Serbia 2009 Economic outlook and perspectives Lisbon, July 2 nd 2009 Vesna Arsic State Secretary

SERBIA – The Heart of SEE  Located in the very heart of SEE region, at the crossroads of 2 Pan-European transportation axes-corridors X and VII.  Clearly determined to become leader in the region – “The Balkan Tiger”

ENHANCED INVESTMENT AND POLITICAL STABILITY  The SAA with the EU signed in April 2008; membership candidacy planned for 2009/2010; accession preparations to be over by 2012  Serbia’s application for the WTO accepted; accession planned for 2009/2010  Credit rating: - Standard & Poor's: BB- - Fitch: BB-  PwC EM20 Index–Serbia as the 3 rd most attractive manufacturing and 7 th Shared Services location among emerging markets  E&Y European Investment Monitor–over 100 new projects in Serbia in 2007, 2008; Serbia ranked 2 nd in South East Europe

Top Five Manufacturing Destinations in the World Source: The PricewaterhouseCoopers EM20 Index, July 2008 Serbia is ranked 3 rd

SEE – The most Attractive Region in Europe for Manufacturing activities Which region is the most attractive for manufacturing activities? SEE 38% in 2008 Vs. 32% in 2007 Source: Ernst & Young Southeast Europe, Attractiveness Survey 2008, 216 International executives

SEE – Clear leadership on costs and productivity Source: Ernst & Young Southeast Europe Attractiveness Survey 2008 – 216 international executives % 49% 10% Labour cost Flexibility of labour legislation % 33% 13% Productivity increase Western Europe Southeast Europe Central Europe Southeast Europe Russia Ukraine Belarus Western Europe Southeast Europe Central Europe 18% 36% 16% Which region in Europe is most attractive in terms of labour and productivity?

Serbia and SE Europe Net FDI Inflow in SE Europe mln Euros

Foreign Direct Investments in Serbia: 2000 – 2008 (mln US $) The largest greenfield investments in SEE awards by OECD went to Serbia 3 years in a row: Ball Packaging 2004, Metro cash & carry 2005, Airport City Belgrade 2006.

GDP Growth Rate and GDP per capita, 2000 – 2008 in USD

Unemployment Rate, * Unemployment rate of 14,7% is the result of harmonizing the methodology with EU standards. If old methodology was used, unemployment rate would have been 17,5% in 2008

Public Debt 2000 – 2008 (in % of GDP)

SERBIA AND THE GLOBAL ECONOMIC CRISIS The effects of the crisis:  GDP growth rate contracting  negative impact on internal & external liquidity  the downfall of the market price of stocks  outflow of capital  decline in industrial production  decline in budget revenue  decrease in imports and exports Faltering economic activity is due to:  falling domestic & world aggregate demand  decline in FDI  contracted lending activity However Serbia is in a more advantageous position than other countries in the region due to its stable and liquid financial sector.

SERBIA AND THE CRISIS – GOVERNMENT MEASURES 1. package of incentives to boost economic activities,export, investment - subsidizing interest rate for liquidity & consumer loans (1,1 billion EUR of loans) 2. reduction in public spending and bureaucracy 3. reprogramming of private debt due in 2009 and planning of capital infrastructure projects 5. conclusion of new arrangements with IFIs (IMF, WB, EIB, EBRD...) - Agreement with IMF worth 3 billion Euros

Investments in Transportation Infrastructure Major part of Corridor X motorway is already built. Three main sections to be completed in the next 3 years -120 km towards Macedonia and Greece km towards Bulgaria km towards Hungary - and Belgrade bypass – major bottleneck on the Corridor X and a huge urban transportation problem in Belgrade Total Investment of almost 2 billion EUR (financed through EIB, WB, EBRD, Hellenic plan and budget) Reconstruction and modernization of railway network on Corridor X Blue line – existing motorways Red Line – planned motorways Corridor X

LOOKING BEYOND THE CRISIS

TRADE LIBERALIZATION a key to stronger integration of Serbian trade in the European & world market EU – customs free export to the market of 490 million consumers Serbia's Nº1 trade partner (53% of the trade with the world) SAA with EU signed in 2008 FTA`s – RF CEFTA Belarus Turkey WTO – accession expected in 2009/10 EFTA – ongoing negotiations USA – preferential trade regime for most products & services ██ EU member states ██ EFTA member states ██ CEFTA member states

EXCELLENT TRADE POTENTIALS In 2008 total trade exchange with world reached 23 bill EUR ( an increase of 15.4% in comparison with 2007) FTA with RF around 150 million consumers market Serbia only country outside CIS with FTA with RF Around 98% of mutual trade is duty free – 50% rule of national origin Continuation of negotiations for further liberalization expected for passenger vehicles, sugar, cigarettes, woven fabrics of cotton, carpets, some furniture etc. CEFTA 30 million consumers market 2 nd major trade partner of Serbia Average share of trade with CEFTA represents 16% of Serbia's total trade with the world Serbia's substantial trade surplus in trade with CEFTA

Favourable investment climate Investment incentives provided by the government cash grants for investment in virtually all sectors special incentives for large scale investments Over 15 bil. $ of FDI since EU member states accounted for more than 70% of FDI inflow. Significant investment opportunities Infrastructure development Pan-European Corridor X (highways & railways) Energy (new thermal & hydro power plants & renewables) cargo terminal at the Belgrade airport

IndustryTotal ( ) Financial sector5081,01 Manufacturing2615,55 Transport and telecommunications 2477,31 Wholesale and retail trade1780,29 Real estate1748,13 Hotels and restaurants331,85 Construction309,2 Agriculture110,5 FDI by Branch of Activity in Serbia 2004 – 2008 million of $

Privatization & strong economic growth in recent years have attracted FDI. At the same time there has been increase of other capital inflows. LEADING FOREIGN INVESTORS

Foreign - Owned Enterprises’ Share in Exports of 25 Top Serbian Exporters Significant foreign enterprise share in Serbian export is a result of privatization process, restructuring and greenfield investments

Significant privatization opportunities Major real sector privatizations in the pipeline Galenika pharmaceutical company Porecje,Vucje (fruits and vegetables processing) JAT Hotels, Belgrade Cable industry, Jagodina Inex Hotels, Belgrade Jumko, Vranje (textile) Simpo, Vranje (furniture) Severtrans Sombor (transportation) Detailed information provided by the Privatization Agency of the Republic of Serbia, www. priv.yu Privatization – 2500 companies sold so far with the total sales proceeds of 3 billion Euros and additional 1,5 billion of investment obligation. Until now 377 foreign investors participated in the privatization process generating 1,6 billion Euros in sales proceeds Basic methods: tender, auction, restructuring, sale of shares from the share fund portfolio, bankruptcy/liquidation.

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