1. Macroeconomic Developments, October – December 2006 Radovan Jelašić – Governor Belgrade, 29 January 2007

2. Contents  Inflation  Monetary policy  Capital inflow and external position  Monetary aggregates  Current account balance  Economic growth  Lending activity of banks  Wages and productivity  Fiscal developments

3. All that was achieved in 2006 will be sustained in 2007! Monthly inflation dynamics in 2006 (%)Annual inflation rates (%) * Preliminary data until 29 January 2007. Switch to 2W repo securities via fixed-rate auctions NBS key policy rate in 2006 (%)Inflation rate in 2006 (%) 13,00%

4. For 2007, the National Bank of Serbia has planned only the things it is certain to achieve!  Planned core inflation for 2007: 4 - 8%; NBS will target the lower band of the corridor;  Target fulfillment alone will determine the future trajectory of the NBS key policy rate in 2007!  Inflationary expectations are declining together with inflation!  Although there is still a need for a part of regulated prices to come closer to market prices, it is important to mention prices that have in the meantime moved down – Politika, petrol at NIS petrol stations, white goods, etc.

5. Eltim - Serbia Tehnomarket – Serbia Tehnomania Mediamarkt – Hungary Topvision – Germany RSD 86.195 RSD 64.999 RSD 77.999 HUF 159.999 EUR 1,098 EUR 828 EUR 994 EUR 625 EUR 549 Example: Samsung LE 27S71 LCD television set* * Exchange rate: EUR 1 = RSD 78.5000 Differences between Serbian and foreign prices cannot be put down to the exchange rate!

6. All profit from price stabilization!  Pensioners – semiannual indexation to price growth;  Our investors abroad – for every euro invested abroad, they need to allocate (approximately) the same amount of dinars;  All people who save in Serbia – dinar and foreign currency savings, voluntary pension funds, shares and other investments (which erode in the context of dinar devaluation);  Corporate sector – price stability is the best way for the corporate sector to finally focus on productivity and market competition, rather than price and exchange rate movements!  Earlier criticisms such as “prices keep growing and the dinar is unrealistically strong” are now obviously out of place!

7. Decision of the Monetary Policy Committee of 29 January 2007! The key policy rate of the National Bank of Serbia on 2-week repo securities has been cut from 14.0% down to 13.0% per annum! Key reasons:  Positive trend of declining core and headline inflation;  Need for additional sterilization in Q4 2006 due to increased budgetary spending;  Lessened pressure on the dinar exchange rate; Effects on inflation

8. Price movements in the first half of the year will be determined by the following factors  Low inflation rate in Q4 2006;  Appreciation effects;  Fall in prices of petroleum products;  Restrictive monetary policy stance;  Strengthening of trust in the dinar.  Deferred price hikes – central heating and electricity;  More expansive fiscal policies in Q4 2006;  Constitution of Government; ... Price reductionPrice rise

9. 86 85 84 83 82 81 80 79 78 EUR mln The National Bank of Serbia aims at notably reducing its role in exchange rate formation... Net result in IFEM Net purchase from exchange offices Total effect on forex reserves -40,1 -15,7 -9,7 +259,4 +153,5 -412,4 NBS interventions in IFEM August 2006 – January 2007 and RSD/EUR exchange rate movements * Until and including 25 January 2007. Purchase Sale +162,1 +148,5 +154,4 +130,9 +86,0 +34,1 +122,0 +132,8 +144,7 +390,3 +239,5 -378,3

10. ... and in 2006 its efforts in this direction were successful! Volume of interbank trade outside IFEM Foreign exchange trade in and outside IFEM Number of active days of NBS in IFEM NBS purchases from exchange offices EUR bln Banks – banks Banks – NBS EUR bln * Until and including 26 January 2007. -9,3% +14,2% +13,4% +189%

11. Foreign exchange market will be further liberalized over the next three months  As of 5 March, the functioning of the fixing session will change – the official middle exchange rate of the dinar against the euro will be set based on the daily weighted average trade in currencies in the overall interbank foreign exchange market;  As of 1 March, the NBS will receive only 3 currencies from exchange offices (EUR, USD, CHF);  On 1 January this year, the NBS cut the incentive fee for exchange offices to 0.5%; by the end of 2007, this fee will be lowered to 0.1%. NBS forex reserves EUR bln For 2007, data as at 25 January.

12. Future exchange rate movements during 2007  If necessary, the NBS will be ready to “iron out” excessive daily and periodical oscillations, but without interfering with the overall exchange rate trend;  Clients that have large foreign currency inflows and outflows should safeguard against foreign currency risk – especially those that have foreign currency inflow only!  The NBS aims to minimize the number of days of its participation in the market in the capacity of buyer or seller!

13. Capital inflow in the first 11 months well exceeded the current account deficit – there is no 1990-1991 scenario!  In December, annual growth rates of reserve money and broad and narrow money supply stood at 41.7%, 39.8% and 37.1%, respectively;  Total sterilization in 2006 was RSD 239 billion – RSD 125 billion through repo operations and RSD 114 billion against reserve requirement.  Import/export coverage ratio in the first 11 months of 2006 amounted to 58.1%, compared to 49.8% in the same period in 2005 (excluding effects of VAT introduction). -1,602 -2,248 1,471 2,601 1,135 2,667 -3,000 -2,000 -1,000 0 1,000 2,000 3,000 4,000 5,000 6,000 I-XI 2005I-XI 2006 in EUR mln Borrowing Current account Foreign direct investment Import and export movements (January-November) 6,159 10,611 9,553 4,762 -1,500 500 2,500 4,500 6,500 8,500 10,500 ExportImport in EUR mln 20052006 +11,1% +29,3%

14. Ratio of current account deficit to GDP declined in 2006 and, according to projections, will be lower than in the preceding two years  Current account balance is improving regardless of 2006 appreciation! -8.2 -11.0 -9.6 -12.4 -10.8 -10.5 -14 -12 -10 -8 -6 -4 -2 0 20012002200320042005 2006 projection Current account balance excluding grants (in % of GDP)

15. Private debt is gaining predominance in total external debt Strengthening of EUR against USD had a notable effect on total debt (debt increased by 27.2% in USD terms and 13.7% in EUR terms compared to end-2005). Public external debt of the Republic of Serbia 5.8 5.9 6.8 6.0 0 1 2 3 4 5 6 7 8 9 2002200320042005November 2006 EUR bln Private external debt of the Republic of Serbia 2.3 2.5 3.2 5.4 8.1 0 1 2 3 4 5 6 7 8 9 2002200320042005November 2006 EUR bln

16. Prices of petroleum products have now returned to their June 2005 level World oil price trends reversed in August 2006. From close to USD 70 in July, the price of Ural oil declined to around USD 50 in January this year. Over the past five months, this has led to a 20% drop in prices of petroleum products. Retail price of petrol MB 95 Ural oil price per barrel (USD)

17. In Q3 2006, GDP growth was around 4.6%  Industrial production grew by 4.6% and processing sector production by relatively high 5.3% in the first 11 months of 2006 compared to the matching period of 2005;  Key contributors to such growth were the production of basic metals and non-metals, food and chemical products;  Overall economic growth, including industry, has been slowing down: 8.4% in 2004, 6.2% in 2005, but 5.8% (preliminary) in 2006!  Serbia needs another “injection” and acceleration of reforms! in % Real GDP growth Source: RSO.

18. Industry unit labour costs have declined Industry productivity gains (12.3% in the first eleven months) outstripped growth in real gross wages (11.9%); unit labour costs therefore declined by around 0.4%. Movements in productivity and real wages in industry (2005=100) 60 70 80 90 100 110 120 130 1357 2004 9111357 2005 9111357 2006 911 ProductivityReal gross wages

19. In the second half of 2006, growth in lending activity underwent a slowdown!  2005 credit growth stood at RSD 149.4 billion, while in 2006 it equaled RSD 105.4 billion.  Lending activity slowed down appreciably in the latter half of 2006: absolute growth was lower than a year earlier;  Lending activity growth in Q4 2006 drew mainly on domestic sources of financing (corporate, household deposits, etc.). Growth in lending activity RSD bln

20. Dinar savings always beat inflation!  The National Bank of Serbia launched a campaign promoting dinar savings, which not only bear a higher interest rate than foreign currency savings, but also invariably beat inflation!  For banks, dinar savings deposits are the most attractive source of financing, as they are subject to a reserve requirement ratio of only 10%, compared to 40% and 45% ratios on foreign currency savings deposits;  The aim of the campaign are not NBS savings bills, but dinar savings in commercial banks;  Over the coming months, the NBS will actively promote dinar savings in all media – the first who start saving in dinars will get the best interest and the best earnings!

21. Thank you! NBS Call Centre Dial toll-free 0800-111-110