SOME ELEMENTS OF COMPETITIVENESS OF THE ECONOMY OF SERBIA NBRM Conference, Skopje, 30 May 2008 Branko Hinić and Milan Šojić, National Bank of Serbia Economic Analysis and Research Department

Contents  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 Inflation Objectives for the Years 2009 and 2010  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 objectives

Core inflation projection

Dinar exchange rate and foreign exchange market  Non-economic factors had a strong impact on foreign investors’ expectations

... in Q1 2008, quarterly core inflation 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 Q (2.2%);  In Q1, retail price growth equaled 2.8% (11.8% y-o-y), with regulated prices contributing 1.6 pp.

Core and headline inflation CORE AND HEADLINE INFLATION IN SERBIA Years In % per annum Headline inflation Core inflation

GDP GROWTH RATES

FDI-inward FDI Stock ( ): $13.5 bn

5. Current account deficit in Serbia and other countries  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 was recorded for Serbia (7% of GDP).

World oil prices  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 average of EUR 4.4 mln in the year to date  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 million sold in the same period a year earlier (in fixing sessions) – 42% more!

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

World Economic Form-Global Competiveness Index Republic of Serbia..... rank 91 of 131 (score 3.78 of 7)  Subindex A-Basic requirements  1st pillar- Institutions  2nd pillar-Infrastructure  3rd pillar-Macroeconomic Stability  4th pillar-Health and primary education  Subindex B-Efficiency enhancers  5th pillar-Higher education and training  6tht pillar-Good market efficiency  7tht pillar-Labour market efficiency  8th pillar-Financial market sofistication  9th pillar-Technological readiness  10th pillar-Market size  Subindex C-Innovation and sophistication  11th pillar-Business sophistication  12th pillar-Innovation  Quality of national business environment

World Economic Form-Global Competiveness Index BY COUNTRIES SERB&HMtng Mac.FRYGRBull.Rom.ALCro.Hun. Competitiveness Index WEF  Sub index A-Basic requirements  1st pillar- Institutions  2nd pillar-Infrastructure  3rd pillar-Macroeconomic Stability  4th pillar-Health and primary education  Sub index B-Efficiency enhancers  5th pillar-Higher education and training  6tht pillar-Good market efficiency  7tht pillar-Labour market efficiency  8th pillar-Financial market sofistication  9th pillar-Technological readiness  10th pillar-Market size  Sub index C-Innovat.and sophistication  11th pillar-Business sophistication  12th pillar-Innovation  Quality of nation. business environment

Republic of Serbia - comparative advantages  Investment Incentives 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 Quality Human Resources  Skilled and productive labor force- one of the major competitive advantages.  Strategic Geographic Location Strategic Geographic Location  You can effectively serve your European and Middle Eastern customers  Low Operating Costs Low Operating Costs  Attractive tax environment  Attractive 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 Locate Business  Property Database

Republic of Serbia - market 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 Serbia - 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

Foreign exchange reserves

Republic of Serbia- Favorable investment regime

Republic of Serbia- Financial 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- Major 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

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