CorD

Written by AIM admin Sunday, 01 February 2015 00:00

Interview: Goran Pitić, President Of The Board Of Directors Of Société Générale Serbia: Persisting With Reforms Most Important

The economic performance of Serbia, as a small country exposed to geopolitical influences, will be dependent on the direction and intensity of these influences. However, what is of utmost

importance is whether the commitment to reform will resist various inevitable populist pressures

Fifteen years after the democratic changes, Serbia is again confronted by some of the issues we had at the beginning of the third millennium, and which the “colour” of its future will depend on,

says Goran Pitic, President of the Board of Directors of Société Générale Serbia, speaking in this interview for CorD.

What do you think are realistic expectations in terms of economic growth in Serbia in the

following three years; are you more inclined towards the conservative forecasts of the IMF,

EBRD and the Fiscal Council, or the government’s more optimistic expectations?

REFORMS GREY ECONOMY STABILITY

The most important factor is whether or not this course of

reforms, and some steps taken in that direction, will turn out to be a long-term commitment

that will resist inevitable populist pressure.

Reducing the share of the grey economy in our

country's GDP, which currently stands at approximately a third, is

certainly a good way to increase budget revenue.

The core of long-term stability is the aforementioned fiscal

stabilisation, coupled with creating conditions for

sustainable long-term economic growth and development.

- Great challenges lie ahead for Serbia, but also many other economies in the world. The world has new geopolitical hot spots opening up that may prove a substantial burden on the functioning of the global political and economic system, while on the economic front there are a lot of

unknowns that will influence the predictability of global economic trends in the years ahead.

Serbia, as a small country, is exposed to those influences and the performance of its economy will depend on their direction and intensity to a great extent. However, the most important factor is what happens with us and whether the commitment to reform, and the steps already taken in

this direction, will prove to be a long-term commitment that will resist various inevitable populist pressures in the years ahead of us. Important preconditions for the success of this

process include strengthening the reform capacity of the government and administration, raising the efficiency of the state and significantly improving the management of state resources, as well as freeing up space for the strengthening of the private sector. The primacy of knowledge over

ignorance and primitivism, but also reformist energies, represent key leverage points for long-term sustainable development.

Fifteen years after the democratic changes, Serbia is again confronted by some of the issues we had at the beginning of the third millennium, and which the “colour” of its future will depend on.

How to engage its reform potential to a greater extent, especially among young people? How to harmonise short-term goals with the long-term needs of the times? How to ensure that the

engines of growth and change are education, innovation and entrepreneurship?

I understand fully the government’s endeavours to achieve quantitative indicators (from GDP growth to all others), as those are indicators that every government in the world presents as a

measure of its performance. Provided negotiations on the Železare steelworks are successful, if energy returns to normal flows, if we are more successful in building Corridors, we achieve an arrangement with the IMF, FIAT has a successful year and we receive a few more good news

items, then I think we will be closer to the EBRD estimate. However, an even more important result for me will be whether or not we succeed in terms of fiscal consolidation, the

professionalization of public administration and public enterprises and, most importantly in the long run, whether we have devoted enough attention and resources to education reform, with the aim of utilising our precious human capital and building a modern, competitive Serbia, capable

of providing a chance for new ideas and new knowledge, as well as responding to the challenges of the modern era.

The key leverage points for long-term sustainable development are the primacy of knowledge over ignorance and primitivism, but also the energy to carry out reforms

What do you think are the main prerequisites for achieving fiscal consolidation?

- For us to spend in accordance with our possibilities and create conditions for long-term, sustainable economic growth. A healthy budget is the foundation of macroeconomic stability, but also the best guarantee of private sector support. Unrealistic increases in the budget rights of

individual users in the previous period had to be harmonised with the budgetary reality. The

challenges of an unsustainably high public debt are immeasurable and, as such, the first step has to be measuring up to reality. It is also essential to improve the work of the tax administration. In

general, serious fiscal consolidation requires progress in the work of institutions at all levels. Experience also teaches us that it is very important to improve the mechanisms for managing the

resources the state has at its disposal (much of this is transferred to the taxpayers’ burden, due to poor and irresponsible management). This year it is necessary to finalise the process of privatising enterprises undergoing restructuring. The reform and professionalization of public

enterprises is another important prerequisite for successful consolidation, both due to the need to raise the performance of the operations of these companies, but also in order to break with an

existing practice that has had a harmful impact on their operations.

Do you believe it is possible to secure relatively substantial budget revenue through the

adoption of strict measures to combat the grey economy?

- Reducing the share of the grey economy, which in our country currently stands at

approximately a third of GDP, is certainly a good way to increase budget revenue, and to increase it significantly, but that is a lasting process. The grey economy has not been completely eliminated anywhere in the world, but it is possible to reduce it to an acceptable level. It is

necessary to develop and implement appropriate measures, to harmonise the activities of relevant institutions by creating an appropriate institutional and legal framework for combatting the grey

economy and securing a model to adequately monitor the implementation of regulations in this area, in order for the budget to make more serious gains at the expense of the grey economy in a deadline of a few years, but also to lessen its negative impact on companies that operate in

accordance with regulations.

How much do these reasons provide an explanation for the very low level of FDI in Serbia,

and how much is that due to internal problems relating to the overall business

environment?

- It is difficult to say which factor has a greater impact on the level of foreign investment in our country, primarily because investors themselves must be in a situation where they can invest, and then they make a decision about where to invest. Last year there was a certain increase in

investment volume, but we nevertheless need to continue working to improve the investment climate. In this sense, last year saw the passing of important laws, such as the Labour Law, the

Law on Spatial Planning and Construction, and the Law on Bankruptcy Procedures, but it is essential to continue the process of harmonising regulations with European standards, reducing delays in adopting required bylaws, shortening administrative procedures and ensuring efficient

implementation of regulations. Predictability in doing business and reducing administrative barriers would additionally convince investors that Serbia is a more attractive country for

investing than others in the region.

There are economists who expect that, even under the best case scenario in the following

three years, in 2017 and 2020 Serbia will face a sovereign debt crisis and, as such, we

should already be thinking about the restructuring of some financial obligations. How do

you, as a member of the team that dealt with this exact problem in the year 2000, view the

possibilities of reducing the debt burden?

- Serbia is in a serious situation when it comes to its level of indebtedness, but this is also true for the global market to a greater or lesser extent. Quality management of debt would ensure long-

term stability, improve the credit rating, reduce the overall risk exposure of the country and, thereby, also lead to a reduction in interest rates and raising the attractiveness for new

investments, both domestic and foreign. The basis for long-term stability is the aforementioned fiscal stabilisation and creating preconditions for long-term sustainable economic growth and development. Those are the basic levers for avoiding bigger problems in the future. This also

implies a good part of the revenue from announced privatisations (Telekom Serbia and others) being used for the early repayment of part of expensive loans. A responsible policy of new

borrowing is certainly required, directed towards maintaining liquidity, relieving the burden of previous unfavourable loans and orientation towards development projects.

It is even more important to know whether or not we will succeed in fiscal consolidation, the professionalization of public administration and public enterprises, than whether we achieve

GDP growth estimates

Do you think now is the right time to sell Telekom Serbia and other enterprises, and what

should be done with that money?

- Telekom should be sold. Experience teaches us that, in the greatest number of cases, the state

has proved a poor manager of its resources, and because of that taxpayers suffer, but also society as a whole. At least equally as important is the fact that, for some companies, this also means a loss of time and some competitive advantages. The telecommunications sector is developing at

unimaginable speeds and maintaining market positions also requires serious investment and management with an understanding of global flows, thus the size of the companies themselves

need to follow the demands of the times. And if we add to this prism the need to think about the quality of services for users, then it is certainly undeniable that the introduction of a third serious international operator on the competitive market in the Serbian telecommunications sector would

mean improving services for clients.

In terms of the funds received from any eventual sale, I support the position of those who consider that the best option is for an important part to be used to relieve the debt burden, while I also find it a reasonable request that a smaller part be used for certain reasoned development

projects.

What are the consequences of austerity measures when it comes to banks’ crediting policy

plans?

- Banks in Serbia, in particular the biggest banks on the market, including Société Générale

Serbia, are branches of major European banking groups, with access to substantial funding sources, so our crediting capacity has never been brought into question even for a moment. At any given moment we are able to respond to high quality demand, although this demand has

been somewhat diminished as a result of well-known market trends. Austerity measures will certainly have a negative impact on the public’s purchasing power and, consequently, demand

for loans, but we will invest our maximum in order to be a reliable partner to them in this situation, and to support them not only by continuing to approve loans, but also by adjusting our offer to suit the current situation.

How much do you think the end of pegging the Swiss Franc to the Euro will impact

negatively on the repayment of retail loans in Swiss Francs, and which modalities for

easing the position of these debtors are possible here?

- Loans denominated in Swiss Francs comprise around 10 per cent of all active loans, and their

users have been hit directly by the recent decision of the Swiss central bank to abandon the pegging of the Swiss Franc exchange rate to the Euro. And despite low interest rates on these

loans, the hit sustained by the budgets of their users is certainly not negligible, considering that the ramifications are greater in the region than with us, because these loans account for a greater proportion of the total credit portfolios of banks elsewhere in the region than, luckily, is the case

in Serbia. The models applied to address this issue differ from state to state, but we should bear in mind the overall situation in Serbia, in order for this problem to be resolved in a way that is

suitable to our market and the situation in which we currently find ourselves. I believe that, for

their part, banks will find a way, each in line with its own capacities and operational policies, to amortise this hit and help their clients continue making regular loan payments, which is in the

interest of banks equally as much as it is in the interest of clients. I have no doubt that in this matter we will have the full support and understanding of the National Bank of Serbia and other

state institutions, but in all of these joint efforts we should not violate the principle of equal treatment of all loan clients, or rather, within the solutions that are in circulation we must not, as a responsible community, favour any segment of clients or the individual interests of any bank.

Do you think it is realistic to expect further pronounced weakening of the Dinar, which

could also endanger the repayment of loans denominated in Euros?

Telekom should be sold in order to improve the company’s performance and a good share of the revenue from this and other upcoming privatisations should be used for early and partial

repayments of expensive loans

- The situation on the global foreign currency market shows that we are awaited by a period of fluctuation, harmonisation and a battle for the positioning of certain currencies. Uncertainty and unpredictability are the words that best describe the trends of the global economy and foreign

exchange markets. There are also differences in the estimates and evaluations of the effects of ECB monetary relaxation, and we know that movements on other markets also influence Serbian

Dinar fluctuations. However, there are grounds for us to believe that it is possible to have a scenario of relative stability of the national currency. The arrangement with the IMF is an

additional positive signal of support to the Dinar. The best long-term factors of support are reforms and the strengthening of Serbia’s economy.

In your opinion, how much will the reduction of the required reserve ratio on the part of

foreign currency reserves impact on a greater offer of bank credits for the economy?

- I have already mentioned the deficit in high quality demand for loans, and this is precisely the decisive reason when it comes to loans to the economy as opposed to the population. The NBS

decision to reduce the total percentage of required reserves on foreign currency sources, but alongside simultaneously increasing the participation of the dinar share in that total percentage, is aimed at freeing up foreign currency sources, which will either be used for new foreign

currency placements or for the deleveraging of banks towards their foreign creditors, though the positive effect on the price of foreign sources is partially reduced by the counter effect of

increasing dinar allocations. However, any effect in that direction, even the most minimal, is valuable, both for the banks, because it enables them to adjust the prices of funding sources downwards, and for the clients, of course. I would add that for more significant loan growth, and

with that economic growth, it is necessary to continue the reform process, primarily in the domain of creating a better investment climate, as well as in the area of conditions for improving

the country’s credit rating.

Do you think that, as a country, we missed a chance to resolve the issue of bad loans

through so-called bad banks, or do you believe, through trading with negative assets, that

this issue can be resolved to a certain degree?

- The amendments to the Law on Banks is already under parliamentary procedure and with these

amendments, along with several other legal regulations, a legal framework has finally been created for the restructuring of banks, which has the primary objective of preserving financial

stability, with minimal use of budgetary resources for this purpose. With these amendments there is also a more precise and more comprehensive definition of the role played by special purpose banks, i.e. “bad banks”, as you referred to them. With these amendments our banking system will

be completely harmonised with EU directives when it comes to the restructuring process. Will this help resolve issues associated with problematic loans? In and of itself, probably not, but it

will contribute to better and higher quality management of banks and risk management. With appropriate interventions in tax policy, when it comes to problematic loan write-offs, as well as implementing agreements on their restructuring, alongside full harmonisation with international

accounting standards, also in the hope that this will lead to positive developments in judicial and extrajudicial procedures, opening up possibilities for sales of bad loan portfolios on the market, it

would be reasonable to expect that, in the foreseeable future, the domestic banking system will fix its infamous record on the list of the highest rates of nonperforming loans in the region.

Last Updated ( Sunday, 01 February 2015 00:04 )