Policy response: Macroeconomic policy measures

Miroljub Labus

UNDP: Regional Policy Roundtable “The Credit Crunch and Structural Adjustments: The Case of Serbia”

Chisinau, Republic of Moldova 6-7 July, 2010

Crises and Policy Response in Serbia: An Overview  Recession is over, but not the crises  Nature of crises  Credit crunch triggered a crises in Serbia, which looks like a typical suddenstop crises (Guillermo Calvo…)  However, structural deficiencies would in any case cause a downturn  Policy dilemma: Cure fundamental weaknesses or fight against recession by any means (structural or anti-cyclical approach)?

 Nature of policy responses  Anti-cyclical fiscal measures, but pro-cyclical monetary measures (due to inflation challenges)  Appropriate prudential and supervisory measures, which were not sufficient  Weak structural measures

 International support: On time and timely (IMF, Vienna club of banks), but the EU integration has been postponed  Politics: Weak government and poor policy coordination between the Government and the National bank

Outline of Presentation

Key macroeconomic figures Key policy measures Key structural deficiencies Politics of the crises responses Some concluding remarks

Recession is over, but not the crises GDP growth rates

Source: IMF

Modest recession in Serbia, but recovery is not robust and certain…

Source: Belox

…since the labor marker is in a deep depression (unemployment rate is 19.2%)

Macroeconomic Imbalances

25

20

15

percent

10

5

0

-5

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

-10

-15

-20

CAB

Source: IMF

Budget

I-S

 Despite expected growth in 2010, reduction in macroeconomic imbalances will not continue After dramatic adjustment in 2009, current account deficit will increase in 2010  Fiscal deficit is also expected to get worse in 2010

Macroeconomic Challenges: Foreign Debt “Is there life after debt?” (The Economist) 24,000,000

Debt sustainability Total foreign debt

Thousends od EUR

20,000,000

70% 60% Private foreign debt

16,000,000

50% 40% 30%

12,000,000

20% 10% 0%

8,000,000

2009

2010

2011

Debt service/gdp

Public foreign debt

2012

2013

2014

2015

Debt service/reserve

4,000,000 I

II III IV 2006

I

II III IV 2007

I

II III IV 2008

I

II III IV 2009

I

II III IV 2010

Source: NBS

 To borrow by the Government or not to borrow, it is the main dilemma Tight public debt policy might be relaxed in 2010…

Source: IMF

 …but, is there a fiscal space for that?  In any case, debt presents a challenge for foreign exchange stability in the future

Policy response: Macroeconomic policy measures

Measures

Before crises

During crises

Fiscal measures Fiscal tightening

No

Easing

Automatic stabilizers

No

Yes

Not much

Yes

Subsidizing

Monetary measures Reserve requirements

Increased

Unchanged

Raised liquidity requirements

Yes

Unchanged

Sterilization operation

Yes

Yes

Exchange rate policy response

Yes

Yes

Interest rate response

No

No

Policy response: Administrative Measures in the Financial Sector

Measures

Before crises

During crises

Credit ceilings

No

No

Capital control

Short term capital

Unchanged

Reserve requirements measures

Increased the required level

Yes

Unchanged

Temporarily

Abolished

Differentiated by currency

Yes

Unchanged

Differentiated by type of deposits

Yes

Unchanged

Broaden the reserve base

Yes

Unchanged

Marginal reserve requirements

Policy Response: Prudential and Supervisory Measures Measures

Before crises

During crises

Prudential measures Increase capital requirements

Yes

Unchanged

Tighten assets classification rules

Yes

Unchanged

Tighten provision rules

Yes

Unchanged

Targeting unhedged borrowing

Yes

Unchanged

Tighten net open position limits

Yes

Unchanged

Loan to value related requirements for households

Yes

Unchanged

Limits on eligibility based on income level of households

Yes

Unchanged

Supervisory/monitoring measures Improving monitoring tools

Yes

Unchanged

Stress testing

No

Yes

Increase cooperation with home supervisors

Yes

Unchanged

Tighten supervision on non-banks

Yes

Unchanged

Structural Deficiencies: Serbia and Others

Percent average 2004-08

Credit Default Swap Spread bps, May2010 120

12

600

100

10

500

8

400

80 60

6 40

200

4

20 0

300

100

2 SVK POL CZE HUN BiH MKD EST ALB LTU HRV ROM SER BGR LVA

-20

0

0 Non-tradable

Euroisation

Saving

Inflation,rhs

Source: IMF

 Structural deficiencies in Serbia might be compared to other transition economies…

Source: EBRD

…but the country’s risk is much higher.

Policy response: Structural Measures

Deficiencies

Measures

State of Affairs Before crises

During crises

No

Present

Unchanged

Privatization

Controversial

Postponed

Reversed

Euroisation

Ineffective

High due to a dual currency system

Increased

Low domestic savings

No

Present

Some improvements

Capital market development

No

Poor

Unchanged

Rigidity in labor market and poor incentive structure

Ineffective

Present

Worsened

De-industrialization/ Huge non-tradable sector

Politics and Structural Governance

 EU accession is not any more a driver for institutional reforms  Lack of full cooperation with the ICTY is more a formal excuse than a substantial reason for postponing the candidate status to Serbia

 The six-party coalition government is at the mid-term  Institutional weaknesses:  Strong President, with no legal authority over economic issues, and weak Government  Poor policy coordination

 General public is in a bad mood, and tired of reforms  March 2009 was the last momentum for structural reforms  Is there now an opportunity for transition losers?

Policy Lessons

 False optimism: Out of recession does not mean the end of economic crises  Structural deficiencies undermined effectiveness of macroeconomic measures  High prudential standards are not sufficient to prevent financial crises  Coordinated international assistance proved to be of a high importance, but this is not a substitute for domestic reforms  Those reforms depend on a stable and determined parliamentarian majority (two-party election system?)  However, people’s frustration with the government might be the key barrier to such an end.