How has the global financial crisis impacted Serbia in comparison to its Balkan neighbors and to other European states? Was the impact more or less severe, and why?
Balkan countries have experienced this crisis in a manner that is very similar to that of Western states--we have all faced significant deceases in foreign trade and industrial production. As a result, most countries in the region expect output reduction this year, but it is very difficult to give any confident projection. Of course, specific industry structure in these countries means that the crisis does not have exactly the same effect. For example, countries with coastal areas experienced a real estate boom in the previous year. However, after real estate prices started collapsing, the construction industry, as well as some banks, were in trouble. Also, the effect of the crisis depends on the country's level of trade integration with the rest of the world. Export-oriented countries were hit harder by this crisis. So, there are some similarities, but also some important differences.
Serbia had very strong GDP growth prior to the crisis, averaging at around 7 percent in the last five years. The crisis began in Serbia in exactly the same manner as anywhere else. The lack of financing meant slower development; lower demand in the world market meant shrinking exports; decreased output meant lower public revenues. The combined result of all these changes was a need to accommodate our budget to reality. Our exports dropped 25 percent and imports dropped 30 percent in the first quarter of this year. The same scenario occurred throughout Eastern Europe. At the onset of the crisis, foreign banks operating in our country started to repay loans from private companies, putting pressure on the exchange rate and creating an outflow of foreign currency. As a result, about 1 billion exited Serbia between November and January.
We also decided to pursue an agreement with the International Monetary Fund (IMF) because we needed to have some anchor for preserving external liquidity. Money was not our primary drive for reaching this agreement, as we have foreign currency reserves that are three times higher than the money supply. However, it was important because the IMF, for the first time, played an intermediate role in pursuing foreign banks to make sure that they keep their exposure to Serbia at the same level as in previous years. This means that if they repay some old loans, they will create a new loan, and we will at least emerge at the zero position. At the same moment, when we started the negotiations with the IMF, the exchange rate stabilized for psychological reasons as confidence took off again. Then, banks really stopped repaying the new loans, or at least they started to lend again. Thus, without the intervention of the central bank in the last three months, we have secured complete stability of foreign currency reserves and exchange rate. In addition, we agreed to receive 3 billion to fill up reserves, which will basically help us preserve external liquidity in the case that foreign banks don't keep the promises to maintain their exposure. This was the most important effect--the external liquidity issue. Meanwhile, banks have remained sound in Serbia, with capital adequacy at the moment being three times higher than the European Union average, which is due to our substantial banking reforms back in 2002.
Also, one of the effects of the crisis was that banks increased their spreads to a high extent; they doubled spreads, not only in Serbia, but also in other Eastern European countries. The spreads went up so that they could recover some of the losses they had previously incurred from bad loans in Western markets. Hence, the government responded to this problem of internal liquidity by subsidizing interest rates. Yes, this is a short-term answer to the crisis, this is a passive measure, but this was probably, at that moment, the only thing we could have done. …