1. 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

2. 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

3. 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%.

4. Medium-term core inflation objectives

5. Core inflation projection

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

7. ... 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 Q4 2007 (2.2%);  In Q1, retail price growth equaled 2.8% (11.8% y-o-y), with regulated prices contributing 1.6 pp.

8. Core 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 2001200220032004200520062007 Years In % per annum Headline inflation Core inflation

9. GDP GROWTH RATES 2000-2007

10. FDI-inward FDI Stock (2001-2007): $13.5 bn

11. 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 200 3-2007 was recorded for Serbia (7% of GDP).

12. 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.

13. 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 556.7 million sold in the same period a year earlier (in fixing sessions) – 42% more!

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

15. World Economic Form-Global Competiveness Index-2007-2008 Republic of Serbia..... rank 91 of 131 (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

16. World Economic Form-Global Competiveness Index-2007-2008 BY COUNTRIES SERB&HMtng Mac.FRYGRBull.Rom.ALCro.Hun. Competitiveness Index WEF 9110682946579741095747  Sub index A-Basic requirements 781045972487688995355  1st pillar- Institutions 991137810249109941146554  2nd pillar-Infrastructure 92117908535841001285354  3rd pillar-Macroeconomic Stability 8890335310647847973107  4th pillar-Health and primary education 31873347425652654441  Sub index B-Efficiency enhancers88 9587985772621056140  5th pillar-Higher education and training 829879753966541034633  6tht pillar-Good market efficiency 11411391986090741177159  7tht pillar-Labour market efficiency 11177521121207385885658  8th pillar-Financial market sofistication 987143836074781036851  9th pillar-Technological readiness 571104890586559744941  10th pillar-Market size 75801301063961431076441  Sub index C-Innovat.and sophistication 88123971015991731255343  11th pillar-Business sophistication 95119901086292731096446  12th pillar-Innovation 78121104926388761315037  Quality of nation. business environment 9010580965277741226146

17. 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

18. 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

19. 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

20. Republic of Serbia- Republic of Serbia- Number of graduated students from universities in Serbia Base of young, educated, skilled and committed workforce Source: SIEPA

21. FOREIGN DEBT 2000-2007

22. Foreign exchange reserves

23. Republic of Serbia- Favorable investment regime

24. 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.

25. Republic of Serbia- Major Foreign Investors

26. 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

27. Thank you for your attention!