It has been fifteen months since the Serbian dinar has been growing more or less continuously, by a total of 4.2% so far. The current exchange rate stands at 118.3 dinars for 1 euro, a drop from 123.07 dinars from only a few months ago.
These days, Serbian media are prone idolizing the strong domestic currency, corroborated by the recent news that one of the global credit rating agencies declared dinar as the “the second best performing currency in the world”.
However, if we dig deep into the report, it actually shows that it is an estimate based on the rate of return on investments in government bonds. It means that even now, when the central banks of European countries are borrowing extremely cheaply in financial markets, while the Germans are borrowing virtually for free, we are still paying high interest rates to financiers.
Like most developed countries, our country also lives on borrowed money, i.e. the money is secured through permanent emission of securities. Some are issued on the period of two, the other on five and some on a ten-year-period and the interest is charged accordingly to the issuance period.
Profit of 8.85%
Last year, in January, Serbia issued two-year bonds in the amount of 5.8 billion dinars, with an interest rate of as much as 4.65% annually. The country failed to sell all bonds at once so, in mid-March of the same year, it offered the remaining bonds on sale.
At that time, 1 euro was worth about 123 dinars, and, in order to buy the entire issued series, the foreign buyer had to exchange change 47.16 million euros for dinars with the National Bank of Serbia (NBS).
Twelve months later, the euro is worth only RSD 118.3, and last year’s buyer has now raised the annual interest rate on these bonds. Now, the buyer has 5.8 billion-dinars worth of bonds in their possession which can easily be sold at a nominal value. In the meantime, the interest rates in Serbian financial market have fallen, so on 20th March this year, Serbia put up for sale a new issue of two-year bonds, this time with an annual yield of only 0.96%. Certainly, last year’s buyer will easily sell the bonds that now yield almost four times higher interest rates.
Others borrow for free
If the buyer wants to return to trading in euros, he will have to pay the current price / exchange rate, that is, RSD 118.2 for t1 euro. Since last time he got 123 dinars for 1 euro, he is now left with about 237 million dinars of surplus.
As it turns out, apart from the interest of 4.65%, the buyer’s earnings are now also higher by an additional 237 million dinars, i.e. 4.2% of the value of the bonds, with his cumulative profit amounting to 8.85%.
Declining economic activity
Stronger dinar has resulted in a lot of borrowing to Serbia. This, however, is not the only bad consequence of the appreciated dinar.
The Secretary of the Serbian Bank Association, Veroljub Dugalic talks about a decline in lending activity, namely in February, Serbia’s total indebtedness was 1.372 billion dinars, i.e. 1.5 billion less than in January, almost 3 billion dinars below the indebtedness in December last year. Banks are extremely liquid, and they do not have anyone to borrow money to in the Serbian market. This is the typical situation for stagnant economy.
In this situation, we can hardly expect a serious increase in production and gross national income, as Serbia remains at around EUR 5.000 per capita, far from Hungary, Croatia, Romania, Slovakia, and Bulgaria and Montenegro.
The strong dinar changes the situation in the Serbian market too. Many imported products have become very expensive, as clearly seen in the prices of imported footwear and clothing which are noticeably higher than in neighbouring countries.
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