The Fed and the ECB this week, as well as the National Bank of Serbia in two weeks, are making decisions on changing interest rates, and this increase in interest rates has already affected the decline in investments. As explained by Lazar Ivanović, an economist at CEVES, investment activity is lower, but he notes that it is generally low anyway.
„The increase in interest rates and uncertainty have indeed affected the decline in investments, which can also be seen in the drop in investment loans, which are seven percent lower compared to last year and 18 percent lower compared to the year before last, and that's even without considering inflation. However, it should also be said that private sector investments were low even before the COVID crisis and before the war in Ukraine, and we all know that interest rates were very low then. Therefore, although the impact of rising interest rates is already visible, the main causes of low private investment concern three things. The first is the now well-known story about the unfavorable business environment. The second factor is also known, and that is the almost exclusive focus of the state on attracting foreign direct investment. The third factor is a weak, relatively weak, and, we must say, outdated way of managing companies,“ explains Ivanović.
He says that our companies buy with cash that they have previously accumulated in their accounts for a longer period, and adds that their machines often have capacities that are larger than necessary. „All of this, therefore, when put together, both slows down and reduces the efficiency of investments. Despite this, therefore, what we see from our index and from previous research is that most companies do not rely on banks and loans because, as they say, they do not need external financing.“
Ivanović states that raising private investments is a complex undertaking. „This undertaking involves both managerial and financial literacy of the economy if we want to raise domestic private investments from the current approximately seven to nine percent to 15 percent, in order to have a total investment of about 25 percent of GDP.“
The report by the BBA analytical team shows that manufacturers are managing to increase product prices with nominal export value above real value. Ivanović says that the prices of export products in the manufacturing industry are slowly catching up with input prices.
„Based on the monthly producer price index of industrial products, we can see that from the end of 2021 to the beginning of this year, the price increase for imported products in the manufacturing industry ranged on average between 12 and 15 percent. Therefore, compared to the previous year, this was above the growth of export prices, which means that this larger part of the burden was transferred to domestic companies. However, in the last few months, i.e., since the beginning of this year, the prices of products we export are rising, while the prices of imported products are stagnating, even slightly decreasing. This means that these terms of trade are largely returning to the old ways. The prices of products that the manufacturing industry exports are slowly catching up with input prices, i.e., as much as it has become more expensive for us, it will be for them too.“
Source: Bloomberg Adria TV
Author of the report: Jelisaveta Lazarević
