Governor's interview for "Večernji list": Modified projections provide hope for economic recovery

Modified projections provide hope for economic recovery and better future

In this year, as well as in the next one, GDP should be growing by 3.4 per cent, although the rates could be additionally modified upwards in the next round of projections, said Senad Softić, Ph.D., Governor of the Central Bank of Bosnia and Herzegovina, in the interview for Večernji list. He says he hopes prices would remain rather stable. He stressed that dynamic increases of investments and exports are expected in this and the next year, which is certainly positive.

So, modified projections provide hope for economic recovery and, I would say, better future, Softić, Ph. D., said. Regarding the inflation rate, Softić, Ph. D., said that, speaking of the situation in BH, he believes that inflation growth is not a threat for us.

The Central Bank has recently modified upwards the projections of economic activity for this and next year. Which are the key conclusions of the projection?

Firstly, I would like to stress that in November 2020, for the first time, we have started publishing our own projections, i.e. the projections of economy activity by the Central Bank of Bosnia and Herzegovina (the CBBH) for BH. It is only one of a number of activities by which we are trying to raise the quality of the CBBH operations. Until the publishing of our projections, those of foreign institutions were used in BH. It is our contribution to higher transparency and better information of all economic entities in BH. We publish our projections twice a year, in May and in November, so this is the second publishing. The key conclusion is the modification of the 2021 and 2022 growth rates upwards. According to the available indicators, GDP is expected to increase by 3.4% in each of these years. To be honest, there is a possibility that in the next round of our projections, planned for November this year, the rates could be additionally modified upwards. I also hope that prices would remain rather stable. We also expect dynamic increases of investments and exports in this and the next year, which is certainly positive. So, modified projections provide hope for economic recovery and, I would say, better future.

What is your view of the possibility that the global growth of prices of raw materials would spread to consumer products? Could BH mitigate that growth? Is a higher inflation growth threat for us?

You have made a good point that the beginning of the so-called super-cycle of the growth of raw material prices is observed globally. Here is a couple of illustrations. One of the most important raw materials in industry - copper is reaching its record prices. Only from January this year, its price has increased by one third. The increasing production of electric cars certainly contributes to that. However, the prices of standard energy sources, such as oil and coal and also natural gas, are increasing as well. The prices of food, cereals and similar are also increasing. That is not strange as demand is also growing due to economic recovery which is registered worldwide. So, in the end of May 2021, the OECD increased its forecasts for the growth of the global GDP for 2021 from 4.4% to 5.8%. Regarding the growth of raw material prices, we should know that the rates apply to a very low base as economic activity in the world due to the 2020 pandemic was declining. In other words, in recent past, raw material prices were lower than the long-term average values. Additionally, the largest economies in the world are already reacting to the growth trends of raw material prices. China is preparing to release a part of its strategic stocks in order to calm down the market of metals (such as copper), the USA is announcing possible raise of interest rates (for 2023), a group of countries oil producers OPEC+ is announcing the increase of production is order to calm down the growth of prices etc.. All the major central banks are monitoring inflation trends closely. Their task is to continue maintaining the price stability, so in case of a more dynamic growth, they will certainly react adequately. For now, there is no risk of uncontrolled price growth in the world. Regarding the situation in BH, I believe that inflation growth is not a threat for us. Do not forget that until recently, we have been facing deflation. In 2020, the prices went down, the indicator is -1%. So, during this and the next year, a slow growth is possible, but we are speaking about the rates below or around 1% annually. Specifically, our projection for 2022 speaks about 0.6% inflation We are watching the trends, and, if they are changed, we will inform the public. I repeat, we do not expect a considerable inflation growth.

Do you expect a growth of household demand for loans?

I would first say that banks in BH are highly liquid, while interest rates are at the record low levels. Naturally, demand for loans depends on economic entities’ expectations. The dynamics of demand will partly depend on our way of coping with the pandemic, and expectations related to its end or at least, a significant improvement of the situation. The demand will partly depend on the speed of economic recovery and generally optimism in the world and in BH. Specifically, household sector ended the previous year with the registered decline of the total value of loans. According to the CBBH data, the amount of loans to households in the end of 2020 decreased by 0.8% compared to the positions from the end of 2019 (which is the first negative growth rate of loans to households since the beginning of 2011), the total amount of newly approved loans to household sector in 2020 being lower by 29.5% compared to the previous year. In the beginning of 2021, banks additionally tightened the conditions for granting loans to households compared to the previous year, this being particularly visible in lending standards for housing loans. The most important factor for tightening the lending conditions is certainly an increased risk perception due to decreased economic activity. Following a significant decline of demand for household loans in 2020, signs of slow recovery of demand were visible in the beginning of 2021. Decrease of expenses for procurement of durable consumer goods and also use of alternative funding sources contributed significantly to decreased demand for household loans, while on the other hand, decreased remittances from foreign countries and visible recovery in real estate market influenced the demand for household loans. The amount of household loans in the end of the first quarter (Q1) of 2021, was higher by 0.7% compared to the end of 2020, while the amount of new loans increased by 15.4%. The growth of lending to household sector was recorded although lending standards were not relaxed. We can be rather optimistic in respect of increase of demand for the total loans to households in the second quarter of 2021. Having in mind positive expectations for the remaining part of the year in respect of economic recovery, the positive trend from Q1 is expected to continue and at the same time, demand for all the loan categories (consumer, general purpose and housing loans) is expected to increase.

What is the situation with corporate loans?

The trends of lending to corporate sector are similar as in the household sector. Since the declaring of the pandemic in 2020, the dynamics of granting loans to private non-financial companies was much slower, which is a direct consequence of recession trends and general slowdown of economic activities in the country. According to the data of the Central Bank of BH, loans to private non-financial companies in the end of 2020 declined by 4.9% compared to the end of 2019, which is the first negative growth rate of this category of loans since the end of 2015. Also, the amount of newly approved loans to this sector in 2020 was lower by 16.9% compared to 2019. Despite positive expectations from the end of 2020, the beginning of 2021 was marked by a new wave of the pandemic and new restrictions in operations. All this brought about deterioration in risk perception, which resulted in tightening of lending standards for corporate loans, but with lower intensity than in the third and fourth quarters of the previous year. Consequently, the total demand for credit lines decreased, so in the end of the first quarter of 2021, the amount of newly approved loans decreased by 33.7% compared to the end of 2019. The only factor for increased demand for corporate loans arose from financial needs for the restructuring of the existing debt, while, on the other hand, corporates had no financial needs for capital investments and for mergers and acquisitions of companies. It is expected that in the second quarter of 2021, due to the relaxation of the measures introduced to prevent negative effects of the coronavirus pandemic and slow growth of economic activity, lending standards for the total and short-term loans of corporates will be somewhat relaxed, with lending standards for long-term loans remaining mainly the same, which will bring about the increase of demand for the total and short-term corporate loans, with the demand for long-term loans remaining the same. Also, stronger financing needs of corporates for debt restructuring will contribute to higher demand for loans in the following period.

What is your view of the possibility of a stronger economic recovery in 2022?

Speaking of 2022, I am an optimist. Risks and uncertainty in recovery during 2021 are still rather high, which partly applies to 2022 as well. However, without some new negative shocks, such as unknown virus variants, if the struggle with the pandemic continues successfully, creation of the conditions for higher growth in 2022 will continue in 2021. I would stress that the speed of economic growth in 2022 does not depend only on the trend of economic dynamics globally but also on ourselves. Firstly on the reforms which are ahead of us. Unfortunately, it seems that there will be no arrangement with the IMF. It is important for structural reforms. That is why we, without the IMF, should continue all these structural reforms which have been discussed recently. These reforms would strengthen the single economic framework of the country, create conditions for additional investments and provide higher security to investors. I would mention the example of the account registry which the CBBH and others have been speaking about for a long time. If it is implemented, banks will have better information on clients and provide loans easier. So, the possibilities of money laundering, frauds and similar are decreased. I am saying again that we in BH can do a lot to make the growth not only higher but also sustainable in the next year and the years to come. It is important that we contribute in that way to the welfare of general population, to make the economic growth inclusive, and that benefits of the growth should be felt actually by as many people as possible, instead of a growth which is visible only in statistics.