeping inflation firmly under control, we ensured favourable conditions of financing the corporate, government and household sectors, and preserved the real value of income of all Serbian citizens. Today, just like in the past eight years, the NBS is trusted to keep inflation under control in the coming period as well', stated Governor Tabaković.

We preserved the relative stability of the dinar against the euro, despite the global crisis triggered by the coronavirus pandemic.

In 2020 as well, the value of the dinar against the euro was preserved, despite elevated uncertainty in the global financial market and global economic trends. This is the result of the timely and well-calibrated measures of the NBS, including FX interventions, in the conditions when citizens and businesses needed it the most - amid the global pandemic-induced crisis. The preserved relative stability of the dinar exchange rate against the euro remained one of the important pillars of certainty of doing business and planning for businesses and citizens, and an important support for the materialization of the full effect of other measures aimed at preventing negative consequences of the pandemic on the domestic economy.

As in the earlier years, in 2020 the NBS continued to buy foreign currency in the periods of stronger appreciation pressures. It thus boosted FX reserves, which are one of the pillars of the country's financial security.

FX reserves have been preserved at a high level.

In 2020 as well, Serbia's FX reserves were preserved at a high and stable level (over EUR 13 bn), despite the global economic crisis. Owing to NBS activities, FX reserves reached a record high level, further strengthening the resilience of the domestic financial system to shocks from the international environment.

Since we are guided by the principle of diversification in managing FX reserves, during last and this year, the share of gold (as a safe haven in highly uncertain market conditions) in FX reserves rose to over 13%, i.e. it doubled compared to end-2018.

Dinar savings continued to rise to new record levels.

Dinar savings increased by over 16% in 2020 to a new record level of over RSD 92 bn. This means that citizens' confidence in the dinar and the domestic banking system was preserved even in the year marked by global uncertainty. Since 2013, dinar savings have been increasing by around 25% annually on average, and are currently five times higher than in 2012.

Owing to the timely response to the pandemic-induced crisis, monetary and financial stability has been preserved and economic growth supported.

At the very start of the pandemic in Serbia, we responded proactively and, amid general uncertainty, we managed to calm the financial market, businesses and citizens. We were one of the first central banks in the world to respond, and we did so in an efficient, timely and adequate manner, preventing a major decline in business and consumer confidence in the first months of the pandemic.

Since the outbreak of the pandemic, we have reduced the key policy rate by 1.25 pp to 1%, which is its lowest level in the inflation targeting regime. We achieved the desired effects with our measures: by cutting the key policy rate, the sources of financing of corporate, household and government sectors were at the lowest level, despite the pandemic - they were by around 0.8 pp lower on average relative to end-2019. The most favourable conditions of financing of corporate and household sectors, along with the effects of the moratorium and granting of loans to micro, small and medium-sized enterprises and entrepreneurs from the Guarantee Scheme, enabled the continuation of the two-digit growth in lending both to corporates and households, and thus faster recovery of our economy from the pandemic. We supported dinar corporate lending by making dinar loans granted by banks within the Guarantee Scheme of the Republic of Serbia even more favourable than envisaged under initial conditions. As around 60% of loans approved under the Guarantee Scheme are dinar loans and interest rates on dinar and euro loans have almost equalised for the first time in Serbia, we achieved our objective with a mix of measures. In such conditions, the dinarisation of total loans also reached a record level.

'Although the domestic banking sector faced the global crisis with structural liquidity surpluses, through different monetary policy instruments banks were provided with additional dinar and FX liquidity on needed terms under favourable conditions. The aim is to ensure efficient functioning of the banking system and even more favourable conditions of corporate and household lending. We also supported smooth functioning of the government securities market and helped preserve favourable financing conditions in that market.

We included dinar corporate bonds in the list of securities that banks can use in monetary operations with the NBS, in order to support in one more way the domestic economy in overcoming the consequences of the crisis and providing the initial stimulus to the development of this segment of the capital market', underscored Governor Tabaković.

The environment of macroeconomic stability and favourable growth outlook contributes to the favourable perception of investors and continued capital inflows to Serbia.

Owing to preserved price, financial and overall macroeconomic stability, we helped preserve the favourable perception of Serbia as an investment destination. This is also confirmed by the issue of eurobonds in the international financial market under the most favourable conditions so far (1.066% in euros over ten years) and continued FDI inflows even during the pandemic. These inflows remained diversified and, as in earlier years, channelled primarily to export-oriented sectors, ensuring full coverage of the current account deficit.

The fourth and fifth (final) reviews of Serbia's economic programme with the IMF under the Policy Coordination Instrument (PCI) were successfully completed. It was stated that the NBS has no reform objectives and pending tasks in respect of the IMF because inflation in Serbia has been kept under control for many years already and significant results have been achieved in terms of strengthening financial stability.

We have taken a range of regulatory activities in the banking sector to support Serbia's businesses and households.

In March 2020, the NBS was among the first central banks in Europe to adopt regulations allowing the first moratorium on repayment of loan and leasing liabilities in the duration of 90 days. As the emergency health situation continued, a new moratorium was introduced in July. The NBS also recommended to insurance companies to offer deferred payment of due insurance premium instalments to their consumers, in a way that does not lessen their rights stipulated by insurance contracts.

We have created regulatory preconditions for reducing the housing loan downpayment for first home buyers to 10% (from 20% previously). Banks were encouraged to offer to borrowers the refinancing or change of the due date of the final instalment of consumer, cash and other loans (other than housing loans or current account overdrafts) approved until 18 March 2020, by two years relative to the current repayment period regime for these loans.

In late August, we adopted three sets of measures to facilitate households' access to sources of financing, particularly housing loans, thereby also supporting the construction industry:

  1. Banks were encouraged to approve housing loans without waiting for the building to be completed fully or mostly;
  2. Possibility was introduced to extend the repayment period of housing loans by five years at most;
  3. Procedures were eased temporarily enabling households to access short-term dinar loans up to a specific amount.

In December 2020, the NBS prescribed an obligation for banks and financial lessors to approve a facility for the repayment of liabilities to borrowers which are unable to settle their liabilities, due to the circumstances caused by the pandemic. These facilities include loan rescheduling and refinancing, and involve the approval of a six-month grace period and the appropriate extension of the repayment period, so that the monthly liabilities of the borrower are not higher than those set out in the repayment schedule before the facilities were approved.

The facilities prescribed by the NBS and all other measures enabled banks to maintain a high quality of their loan portfolios, with the share of NPLs reduced to a historical low of 3.48% at end-November 2020.

All measures were well-calibrated and limited in duration, helping preserve high banking sector capitalization (capital adequacy ratio is 22.3%), maintain banking sector liquidity and preserve financial system stability.

We continued to raise the overall level of protection of financial service consumers, by conducting procedures on individual consumer complaints and procedures of collective consumer rights protection (determining unfair business practice and unfair contractual provisions, and on-site and off-site supervision of banks).

As a result of our innovations, our country is on a par with state-of-the-art global trends, with due care taken to preserve our citizens' health.

The Law on Digital Assets, in the drafting of which the NBS took an active part, was adopted in December 2020. For the first time in our country, this Law regulates comprehensively operations with and issuance of virtual currencies and digital tokens, in line with international standards on combating money laundering and terrorism financing.

This year, the NBS also enabled the establishing and verification of identity of entrepreneurs and representatives of legal persons by using video-link in real time (video identification). As a result, legal persons and entrepreneurs can now set up a business relation with a financial institution supervised by the NBS entirely online, without the need to go to the business premises of such financial institution, which is particularly significant in the conditions of the pandemic. Video identification of natural persons was already enabled in March 2019.

In cooperation with banks, we have enabled instant payments at physical POS in February 2020 and at internet POS as of June 2020. At this point, customers can make instant payments at over 2000 POS. Around 25,000,000 transactions were executed in the NBS instant payments system in 2020, which is around three and a half times more than in 2019.

Since the outbreak of the coronavirus pandemic-induced crisis, the NBS took numerous activities in the area of payment services to make it easier for our citizens to make everyday payments and access money in their accounts, during implementation of containment measures.

We took all activities needed to digitalise bills of exchange, i.e. to introduce e-bills of exchange in legal and business transactions in Serbia in 2021, through the Central Register of E-bills of Exchange which is to be formed in the NBS. The Register will function in a way that will provide additional legal security and facilitate business for all parties, providing further support to the digitalization of the domestic business environment and to a modern way of doing business for both our corporates and households.

'We have preserved our economy, inflation is low, exchange rate stability has been preserved and financing conditions were even more favourable than last year. Through monetary and fiscal packages taken in the shortest possible time together with the Government of the Republic of Serbia, we prevented a sharper fall in business and consumer confidence in the initial months of the pandemic. Production capacities and jobs were preserved, enabling fast economic recovery from May onwards. If we look at total GDP, two-thirds of recovery were already completed in the third quarter, while leading indicators, such as industrial production, commodity exports and retail trade, reached their pre-crisis level in the third quarter. As a result of coordinated measures of the NBS and the Government, Serbia will record the most favourable GDP growth rate outturn in Europe this year.

We have kept our objectives unchanged and we continue to work in the same direction - to preserve stability to the benefit of our households and businesses. We remain a reliable partner of our Government in the effort to ensure investment growth, further improvement of our citizens' livings standard, certain and stimulating terms of business for our economy and the overall economic progress. We expect that the maintained medium-term economic outlook of our country and the measures of the Government and the NBS will support a recovery in domestic demand which, coupled with further normalisation of external demand, will lead to a more than full recovery of our economy next year, with a GDP growth rate of around 6%', Governor Jorgovanka Tabaković concluded.

Governor's Office