Interviews

Serbia is facing new big challenges that are coming from the outside and inside: from the world there is the pressure of higher interests because the euro zone is struggling with the costs of the crisis in the south and the growing inflation. The price will first be paid by the citizens who are repaying housing credits. On the internal plane, the bad privatization and high level of illiquidity have narrowed down the number of bank clients in the real sector and directed them towards the purchase of state securities. One can discern a problem here too, because it is unclear how big the state’s capacity is for repaying the credits which it is taking increasingly often. “It is better to stop and re-calculate, because the costs of the populist approach will be paid with a new circle of poverty”, said Professor Đorđe Đukić of the Faculty of Economics in Belgrade in an interview published in a special edition of the Biznis i Finansije (BiF) magazine, FINANSIJE TOP.

(Part I)

Even though the profit of banks is dropping in all segments, the level of bad placements is growing, the number of credit-worthy companies is being drastically reduced and the banking sector is stable according to all indicators. “The banks will withstand all the blows”, said the BiF’s interviewee. It seems to me that even if there were no longer any of us, bank would continue to exist.

BiF: Inflation is growing in Europe, and long-term recovery is uncertain. .What does this mean for us?
Đ. Đukić: The resolution of the problem of Greece, the instability in the south of Europe and the fight against inflation will lead to the growth of the euribor. Countries with a low credit rating, which is exactly what Serbia is, will suffer the most because of the negative effects of the growth of the interest rate on the inter-bank market and the interest rates on long-term sources which will primarily affect the citizens, while companies will be much less affected. The crisis has brought a double negative effect for Serbia: in the countries where the interest rates had been dropping, they stagnated during the crisis and kept slightly increasing, in Serbia the additional factors led to them growing. The reasons should be sought in the environment, i.e. in the high reserve requirement and the constant immobilization of the funds which is making the citizens’ savings especially expensive. In conditions when both domestic and foreign banks are focused on the citizens’ savings which cannot be attracted with an interest of below 6 percent, one cannot expect the interests to drop. Secondly, the issue of relations between the bank’s head offices and their subsidiaries has deteriorated. Under the Vienna Agreement, the head offices have agreed to postpone the speedy repayment of credits in the company sector, but, at the same time, they made it clear to their subsidiaries that they can initiate credit expansion

only on the basis of domestic savings. In such conditions, during the crisis we saw that banks were repaying their debts to their head offices, the private sector to banks, while the state’s borrowing was growing.
BiF: The appreciation of the dinar is quite certainly helping the economy to repay its debts and making it easier for the citizens to deal with the repayment of loans. How much will this cost in the long run?
Đ.Đukić: On the home scene we are faced with the inconsistency and incoherence of the domestic policy which is being seen on a daily basis by investors. We can read between the lines that the dinar’s appreciation will continue, whereby the central bank is playing into the hands of the citizens and companies, making the repayment of their debts easier on a short-term basis. As regards investors, their legitimate interest is to conduct speculative activities: they sell euros, buy dinars, acquire state securities and wait to get rid of them when they assess that a political or economic risk exists. What investors are now worried about most of all is that, after the situation with Telekom, the state is obviously considerably borrowing to a large extent. There is a bombardment of several new loans: 800 million dollars from the World Bank, the issuing of euro bonds in the value of a billion dollars, the prompt borrowing of a hundred million euros with the issuing of bonds. Investors see in this greater uncertainty as to whether the state will manage to maintain a deficit of 4.1% of the GDP. According to data of the finance ministry, the deficit is 41% of the GDP, but I believe that decision-makers would have to take into consideration Stiglitz’s remark that a large portion of the GDP is in the form of services which have no impact on the capacity to repay debts. I believe that, from the standpoint of the state, it is better to halt the borrowing until the possibilities for servicing that debt are assessed. It is more honorable not to be part of the executive authorities than, in two or three years, to bring the country in the position to have opt for the restructuring of the debt like at the end of the 1980s. This is all the more topical as the situation in the south of Europe is quite hopeless and a big question is how much our export economy will be able to export and collect.
I am not appealing to the government to reconsider borrowing because I want it to be unpopular. We are in an extremely complicated situation and it can be only worse both on the world market and in the environment and we do not have large negotiating powers from the aspect of the stability of the inflow, aside from remittances from abroad.
BiF: However, banks collect considerable income precisely from such conduct by the state?
Đ.Đukić: It is in the interest of banks to sell euros, buy dinars and acquire state securities for the sake of a short-term profit. The space for earning in Serbia, compared to the environment, is unprecedented in this period, of course for those who have the ability to predict and who signaled to the bank management in time to sell euros and buy dinars, and then acquire securities that bring 12% interest. When to this you also add the dinar’s appreciation of 8 to 9 percent, it is impossible to achieve such a yield anywhere in the region. Bankers will be inclined to think on an increasingly short-term basis because of the contradictory statements by the authorities who first claimed that appreciation is not desirable, only afterwards to say that appreciation is no problem. Never has the artificial appreciation of a currency brought any good to any country, but rather only high costs of the redistribution of income between debtors and creditors on the one hand, as well as exporters and importers, on the other, and increased borrowing. But also a semblance of an easy the price for which must be paid later with a drastic drop in the standard of living.

BiF: Nevertheless, your assessment, not only as a professor of economics, but also as a member of the bank’s administration is that there will always be credits for good companies?
Đ. Đukić: Companies will not feel the burden of higher interests, because there will always be favorable credits for them, whose interests do not depend on Serbia’s rating. Blows will be suffered by small and medium-sized enterprises which a bad credit history and whose access to credits is simply closed. Good small enterprises will be able to count on interest of between 6 and 7 percent, because banks are drawing quite a lot of favorable credits from the EBRD, EIB and similar sources. For Serbian version read here

Tanja Jakobi

June 9, 2011