Examen visual

2.1 The state the country was in

The effects of the financial crisis could be direct or indirect. Direct effects are related to impairment and loss of assets of banks and other financial institutions invested in risky financial instruments (e.g. mortgage-backed securities). Indirect effects refer to the distrust of financial market participants, withdrawal of foreign capital, lack of capital for lending to the economy, increased borrowing cost, insolvency of the economy and decline in economic growth. Furthermore, effects in the financial sector and the real economy sector can be short term or long term effects.

The effects that the crisis had on Serbia were indirect effects. They appeared in the form of currency depreciation,5 stock index fall (due to the withdrawal of foreign portfolio investors), insolvency of economy, declining GDP, rising unemployment, export fall. The crisis did not significantly hit Serbia since there was a high capital adequacy6, and that high-risk securities were not invested in.7 Many problems that occurred in Serbia were more the result of the transition process that was being carried out carried out for a number of years, than the result of the direct impact of global crisis. Due to the reduced inflow of foreign capital, and the withdrawal of foreign capital, a reduction in exports, falling gross domestic product and growth of insolvency of the economy, costs of financing increased. The withdrawal of foreign currency deposits from banks was also greater due to fear and the feeling of mistrust. This was also influenced by bad experience that citizens of Serbia went through during the period of hyperinflation in the early nineties of the twentieth century. This is how mattresses became the safest place for savings.

2

An interesting information can be found in literature about certain countries, such as Japan, in which governments lost their reputation due to providing aid for recovery of the financial system, at the time of the banking crises in the late nineties of the 20th century (JOVANIĆ,T. Ciljevi i oblici regulisanja poslovanja banaka, s. 302).

3 _{NARODNA BANKA SRBIJE. Izveštaj o stanju u finansijskom sistemu, s. 17.} 4

Deregulation means weakening of state control. The process began in the U.S. and spread to the rest of the world. While there are arguments that justify it, deregulation implies higher exposure to risk in business operations. (ROSE, P., HUDGINS, S. Bankarski menadžment i finansijske usluge, s. 21. and s.36-40). Deregulation occurs with the change of the economic system in the U.S and Great Britain because state ownership, government regulations and internetionism became obstacles to the process of privatization.Thus the economic entities have become attractive to private investors (TABOROŠI, S. Ekonomsko pravo, s. 122).

5

In the period between the end of September 2008 and the end of January 2009 Serbian Dinar lost 19 % of its value(ĐUKIĆ, Đ. The Global Financial Crisis and the Behaviour of Short-Term Interest Rates – International and Serbian Aspects, s.498)

6

At the end of 2009 capital adequacy ratio was 21.4%, compared to the stipulated minimum of 12%. BOŠNJAK, M. Globalna finansijska i ekonomska kriza i njen uticaj na privredu i finansije Srbije, s.37.

7 _{BOŠNJAK, M. Globalna finansijska i ekonomska kriza i njen uticaj na privredu i finansije Srbije, s.}

The situation in Serbia just confirmed the theory which stated that during the period of crisis capital moved from periphery to the core. Capital was withdrawn from Serbia and moved to the countries it had come from. This was mostly capital which came from European countries also affected by the crisis.

The crisis manifested itself in the financial system of Serbia in many ways among which were rising interest rates. Rising interest rates caused more difficult and more expensive borrowing of both the economy and the citizens. Crisis affected Serbia through growth of Euribor and Libor and then spread to the real sector of the economy. Crisis opened the issue of insufficient aggregate demand which had the effect on Serbian economy through the form of reduction in exports. However, reduction in imports also occurred. Tighter and limited credit conditions led to decrease in the volume of production, hampered collection of accounts receivable, decreased exports and decline in economic growth. During 2008 GDP was reduced but its structure was also changed as the result of reduced consumer spending, reduced investment spending and higher public spending. Serbia registered a 3.5 % GDP fall in 2009.8 The biggest GDP fall was in the field of industry, construction and trade.

Due to scarce foreign capital and hampered borrowing, the main sources of credit in 2009 were corporate loans, foreign currency savings and remittances from abroad.

Banks in Serbia were not investing their funds in high-risk assets i.e. mortgage-backed securities. This proved to be a good decision. Banks were significantly investing in repurchase of NBS securities and short-term government bonds of the Republic of Serbia. Free RSD funds were being invested in treasury bills instead of loans. Since the real and the financial sector of the economy are connected, banks started to grant loans in a more restricted manner due to the economic downturn, rising unemployment, higher interest rates and depreciation of RSD. Clients also began to have difficulties in fulfilling their credit obligations because of these factors as well. Due to depreciation of the exchange rate nominal obligations of the borrower were increased. Decline in wages came as the result of this because wages failed to follow currency depreciation.9 Research conducted with the use of CAMELS methodology (capital adequacy, asset quality,

management, earnings, liquidity and sensitivity to market risk) even state that the performance of

banks was reduced for some time and recovery was registered only after 2009.

2.2. Measures undertaken by the country

As it was previously mentioned, the crisis did not have direct but indirect effect on Serbia. Serbia did suffer decrease in economic growth and macroeconomic indicators but it must be said that these were primarily the results of the transition and structural problems of the economy. No banks in Serbia went bankrupt. The Serbian banking system was characterized by a high capital adequacy ratio, even 2.5 times higher than the one prescribed by the Basel standards.10 The population’s distrust, yet, led to withdrawal of foreign currency deposits.

In order to mitigate the consequences of the crisis in Serbia certain measures were undertaken by the country, i.e. the Government of Serbia and the National Bank of Serbia. Due to the outflow of foreign capital and the depreciation of the local currency, the NBS was forced to intervene in the inter-bank foreign currency market by selling foreign currency reserves (euros), 894.7 million euros that is.11 Despite these interventions of the central bank, RSD weakened. Since the country had a problem with foreign currency insolvency (international insolvency) at the time, the central bank responded by abolishing required reserves on foreign loan, and also by increasing required reserves on Serbian Dinar (RSD). Penalties for uncommitted required reserves were also reduced.12

For the purpose of better risk management, the NBS issued certain guidelines in relation to the Basel II standard. These guidelines came into force on December 31st 2011 as a general

8 _{MINISTARSTVO FINANSIJA. Izveštaj o razvoju Srbije 2010, s. 25.}

9 _{VUNJAK, N., DAVIDOVIĆ, M., STEFANOVIĆ, M. Uticaj globalne finansijske krize na performanse}

bankarskog sektora u Srbiji, s. 1290.

10 _{MINISTARSTVO FINANSIJA. Izveštaj o razvoju Srbije 2010, s 25.}

11 _{The biggest monthly intervension was in January 2009 and it was 381.3 million euros. (ĐUKIĆ, Đ.}

The Global Financial Crisis and the Behaviour of Short-Term Interest Rates – International and Serbian Aspects, s. 501).

framework for the implementation of Basel II for banks operating in Serbia. In this sense banks adjusted their business to the new regulations.

A subsidy represented the most commonly used measured in the crisis. As the real sector of the economy recovered the country started granting subsidized loans, i.e. loans with subsidized interest rates. Thus a Program for supporting economy was created which approved 40 billion RSD of liquidity loans with a foreign currency clause and a 3 % interest rate per annum. RSD liquidity loans were also introduces with a 10.5 % interest rate. Investment loans were also subsidized with participation of the Fund for Development and State guarantees with the amount of 17 billion RSD and consumer loans of 20 billion RSD. Consumer loans for automobiles, agricultural machinery, furniture and building materials were subsidized as well.

Reducing required reserves during 2009, reducing key policy rate and real interest rate were a further incentive for the economy.13 As part of the measures to mitigate the effects of the crisis the insurance deposit amount was increased to 50.000 EUR per depositor (individuals, entrepreneurs, small and medium enterprises) in order to ensure financial stability.14 Taxes on interest income and taxes on capital gains realized from trading in securities15 were abolished. The purpose of these measures was to encourage saving and trade in the stock market. In order to facilitate repayment of loans banks abolished the costs of early repayment of the loan and allowed the extension of the repayment period for up to one year and allowed conversion of debt into other currencies.16

The Government also subsidized apartment building. Public investments in infrastructure were increased in order to stop further decline in unemployment. The intension was to finish the process of privatization but this goal was not achieved.17

The Republic of Serbia brought several regulations in 2009 in order to encourage exports. These regulations stipulated conditions for granting the status of a major exporter who could use incentives, loans for investments and working capital acquisition, use credit with subsidized interest rates for liquidity and consumer loans in accordance with the Regulation on criteria based on which in the sense of Value Added Tax Law is considered to be the prevailing international trade in goods.18

During 2009 and 20010 measures were being undertaken in order to mitigate the effects of crisis and help the recovery of economy. In April 2009 The Government came out with a program of measures aimed at reducing public spending, increasing employment and improving competitiveness. In order to reduce public spending the Government reduced the number of employees in the public administration. Pensions and wages in this sector were frozen. In 2010 subsidized cash and consumer loans were approved with maturities of up to three years with one year grace period. The purpose of these loans was to increase the demand and purchasing power of the citizens. A Law on conditions and ways of attracting foreign investment was brought in order to attract direct foreign investment.19 The Republic of Serbia managed to approve around 3 billion euros in 2009 and 2010 through incentives.20

In 2011 the Government of Serbia adopted the Program of measures to mitigate the negative effects of the global economic crisis. Measures were mostly in the form of subsidies, i.e. subsidized loans to companies and households (including those during 2008, 2009, 2010). Emphasis was put on employment promotion in addition to these subsidies, i.e. subsidy loans. To increase exports, exporters were allocated grants and the limit for recovery of value added tax was reduced from 45 to 15 days. The equipment which was not produced in the country and had to be imported was freed

13 _{BOŠNJAK, M. Globalna finansijska i ekonomska kriza i njen uticaj na privredu i finansije Srbije,}

s.38.

14

Zakon o osiguranju depozita, čl. 2.

15 _{Zakon o privremenom izuzimanju od oporezivanja porezom na dohodak građana pdređenih vrsta}

prihoda, „Službeni glasnik Republike Srbije”, No. 5/09

16 _{MINISTARSTVO FINANSIJA. Izveštaj o razvoju Srbije 2010, s 17.}

17 _{BOŠNJAK, M. Globalna finansijska i ekonomska kriza i njen uticaj na privredu i finansije Srbije, s.}

45.

18 _{MINISTARSTVO FINANSIJA. Izveštaj o razvoju Srbije 2010, s 17.}

19 _{Uredba o uslovima i načinu privlačenja direktnih investicija („Službeni glasnik Republike Srbije”,}

No. 34/2010)

from customs duty. A series of agreements on free trade were signed with the Russian Federation, Belarus and Turkey.21