SOME ELEMENTS OF COMPETITIVENESS SOME ELEMENTS OF COMPETITIVENESS OF THE ECONOMY OF SERBIAOF THE ECONOMY OF SERBIA

NBRM Conference, SkopjeNBRM Conference, Skopje, , 30 May 30 May 20082008

Branko Hinić and Milan Šojić, National Bank of Serbia

Economic Analysis and Research Department

ContentsContents

Memorandum of the NBS on Setting Inflation Objectives for

2009 and 2010

Medium-term core inflation objectives

Core inflation projection

World Economic Form - Global Competiveness Index for

Serbia

Investing in Serbia

Memorandum of the National Bank of Serbia on Setting Memorandum of the National Bank of Serbia on Setting Inflation Objectives for the Years Inflation Objectives for the Years 20092009 and and 20102010

Linearly declining band of core RPI year-on-year inflation rates with

the following parameters:

2009 starting level:

a range of 3.0% - 6.0% with a midpoint of 4.5 %

2009 end level and 2010 starting level:

a range of 2.5% - 5.5% with a midpoint of 4.0%;

2010 end level:

a range of 2.0% - 5.0% with a midpoint of 3.5%.

Medium-term core inflation objectivesMedium-term core inflation objectives

Medium -term core inflation objectives (y ear-on-y ear growth rates, in %)

0

1

2

3

4

5

6

7

8

9

10

IV

2006

I II III IV

2007

I II III IV

2008

I II III IV

2009

I II III IV

2010

Objectiv e f or 2007 4-8%

Objective for 2008 3-6%

Objective for 2006 7-9%

Objective for 2009 2.5-5.5%

Objective for 2010 2-5%

Projected core inflation (y ear-on-y ear rates, in %)

0

1

2

3

4

5

6

7

8

9

10

II III IV

2007

I II III IV

2008

I II III IV

2009

Objective for 2008 3-6%

Objective for 2009 2.5-5.5%

Objective for 2007 4-8%

Core inflation projectionCore inflation projection

Dinar exchange rate and foreign exchange marketDinar exchange rate and foreign exchange market

Non-economic factors had a strong impact on foreign investors’

expectations

Movements in the RSD/EUR exchange rate in 2007 and 2008

76

78

80

82

84

86

Jan2007

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan2008

Feb Mar Apr

80,76

79,66

79,96

78,19

RSD/EUR

76,81

78,89

84,75

77,20

84, 68

77,89

80,30

78,51 78,6

79,90

81,57

80,00

81,38

79,58

82,98

80,78

81,88

79,03

81,82

78,67

82,99

79,76

83,83

81,44

1-20May

83,70

82,02

82,26

79,70

83,87

80,66

...... in Q1 2008, in Q1 2008, quarterly quarterly core inflationcore inflation slowed down slowed down!!

In Q1, core inflation (7.7%, y-o-y) was above the upper bound of the target range in line

with expectations, despite the decline in its quarterly growth rate in Q1 (1.5%) relative to

Q3 and Q4 2007 (2.2%);

In Q1, retail price growth equaled 2.8% (11.8% y-o-y), with regulated prices contributing

1.6 pp.

Retail prices(in %)

11.8

5.6

14.3

11.7

5.1

9.1

0

2

4

6

8

10

12

14

16

I

2006

II III IV I

2007

II III IV I

2008

year-on-year growth quarterly growth, ann.

Core inflation (in %)

11.6

4.0

7.0

7.0

-0.3

5.9

-2

0

2

4

6

8

10

12

14

I2006

II III IV I2007

II III IV I2008

year-on-year growth quarterly growth, ann.

CCore and headline inflation 2001-2007ore and headline inflation 2001-2007

CORE AND HEADLINE INFLATION IN SERBIA

2001-2007

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2001 2002 2003 2004 2005 2006 2007

Years

In % per annum

Headline inflation

Core inflation

GDP GROWTH RATES 2000-2007GDP GROWTH RATES 2000-2007

GDP- REPUBLIC OF SERBIA Growth rates 2000-2007

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2000. 2001. 2002. 2003. 2004. 2005. 2006. 2007.

In %

FDI-inward FDI-inward

FDI Stock (2001-2007): $13.5 bn

5. 5. Current account deficit in Serbia and other countriesCurrent account deficit in Serbia and other countries

Current account def icit (% of GDP)

-22

-20

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

2003 2004 2005 2006 2007

Bulgaria

Romania

Slovakia

Serbia

Source: EUROSTAT and central banks' websites.

Slovenia

Croatia

Capital inflows exceeded the current account deficit financing needs in 2007, which

reflects an increase in foreign exchange reserves.

The strongest average increase in foreign exchange reserves in the period 2003-2007 was

recorded for Serbia (7% of GDP).

Changes in central banks' foreign exchange reserves (% of GDP)

-18

-15

-12

-9

-6

-3

0

3

6

2003 2004 2005 2006 2007

Bulgaria

RomaniaSlovakia

Serbia

Note: The minus sign indicates increase in fx reserves and vice versa.

Source: EUROSTAT and central banks' websites.

Slovenia

Croatia

World oil pricesWorld oil prices

World price of Ural oil per barrel (in USD)

115,9

63.1

67.668.8

73.9 73.7

67.571.3

76.4

84,4

90.6 89.093.1

88,8 87.489.4

94,9

101.4100.0

108.2

55

60

65

70

75

80

85

90

95

100

105

110

115

120

May-07

J un J ul Aug

Sep

Oct Nov Dec J an Feb Mar Apr May-08

Average for the period

Annual price growth:

Ural oil 84% (May 2008/May 2007);

Oil derivatives 21.9% (April 2008/April 2007).

Strengthening of the dollar places additional upward pressure on prices of oil derivatives.

In order to boost liquidity in the IFEM, the NBS sold a daily In order to boost liquidity in the IFEM, the NBS sold a daily average ofaverage of EUREUR 4 4..4 4 mln in the year to date mln in the year to date

Purchase/sale of foreign exchange by the NBS in the fixing session and euro exchange rate

-120,000

-100,000

-80,000

-60,000

-40,000

-20,000

0

03

.01

.07

17

.01

.07

31

.01

.07

14

.02

.07

01

.03

.07

15

.03

.07

29

.03

.07

16

.04

.07

30

.04

.07

16

.05

.07

30

.05

.07

13

.06

.07

27

.06

.07

11

.07

.07

25

.07

.07

08

.08

.07

22

.08

.07

05

.09

.07

19

.09

.07

03

.10

.07

17

.10

.07

31

.10

.07

14

.11

.07

28

.11

.07

12

.12

.07

26

.12

.07

14

.01

.08

28

.01

.08

11

.02

.08

26

.02

.08

11

.03

.08

25

.03

.08

08

.04

.08

22

.04

.08

12

.05

.08

(000 EUR)

76

77

78

79

80

81

82

83

84

85RSD/EUR

NBS interventions in IFEM (left scale) Exchange rate (right scale)

No steps have been taken to defend the exchange rate in the fixing session since mid-May 2007;

Since the start of the year, the NBS sold a total of EUR 393 million (outside the fixing session),

compared to EUR 556.7 million sold in the same period a year earlier (in fixing sessions) – 42%

more!

Composition of banking sector trading in the IFEM in 2007 and 2008*

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

J an 2007 Mar May J ul Sep Nov J an Mar 1-16May2008

Bank - bank Banks - NBS

in EUR mln

* NBS sells a portion of foreign exchange purchases from exchange dealers in the IFEM.

Capital marketCapital market

BELEX15 index

0

100

200

300

400

500

600

700

800

900

3/1/08 22/1/08 7/2/08 26/2/08 13/3/08 31/3/08 16/4/08 9/5/08

RSD mln

Source: Belgrade Stock Exchange.

1,500

1,600

1,700

1,800

1,900

2,000

2,100

2,200

2,300

2,400

in index points

Turnover - left scale Value

The impact of non-economic factors and world financial crisis.

World Economic Form-Global Competiveness IndexWorld Economic Form-Global Competiveness Index-2007-2008-2007-2008 Republic of Serbia..... Republic of Serbia..... rank 91rank 91 of 131 of 131 (score 3.78 of 7)(score 3.78 of 7)

Subindex A-Basic requirements......................78

1st pillar- Institutions ..........................................99

2nd pillar-Infrastructure.......................................92

3rd pillar-Macroeconomic Stability.........................88

4th pillar-Health and primary education.................31

Subindex B-Efficiency enhancers....................88

5th pillar-Higher education and training.............82

6tht pillar-Good market efficiency.....................114

7tht pillar-Labour market efficiency...................111

8th pillar-Financial market sofistication.............98

9th pillar-Technological readiness......................57

10th pillar-Market size...........................................75

Subindex C-Innovation and sophistication.....88

11th pillar-Business sophistication....................95

12th pillar-Innovation............................................78

Quality of national business environment......90

World Economic Form-Global Competiveness IndexWorld Economic Form-Global Competiveness Index-2007-2008-2007-2008 BY COUNTRIESBY COUNTRIES

SER B&H Mtng

Mac.FR

Y GR Bull. Rom. AL Cro. Hun. Competitiveness Index WEF   91 106 82 94 65 79 74 109 57 47

Sub index A-Basic requirements 78 104 59 72 48 76 88 99 53 551st pillar- Institutions 99 113 78 102 49 109 94 114 65 542nd pillar-Infrastructure 92 117 90 85 35 84 100 128 53 543rd pillar-Macroeconomic Stability 88 90 33 53 106 47 84 79 73 1074th pillar-Health and primary education 31 87 33 47 42 56 52 65 44 41Sub index B-Efficiency enhancers 88 95 87 98 57 72 62 105 61 405th pillar-Higher education and training 82 98 79 75 39 66 54 103 46 336tht pillar-Good market efficiency 114 113 91 98 60 90 74 117 71 597tht pillar-Labour market efficiency 111 77 52 112 120 73 85 88 56 588th pillar-Financial market sofistication 98 71 43 83 60 74 78 103 68 519th pillar-Technological readiness 57 110 48 90 58 65 59 74 49 4110th pillar-Market size 75 80 130 106 39 61 43 107 64 41Sub index C-Innovat.and sophistication 88 123 97 101 59 91 73 125 53 4311th pillar-Business sophistication 95 119 90 108 62 92 73 109 64 4612th pillar-Innovation 78 121 104 92 63 88 76 131 50 37Quality of nation. business environment 90 105 80 96 52 77 74 122 61 46

Republic of SerbiaRepublic of Serbia -- c comparative advantomparative advantaagesges

Investment Incentives

State grants in the range between €2,000 and €10,000 per every new job created and tax incentives now available.

Quality Human Resources

Skilled and productive labor force- one of the major competitive advantages.

Strategic Geographic Location

You can effectively serve your European and Middle Eastern customers

Low Operating Costs

Attractive tax environmentAttractive tax environment - corporate profit tax rate 10% and other benefits.

Lowest individual income tax- 12%

Total monthly labor costs EUR 550 (April 2008)

Locate Business

Property Database

Republic of SerbiaRepublic of Serbia - - market accessmarket access

Duty free exports to the EU

FTA with Russian Federation - market of 150 million

people

CEFTA – duty free access to 30 million people

market (CEFTA agreement signed in 2007)

WTO accession expected in 2008

Republic of SerbiaRepublic of Serbia - investment factors - investment factors

Continuous macroeconomic stability (GDP growth, budget balance,

relatively low public debt to GDP, core inflation - new monetary

framework)

Market access and market potential

Valuable human capital

Attractive tax environment

Government incentives

Law of Concessions/ free zones incentives / BOT-investments, etc...

FDI growth

Republic of Serbia- Republic of Serbia- Number of graduated students from universities in Serbia

Base of young, educated, skilled and committed workforce

Source: SIEPA

FOREIGN DEBT 2000-2007 FOREIGN DEBT 2000-2007

FOREIGN DEBT

0

5000

10000

15000

20000

25000

30000

$ m

ln

Foreign exchange reservesForeign exchange reserves

FOREIGN EXCHANGE RESERVES

2001-2007

0,0

2.000,0

4.000,06.000,0

8.000,0

10.000,0

12.000,014.000,0

16.000,0

18.000,0

2001 2002 2003 2004 2005 2006 2007

$ m

ln.

NBS Banks Total

Republic of Serbia- Favorable investment regime Republic of Serbia- Favorable investment regime

Republic of Serbia- Republic of Serbia- Financial incentivesFinancial incentives

Non-refundable funds for investments in all sectors, except agriculture, tourism, hospitality and trade

Investment projects rated based on the evaluation criteria : investors reference; participation of domestic suppliers; effects on R&D, HR etc.

Republic of Serbia- Republic of Serbia- MMajor Foreign Investors ajor Foreign Investors

MONETARY AND MACROECONOMIC RESULTS IN REPUBLIC OF SERBIA

        WIDE-RANGING ECONOMIC REFORMS (FISCAL REFORM, NEW BANKS,

OWNERSHIP RIGHTS, GOVERNANCE REFORM, etc.)

        MACROECONOMIC STABILITY

   CORE INFLATION ONE DIGIT LEVEL WITH DECREASING TREND

        GROWING FOREIGN CURRENCY RESERVES

        GROWING FX SAVINGS DEPOSITS OF CITIZENS

        ENHANCED РRIVATIZATION PROCESS, BUT ALSO:

        РROBLEMS: UNEMPLOYMENT, AS WELL AS TRADE BALANCE DEFICIT  

Thank you for your attention!