risks of delayed reindustrialization

RISKS OF DELAYED REINDUSTRIALIZATION

Prof. Dragan Đuričin

THE 2013 KOPAONIK BUSINESS FORUM

The 2013 Kopaonik Business Forum - 2

Strategic audit of Serbia’s economy

• Geopolitical transition provoked two structural imbalances− Deindustrialization− Depopulation (along with human capital paradox)

• Key consequences of mentioned imbalances− Output gap (followed by strong inflation pressure)− Low competitiveness (along with twin deficits)

• Dysfunctional policy platform exacerbates structural imbalances− Orthodox approach instead heterodox one Financialization instead of reindustrialization Price control instead output gap elimination


Two periods – two stories, 1960-2010

Ratio Industrial productionto GDP (%)

10

15

20

25

30

35

1960 1970 1980 1990 2000 2010

Industrial workers

0

2

4

6

8

10

12105

1960 1970 1980 1990 2000 2010

Industrial production (%)

150

100

50

01960 1970 1980 1990 2000 2010


Dysfunctional economic policy platform• “Strong currency in weak economy” transitional strategy

− Proceeds from privatization and FDIs fuelled this model Privatization as a form of export instead of divestment Capital inflows have been used for defending FX rate instead for investment (via

Development Bank, for example)− Functioning of the capital market has been reduced to the role of infrastructure

for privatization completion When a capital market is shallow and in retreat, financial system is bank-centric

− Industrial policy bellow the radar of policy makers

• Macroeconomic policies without a cohesive anchor− Wages (and pensions) are mostly adjusted through inflation− Inflation is dependent on FX rate− Wages (and pensions) and FX rate are mostly dependent on populist attitude

(primarily, election cycle)

• Economic fundamentals provoke negative economic expectations− Extremely high cost of capital− Really appreciated FX rate− Relatively high and unpredictable cost of labor


Policy rate benchmark, H1 2008 –H1 2012

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12

EUUS

Serbia


Epilogue

• Transitional output gap was not eliminated• Policy targets (CPI primarily) were not achieved• Economy stayed impotent and out of tune


Macroeconomic indicators, 2002-2012

Indicators 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Real GDP growth rate 4.3 2.5 9.3 5.4 3.6 5.4 3.8 -3.5 1.0 1.6 -1.5

CPI, in% 14.8 7.8 13.7 17.7 6.6 11.0 8.6 6.6 10.3 7.0 12.2

Unemployment rate 13.3 14.6 18.5 20.8 20.9 18.1 13.6 16.1 19.2 23 22.4

Current account balance, in % of GDP

-4.2 -7.8 -13.8 -8.8 -10.1 -17.7 -21.6 -6.6 -6.7 -9.2 -8.3

Budget deficit/surplus, in %

-4.3 -2.6 -0.3 0.3 -1.9 -1.7 -1.7 -3.4 -3.7 -4.2 -5.0

Public debt, in % 72.9 66.9 55.3 52.2 37.7 31.5 29.2 34.7 44.5 48.7 59.2

External debt, in % 58.7 55.9 49.8 60.1 60.9 60.2 64.6 77.7 84.9 77.5 85.6

RSD/EUR FX rate (period average)

60.66 65.13 72.70 83.00 84.10 79.96 81.44 93.95 103.04 101.95 113.45


Vulnerability indicators, 2012Performances Indicators Reference point

Transitional output gap Okun index (inflation + unemployment)Twin deficitsCurrent accountBudget

30%34.6%

8.3%5%

0%<12%

<5%<3%

Indebtedness Public debt/GDP Foreign debt/GDP Foreign debt/Export

Credit rating S&PFitch

59.285.6

215.7

BB-/negativeBB-/negative

<45%<90%

<220%

investment rang > BBinvestment rang > BB

Export (goods)/GDP Currency depreciation (2012/2011)Nominal Real

Global competitiveness indexCorruption perception indexEase of doing business Economic freedom index

29.4%

-9.9%-5.7%

95th of 14480th of 17686th of 18594th of 177

>50%

<-5%<-3%

65-SEE average59-SEE average60-SEE average62-SEE average

Ope

rati

onal

pe

rfor

man

ces

Fina

ncia

lpe

rfor

man

ces

Com

peti

tiven

ess


Impact of loan-to-deposits on banking industry in CEE12

10

8

6

4

2

0

-2

-4

-6

-8

Loan-to-deposit (%)80 85 90 95 100 105 110 115 120 125 130 135 140

Asse

ts g

row

th(%

)

SlovakiaCroatia

Serbia Bulgaria

RomaniaHungary

SloveniaLithuania

Latvia

Estonia

Czech Republic

Poland


Real economy

0

200000

600000

800000

1000000

1200000

1400000

2006 2007 2008 2009 2010

2008 2009 2010

Long-term liabilities

0

100000

200000

300000

400000

500000

600000

700000

2006 2007

Short-term liabilities

0

200000

400000

600000

800000

1000000

1200000

1400000

2006 2007 2008 2009 2010

Current operation liabilities

400000

Thou

sand

Thou

sand

Thou

sand

00.20.40.60.8

11.21.41.61.8

2007 2008 2009 2010

Debt to equity

Inde

bted

ness

Liqu

idit

yPr

ofit

abili

ty

-120000-100000-80000-60000-40000-20000

0200004000060000

2006

Net income (loss) after taxes

2007 2008 2009 2010

Thou

sand

-120000

-100000

-80000

-60000

-40000

-20000

0

0

20

40

60

80

100

120Average No. days receivables

0

50

100

150

200

250

2007 2008 2009 2010

Average No. days payables

2007 2008 2009 2010

Thou

sand

2006 2008 2009 2010

Net working capital2007

-7

-6

-5

-4

-3

-2

-1

02007 2009 2010

Return on equity2008


Capital market is shallow and in retreat

• Market cap in numerous listed companies is lower than their book value− Expected ROE < Factual RR

• Metalac Group case− Market cap = EUR 18.3 mil (January 2013) Net profit (Yr. 2012)= EUR 5.4 mil Book value (Yr. 2012)= EUR 50.0 mil


Public sector is loss-making one

• Full cost pricing has not yet been implemented− Price of electricity colorfully explains the point

• Mismanagement− “Party property”


Electricity price benchmark, 2010

0,00 5,00 10,00 15,00 20,00 25,00 30,00

DenmarkGermanyBelgium

SweedenItaly

PortugalSlovakia

Great BritainSlovenia

PolandTurkeyFranceGreeceCroatia

RomaniaMontenegro

BulgariaAlbania

BHMacedonia

Serbia

Households

Before taxes VAT and other taxes

0,00 5,00 10,00 15,00 20,00 25,00

DenmarkItaly

GermanySlovakiaBelgiumSlovenia

PolandGreat Britain

CroatiaTurkey

SweedenGreece

RomaniaPortugal

FranceBulgariaAlbania

BHMacedonia

MontenegroSerbia

Industry


Households

• Small market without demographic dividend− Low income 2.5 million of households Average income is EUR 422 Average pension is EUR 230

− Depopulation Negative population growth rate

− Small savings EUR 8 billion

• But, significant remittances− EUR 2.5-3.5 billion per year− Yearly FDIs plus equity investments have never surpassed level of

remittances


Inde

bted

ness

Liqu

idit

yPr

ofit

abili

ty

2008

24 21 20 21

2009 2010 2011

Equity/Assets (%)

2008

14 1310 10

2009 2010 2011

Revenues/Loans (%)

2008

2,711 2,635 2,432 2,383

2009 2010 2011

# of branch

2008

8 7 6 6

2009 2010 2011

Net revenue/Assets (%)

2008

2.13.0

2.0

3.9

2009 2010 2011

Cost of Risk/Loans (%)

2008

8.3

4.5 5.1

0.2

2009 2010 2011

ROE (%) Cost to Income (%)

2008 2008

60 33.163 32.163 32.7 34.261

2009 20092010 20102011 2011

Operating costs/FTE (EURk)

2008

na

42 41 42

2009 2010 2011

Personal exp./Op.costs (%)

Banking industry


Global economy growth prospects, 2013-2015

0

1

2

3

4

5

6

7

8

2010 2011 2012 2013f 2014f 2015f

Annual GDP growth, %

Developing countries

World

High-income countries

June 2012 forecast


Paradigm change

• Downturn is not the time for setting economic policy targets− It is the time for changing policy platform and coordinating policy tools

• Model of capitalism is under revision, including:− The role of state (government-led industrial policy)− The role of super elite − The role of sovereign wealth funds

• Only two focuses of industrial policies− Commodities− High-end products

• New set of priorities for technology development1. Climate change2. Food safety3. Sustainable transport4. Pro-aging

• Technology platforms for competitiveness improvement− 36 in the EU


Anti-crisis program

Per

form

ance

impr

ovem

ents

2013 2014 2015 2016 2033

t

COMMODITIESEXPANSION

REINDUSTRALIZATION

FISCALCONSOLIDATION


Reindustrialization

• New level playing field− Government –led industrial policies in tradable sectors− Private sector motivated by value creation and reestablished by

morality and ethics • Turnaround strategy targets

− Structural reforms− Macroeconomic stability

• Mindset shift− Shift from macroeconomic stability toward dynamic management in

public and private sectors• Industrial policies lead, macroeconomic policies follow

− Priority sectors− Infrastructure development (mostly conceptual) − Automatic stabilizer in monetary and fiscal policies


Priority sectors for reindustrialization

1. Food processing2. Dairy3. Construction4. Metal processing5. Automotive6. ICT7. Military8. Life sciences


Recommendations, instead of conclusions

• Serbia’s economic crisis has deep political roots− Main geopolitical stakeholders redirected transition toward

geopolitical instead economic tenets− No macroeconomic policy can improve situation

• By contrast, the economy must be the top priority• Turnaround strategy

− Good vision− Fist step in good direction

• Model of capitalism under revision − The role of domestic capitalists

• Structural reforms along with scientification of society− Improvement of Serbia’s manufacturing space based on integration

with the EU technological platforms


Thank you!

Prof. Dragan Djuricin,Chairman

Deloitte d.o.oTerazije 8; 11000 Belgrade

Phone: +381 (0) 11 38 12 205Direct: +381 (0) 11 38 12 202

[email protected]/rs

risks of delayed reindustrialization

Documents