1. © The McGraw-Hill Companies, Inc.,2001 17- 1 Irwin/McGraw-Hill Institute of Internaitonal Politics and Economics Prof. dr Hasiba Hrustić FOREIGN DEBT OF SERBIA AND ITS NEIGHBORS

2. © The McGraw-Hill Companies, Inc.,2001 17- 2 Irwin/McGraw-Hill SERBIA AND ITS NEIGHBORS NEIGHBOR COUNTRIES :  Hungary  Romania  Bulgaria  Macedonia  Albania  Montenegro  Bosnia and Herzegovina  Croatia

3. © The McGraw-Hill Companies, Inc.,2001 17- 3 Irwin/McGraw-Hill Main Macroeconomic Indicators  GDP  General government debt  Inflation  Unmployment  Current account balance  General government balance  Foreign loan

4. © The McGraw-Hill Companies, Inc.,2001 17- 4 Irwin/McGraw-Hill Real GDP growth and General government debt Real GDP Ann. % chGeneral government debt % of GDP Country200620072008200620072008 Serbia (exc. Kosovo)5.25.26.96.95.45.4 36.229.425.6 Hungary4.11.20.665.665.873.0 Romania7.96.27.812.412.713.2 Bulgaria6.36.26.422.718.214.1 FYR of Macedonia4.05.95.541.529.030.8 Albania5.56.06.155.553.851.4 Montenegro8.610.78.032.626.330.1 Bosnia and Herzeg.6.76.85.521.318.516.0 Croatia4.85.62.440.837.747.8

5. © The McGraw-Hill Companies, Inc.,2001 17- 5 Irwin/McGraw-Hill Inflation and Unemployment rate Inflation Ann. % chUnemployment rate % Country200620072008200620072008 Serbia (exc. Kosovo)12.711.08.68.621.618.814.7 Hungary4.07.96.17.57.47.7 Romania9.16.64.912.422.422.5 Bulgaria7.47.612.09.06.96.0 FYR Macedonia3.22.38.336.034.933.0 Albania2.42.93.013.913.412.6 Montenegro3.04.39.214.711.910.7 Bosnia and Herzeg.6.11.59.444.242.940.5 Croatia3.22.97.411.19.612.4 EU -272.32.43.78.27.17.0

6. © The McGraw-Hill Companies, Inc.,2001 17- 6 Irwin/McGraw-Hill Current account balance and General government balance Current account balance % of GDP General government balance % of GDP Country200620072008200620072008 Serbia (exc. Kosovo) -11,515,9-17,91,6-1,9-2.3 Hungary-7.5-6.4-7.2-9.3-5.0-3.3 Romania-10.6-13.6-12.9-2.2-2.5-5.2 Bulgaria-11.5-18.6-22.53.00.1-3.2 FYR Macedonia-0.9-3.0-12.9-0.50.6-3.0 Albania-6.5-10.5-13.2-3.3-3.5-5.2 Montenegro-24.7-29.4-35.42.76.44.3 Bosnia and Herzegovina-7.8 -12.62.91.3-2.0 Croatia-7.9-8.7-10.9-2.2-1.8-2.8

7. © The McGraw-Hill Companies, Inc.,2001 17- 7 Irwin/McGraw-Hill FOREIGN DEBT the foreign loan is partly financed by incomes from foreign direct investments (FDI) attained in the process of privatization - remittances from abroad - foreign private lending Rapid credit growth has been one of the main drivers of growth in the region in recent years The rapid credit growth in the region in recent years has boosted domestic consumption

8. © The McGraw-Hill Companies, Inc.,2001 17- 8 Irwin/McGraw-Hill The impact of the global international crisis and external financing reduced economic activity enhanced foreign loan and trade deficits import dependency significant declined in foreign trade and industrial production output reduction this year high levels of unemployment

9. © The McGraw-Hill Companies, Inc.,2001 17- 9 Irwin/McGraw-Hill External Debt of Serbia and its Neighbors, 2008 Country External Debt (bn USD) External Debt Per Capita (USD) 1 External debt (% of GDP) Serbia (exc. Kosovo)30,74,17564.4 Hungary164,215,728108.9 Romania99,14,60949.5 Bulgaria33,74,43467.5 Macedonia4,32,18222.8 Albania1,55477.4 Montenegro0,64510.9 Bosnia and Herzegovina 7,61,66725.3 Croatia55,012,22467.0

10. © The McGraw-Hill Companies, Inc.,2001 17- 10 Irwin/McGraw-Hill Foreign-denominated loans The combination of foreign bank domination of the banking system and weak fundamentals plaguing in region is definitely an issue in this region as well

11. © The McGraw-Hill Companies, Inc.,2001 17- 11 Irwin/McGraw-Hill

12. © The McGraw-Hill Companies, Inc.,2001 17- 12 Irwin/McGraw-Hill Foreign bank domination of the banking system

13. © The McGraw-Hill Companies, Inc.,2001 17- 13 Irwin/McGraw-Hill Foreign-denominated loans Foreign-denominated loans allow potential homeowners to take out a loan originally denominated in low-interest-rate Swiss francs or euros instead of the high-interest- rate domestic currencies. Due to the instability of the region’s currencies, foreign-denominated lending was popular with business lenders and other consumer lenders. At the onset of the current finansial crisis, foreign banks operating started to repay loans from private companies, putting pressure on the exchange rate and creating an outflow of foreign currency

14. © The McGraw-Hill Companies, Inc.,2001 17- 14 Irwin/McGraw-Hill Foreign bank domination of the banking system As a result, about 1 billion exited Serbia between November 2008 and January 2009 Also, one of the effects of the crisis was that banks increased their spreads to a high extent; they doubled spreads, not only in Serbia, but also in other Eastern European countries.

15. © The McGraw-Hill Companies, Inc.,2001 17- 15 Irwin/McGraw-Hill

16. © The McGraw-Hill Companies, Inc.,2001 17- 16 Irwin/McGraw-Hill Short Macroeconomic Profile strengths and weaknesses

17. © The McGraw-Hill Companies, Inc.,2001 17- 17 Irwin/McGraw-Hill GDP Per Capita Country GDP (nominal ) Per Capita (USD) Serbia (exc. Kosovo) 6,782 Hungary15,542 Romania9,291 Bulgaria6,857 Macedonia4,656 Albania4,073 Montenegro7,702 Bosnia and Herzegovina4,625 Croatia15,628

18. © The McGraw-Hill Companies, Inc.,2001 17- 18 Irwin/McGraw-Hill Serbia STRENGTHS  High GDP growth  Inflation decreasing  High level of FDI  High level of foreign exchange reserves WEAKNESSES  Slow progress in structural reforms  Slow privatisation of state- owned companies  Large public sector  High unemployment  Low competitiveness and weak private sector  Low, uncompetitive exports  Large current account deficit  Poor functioning of the court system  Corruption

19. © The McGraw-Hill Companies, Inc.,2001 17- 19 Irwin/McGraw-Hill HUNGARY STRENGTHS EU Member  Preparations for euro membership under way  Budget deficit  Declining inflatory pressures  Rising FDI and improving investment climate WEAKNESSES  Large public debt  trade deficit  current account deficit  external debt increasing

20. © The McGraw-Hill Companies, Inc.,2001 17- 20 Irwin/McGraw-Hill Romania STRENGTHS EU Member High GDP growth Booming economy Inflation decreasing High level of FDI High level of foreign exchange reserves WEAKNESSES  Unemployment  Weak private sector  Fiscal loosening and rising budget deficit  Rapid credit growth  Large trade deficit  Large current account deficit  Poor functioning of the court system  Corruption

21. © The McGraw-Hill Companies, Inc.,2001 17- 21 Irwin/McGraw-Hill Bulgaria STRENGTHS EU Member  High GDP growth  Low public debt  Preparations for euro membership under way  Declining inflatory pressures  Rising FDI and improving investment climate WEAKNESSES  Large trade deficit  Large current account deficit  external debt increasing  Private sector external debt increasing  Poor functioning of the court system  Corruption

22. © The McGraw-Hill Companies, Inc.,2001 17- 22 Irwin/McGraw-Hill STRENGTHS EU candidate status  High GDP growth  Stable currency  Low inflation  Low external debt  High level of foreign exchange reserves WEAKNESSES  Current account deficit  Low competitiveness and weak private sector  Large public sector  High unemployment  Low exports  Poor functioning of the court system  Corruption Macedonia

23. © The McGraw-Hill Companies, Inc.,2001 17- 23 Irwin/McGraw-Hill Albania STRENGTHS  SAA signed  Progress in privatisation  High GDP growth  Low inflation  Unemployment decreasing  Low external debt and low servicing costs  High level of foreign exchange reserves WEAKNESSES  Low competitiveness and weak private sector  High general government debt  Rapid credit growth  Low exports  Large current account deficit  Budget deficit  Poor functioning of the court system  Corruption

24. © The McGraw-Hill Companies, Inc.,2001 17- 24 Irwin/McGraw-Hill Montenegro STRENGTHS SAA signed  High GDP growth  Low inflation  Rising FDI and improving investment climate  Low external debt and low servicing costs WEAKNESSES  Large public sector  Low competitiveness and weak private sector  Low exports and large current account deficit  High interest rates  Poor functioning of the court system  Corruption

25. © The McGraw-Hill Companies, Inc.,2001 17- 25 Irwin/McGraw-Hill Bosnia and Herzegovina STRENGTHS  High GDP growth  High industrial production growth  Stable currency  Low inflation  High level of foreign exchange reserves WEAKNESSES  Complex and expensive state administration  Slow structural reforms  High unemployment  Large public sector  Low competitiveness and weak private sector  Rapid credit growth  Low exports and large current account deficit  Poor functioning of the court system  Corruption

26. © The McGraw-Hill Companies, Inc.,2001 17- 26 Irwin/McGraw-Hill Croatia STRENGTHS EU candidate status  Ambitious privatisation agenda  Low inflation  High level of foreign exchange reserves WEAKNESSES  Heavy reliance on seasonal tourism receipts  Large trade deficit  Large current account deficit  Large external debt  Large government debt  Budget deficit  Poor functioning of the court system  Corruption

27. © The McGraw-Hill Companies, Inc.,2001 17- 27 Irwin/McGraw-Hill Development Priorities Macroeconomic stability Privatisation of strategic companies still not completed Investment in infrastructure needed Unemployment, current account deficit, inflation,debt Industrial production, export Importance of tourism increasing Weak SMEs sector