REPUBLIC OF SERBIA Ministry of Finance I NVESTOR P RESENTATION M AY - - PowerPoint PPT Presentation

Ministry of Finance

INVESTOR PRESENTATION MAY 2015

REPUBLIC OF SERBIA

• 1. Republic of Serbia – Overview
• 4. Fiscal Policy and Debt Management Strategy
• 3. Banking Sector
• 2. Macroeconomic Background

Serbia at a Glance

Key Facts

Resilient economy on the path to full integration with Europe



Form of Government: Parliamentary Republic



Territory: 88,361 sq. km



Capital: Belgrade



Population: 7.1 million(1,2)



GDP per capita: EUR 4,675(1,2)



Nominal GDP: EUR 33.2bn(1,2)



Credit ratings: BB-/B+/B1



Currency: Serbian Dinar (RSD)



Current exchange rate: EUR/RSD = 120.6102 (3) USD/RSD = 110.0057 (3)

Vilnius

EU Non-EU

SERBIA

Nis Kragujevac Novi Sad

Belgrade

1 National Statistics Office as of 2014 (preliminary), 2 Excluding Kosovo and Metohija, 3 NBS as of 1 June 2015

Recent Milestones and Progress to EU accession

EU membership application Responses to the European Commission’s Questionnaire

2008 2006 2009 2011 2009 2011 Mar 2012

EU candidate status awarded

July 2012

Formation of new Government

Sept 2013

EC agrees to start Serbia’s EU accession negotiations in January 2014

Dec 2013

Government restructuring

3

Jan 2014

Serbia started EU accession negotiations

April 2014

Formation of new Government

Nov 2014

Serbia reached IMF agreement

March-15 Dec-14 Change March -15 Dec -14 Change March-15 Serbia BB- BB- No Change B+ B+ No Change B1 Bulgaria BB+ BB+ no change BBB- BBB- no change Baa2 Croatia BB BB no change BB BB no change Ba1 Hungary BB+ BB BB+ BB+ no change Ba1 Romania BBB- BBB- no change BBB- BBB- no change Baa3 Latvia A- A- no change A- A- no change A3 Lithuania A- A- no change A- A- no change Baa1

Serbia’s Rating In Comparative Perspective

Credit Rating History

 Standard and Poor's – In January 2015, the S&P affirmed ratings at BB- with negative outlook. The main drivers of were the beginning of fiscal consolidation programme and the new IMF agreement.  Fitch Ratings – In January 2015, the Fitch affirmed Serbia’s B+, with stable outlook.The main risk factors that, individually or collectively, could trigger positive rating action are:

• Successful implementation of a credible medium term fiscal consolidation programme that effectively reduces public debt/GDP;
• An acceleration of economic recovery and narrowing of external imbalances.

 Moody's – In July 2013, Moody’s Investor Service assigned B1 rating to the Republic of Serbia, with a stable outlook. The main drivers of Serbia's B1 ratings are: the government’s fiscal deficits and debt levels, the economy’s subdued near-term growth prospects and wide current account deficits and the institutional benefits of Serbia’s future EU accession process.

4

• 1. Republic of Serbia – Overview
• 4. Fiscal Policy and Debt Management Strategy
• 3. Banking Sector
• 2. Macroeconomic Background

Exports Have Been A Major Driver Of Economic Growth

Source: National Statistics Office, Ministry of Finance Source: National Statistics Office, Bloomberg

Real GDP Growth (Y-o-Y) Real GDP Growth 2011 – Q1 2015 (Y-o-Y)

• In 2013 the Republic of Serbia marked one of the highest real GDP

growth rates (2.6%) in the CEE region

• The growth in 2014 is -1.8%, which was was mainly driven by the

impact of the floods on coal and electricity production in May-December 2014

• During January-April 2015 exports of goods increased by 4.2% in value

terms over the corresponding 2014 period, while imports of goods increased by 6.2% (in EUR terms)

• Exports of motor vehicles kept the leading 17.4% share followed by

processed food products with 10.7% share, basic metals 8.9% share, and rubber and plastic products 7.2% share in total exports (in EUR terms)

• In April 2015 the export-import ratio was on the level of 72%

Source: National Bank of Serbia

Exports of Goods – Nominal Growth (Y-o-Y)

6

29.8 33.4 31.7 34.3 33.2

0.6% 1.4%

• 1.0%

2.6%

• 1.8%
• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 27 28 29 30 31 32 33 34 35 2010 2011 2012 2013 2014 GDP, EUR bn GDP growth rate 13.9% 3.8% 26.0% 1.4% 4.2% 0% 5% 10% 15% 20% 25% 30% 2011 2012 2013 2014 Apr-15

• 3.0%
• 2.0%
• 1.0%

0.0% 1.0% 2.0% 3.0% 4.0%

Serbia Romania Bulgaria Croatia Hungary

External Position

Exchange Rate USD/RSD (April 2014 – April 2015) Exchange rate EUR/RSD (April 2014 – April 2015)

Source: National Bank of Serbia Source: National Bank of Serbia Source: National Bank of Serbia

• At the end of April 2015 Serbia had a comfortable level of FX reserves

at EUR 10.5bn (7 months of imports coverage) and net reserves at EUR 8.4bn which provide a good cushion for the Serbian external position

• At the end of February 2015 external debt stood at EUR 26.5bn,

including private sector external debt of EUR 11.7bn

• During the period April 2014 - April 2015 RSD/EUR exchange rate

showed limited volatility. In November 2014 depreciation pressures brought RSD/EUR rate above 120.0 (and triggered managing role of the NBS). Strengthening of USD brought USD/RSD to the level of 112.0 in February 2015.

Foreign Exchange Reserves

7 105.0 107.0 109.0 111.0 113.0 115.0 117.0 119.0 121.0 123.0 125.0 80.0 84.0 88.0 92.0 96.0 100.0 104.0 108.0 112.0 12.1 10.9 11.2 9.9 10.5 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0 2011 2012 2013 2014 Apr-15

Trade Balance

Balance of Payments (% of GDP)

Source: National Statistics Office, National Bank of Serbia Source: National Statistics Office

Trade Deficit (% of GDP)

5.2 5.3 3.6 4.4 15.4% 16.7% 13.0% 13.2% 5.0% 7.0% 9.0% 11.0% 13.0% 15.0% 17.0% 19.0% 0.0 1.0 2.0 3.0 4.0 5.0 6.0 2011 2012 2013 2014 Trade deficit (EUR bn) Trade deficit (% of GDP) Source: National Statistics Office, National Bank of Serbia

External Liquidity Indicators (% of GDP)

• Current account deficit in 2014 reached historical minimum level of

5.9% of GDP, while estimated CAD for 2015 is 4.3% of GDP

• The significant growth rates in 2014 are recorded in export of tobacco

products (+84%), paper products (+22%), oil derivatives (+14%), agricultural production (+14%), processed food (+5%) and clothing (+4%), meanwhile in the period Jan-March 2015 significant growth rates were recorded in exports of agricultural products (+30%) and basic metals (+20%) comparing to the same period last year

• The export - import ratio was stable over the past 12 months at the

level of 72%

• Recovery of euro zone will be very important for further acceleration
• f Serbian exports

8 9.9% 11.5% 6.1% 5.9% 13.0% 13.8% 11.6% 10.4% 36.1% 34.5% 32.7% 31.1% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 2011 2012 2013 2014 CA Deficit Debt Repayments FX Reserves

• 9.9%
• 11.5%
• 6.1%
• 5.9%

2.6% 8.7% 2.2% 1.4% 6.6% 2.1% 3.6% 3.9%

• 15.0%
• 10.0%
• 5.0%

0.0% 5.0% 10.0% 15.0% 2011 2012 2013 2014 Net FDI Financial Account ex.FDI Current Account

0.231884 0.231884

Serbia’s Exports and Imports in the period January- April 2015

Import of Goods Import of Goods Export of Goods

Source: National Statistics Office Source: National Statistics Office

Export of Goods

Source: National Statistics Office Source: National Statistics Office 68% 6% 16% 10% EU CIS MEDA Other 62% 12% 7% 19% EU CIS MEDA Other 19% 12% 8% 7% 4% 7% 45% Italy Germany Bosnia and Herzegovina Russian Federation Montenegro Romania Others 11% 12% 11% 8% 5% 4% 49% Italy Germany Russian Federation China Hungary Poland Others 9

…And By Types Of Products

Source: National Statistics Office

Export Jan – Apr 2015 (FOB) Import Jan – Apr 2015 (CIF)

Source: National Statistics Office 2% 33% 27% 5% 23% 10% Energy Intermediate goods Capital goods Durable consumer goods Non durable consumer goods Unclassified by MIG destination 13% 31% 22% 2% 14% 18% Energy Intermediate goods Capital goods Durable consumer goods Non durable consumer goods Unclassified by MIG destination

External Trade as % GDP

• Serbia’s exports are reasonably diversified, covering the full range of

products from intermediate inputs, to consumer and capital goods

• This confirms that Serbia is already being integrated into the

European trade system and is able to export goods to multinational companies operating in the global supply chain

• Intermediate and capital goods have been the fastest growing export

product categories in period 2011-2013, one of the positive results of the direct foreign investment that Serbia has attracted in recent years, while durable and non durable consumer goods recorded positive growth rates in 2014 12.0% and 8.5% respectively

Source: National Statistics Office 10 24.8% 27.6% 32.1% 33.6% 41.7% 46.5% 45.1% 46.8% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 2010 2012 2013 2014 Export Import

Foreign Direct Investments

Net FDI Diversification by Geography (3Q 2014) Net FDI Diversification by Sector* (3Q 2014) Net Foreign Direct Investment (EUR mln)

• FDI’s in 2014 were expected to be at the same level as in 2013

(EUR 1.25bn), but at the end of the year FDI’s reached slightly higher level (EUR 1.3bn).

• The majority of the FDI’s came from EU countries (80%),

Switzerland (11%) and Russia (7%)

• Air Serbia improved performance of the Belgrade Airport Nikola

Tesla which became very attractive to potential investors. Growth in number of was 32% in 2014, one of the highest in Europe

• Privatization of Telekom Srbija planned in Q4 2015
• FDI’s in 2015 are expected to be at the level of EUR 1.3bn

Source: National Bank of Serbia Source: National Statistics Office; National Bank of Serbia Source: National Statistics Office, National Bank of Serbia *2012 data affected by Telekom Srbija’s buyback of its Treasury shares from OTE (EUR 380m) 11 29.9% 13.0% 8.6% 3.3% 44.8% 0.1% Manufacturing Wholesale and retail trade Construction Inovation and technology Financial intermediation Transport and communication Agriculture 1,040 2,197 669 1,229 1,288 500 1000 1500 2000 2500 2010 2011 2012 2013 2014 4.9% 5.6% 5.8% 6.9% 7.5% 9.9% 11.0% 18.7% 29.8% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

Inflation in the Target Band in 2015

Source: National Bank of Serbia Source: National Bank of Serbia Source: National Bank of Serbia

• Inflationary pressures have eased considerably due to tight monetary

policy, downward pressure on food prices following a good agricultural season in 2013 and 2014 and weak aggregate demand

• Inflation has been moving below the target tolerance band since March

2014 mainly due to movements in food prices and oil prices in the last quarter 2014

• According to the NBS estimate, y-o-y inflation is expected to rise

moderately after January and gradually come closer to the lower bound

• f the target tolerance band in Q3 2015
• During 2014, the NBS gradually reduced its Key Policy Rate by 150 bps

and at the end of December 2014 KPR was at the level of 8.0%, meanwhile in 2015 NBS reduced KPR for additional 150 bps to the level of 6.5% in May 2015

Y-o-Y Inflation eop Key Policy Rate and Money Supply Contribution of CPI Components to Y-o-Y Inflation (%)

12 10.3% 7.0% 12.2% 2.2% 1.7% 1.8% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 2010 2011 2012 2013 2014 Apr-15

• 4
• 1

2 5 8 11 14 Services Energy Industrial goods excluding food and energy

• 15.0%
• 10.0%
• 5.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% Key Policy Rate (left axis) M2 (YoY) (right axis)

• 1. Republic of Serbia - Overview
• 4. Fiscal Policy and Debt Management Strategy
• 3. Banking Sector
• 2. Macroeconomic Background

Banking Sector Overview

Source: National Bank of Serbia *latest available comparable data Source: National Bank of Serbia Source: National Bank of Serbia

Asset Structure Liabilities and Capital Structure Balance Sheet of the Banking Sector

55% 14% 9% 15% 2% 5% Realized loans and deposits Callable loans and deposits Cash and cash equivalents Securities and stakes in companies Fixed assets Other assets 14

Assets 2011 2012 2013 2014

• I. Foreign Assets

38.0% 35.7% 36.2% 35.2% Of which FX reserves 34.5% 31.4% 32.8% 28.9%

• II. Domestic credit

52.5% 56.5% 56.0% 56.9%

• f which Government

5.4% 7.3% 8.6% 10.9%

• f which reserves in NBS

3.0% 3.0% 2.8% 3.5%

• f which Companies

27.7% 28.1% 25.7% 23.2%

• f which Households

16.4% 16.4% 17.1% 17.3%

• III. Other Assets

9.3% 9.4% 9.6% 9.8% Total Assets (EUR bn) 35.1 35.0 34.4 34.6 Liabilities 2011 2012 2013 2014

• I. Foreign Liabilities

19.8% 18.8% 14.7% 10.5%

• II. Government depostis

4.6% 4.9% 7.3% 8.0%

• III. Currency in circulation

3.1% 2.8% 3.1% 3.1%

• IV. RSD deposits

10.2% 9.3% 10.8% 11.6%

• V. FX deposits

27.6% 29.2% 29.7% 29.9%

• VI. Other Liabilities

34.7% 35.0% 34.4% 36.9% Total Liabilities (EUR bn) 35.1 35.0 34.4 34.6

Source: National Bank of Serbia 61% 12% 5% 14% 7% 1% Deposits Borrowing Liabilities under securities Other liabilities Equity capital and other capital Reserves Accumulated losses

A Strong Capital Cushion Offsets Relatively High NPLs

Source: National Bank of Serbia Source: National Bank of Serbia Source: National Bank of Serbia

Credit Growth Y-o-Y Capital Adequacy Ratio and NPL’s Banking Sector Ownership by Assets (2014)

15% 25% 14% 11% 10% 25% Austria Italy Greece France Other foreign banks Domestically owned banks

• At the end of March 2015 CAR stands at high level of 20.3%, mainly

due to capital increases, higher reserves from profit

• NPLs are fully covered by balance sheet loan loss reserves.

Regulatory provision (at 113% in March 2015) and IFRS provisions (at 59% in March 2015) cover half of NPLs. Among others, NBS regulatory measures allow the sale of NPLs to non financial entities and better tax treatment on restructured debt

• Liquidity ratio of the banking system is higher than the regulatory limit

(2.2 in March 2015) and liquid assets represent 36% of total assets in March 2015

• The loan to deposit ratio for the banking sector remains on a

conservative low level 1.0 in March 2015

15 16.9% 19.0% 18.6% 21.4% 21.5% 22.6% 19.9% 19.1% 19.9% 20.9% 20.0% 20.3% 15.0% 16.0% 17.0% 18.0% 19.0% 20.0% 21.0% 22.0% 23.0% 2010 2011 2012 2013 2014 Q1 2015 NPL's CAR

• 20.0%
• 10.0%

0.0% 10.0% 20.0% 30.0%

Loans to households Loans to enterprises Total loans

• 1. Republic of Serbia - Overview
• 4. Fiscal Policy and Debt Management Strategy
• 3. Banking Sector
• 2. Macroeconomic Background

Fiscal Policy Measures – New IMF Agreement

In September 2014 Government announced new fiscal consolidation measures and structural changes:  Public sector wage bill (including public enterprises) reduced by about 10%  Average reduction of pensions by up to 10% with progressive rates starting from pensions above EUR 210 per month (25.000 RSD)  Decrease in subsidies: to agriculture, Srbijagas, Railways, RTS  Reduction of discretionary expenditures (goods and services)  Reform of tax administration and public revenue system  Reform of public enterprises  Privatization of SOE’s  Public administration reform and rightsizing  Improvement of capital expenditure planning and execution

Source: Ministry of Finance Source: Ministry of Finance Source: Ministry of Finance

Consolidated Fiscal Balance (% of GDP) Central Government Budget (RSD bn) Tax Revenues (as % of GDP)

17 712 744 788 812 881 812 877 980 986 1057

• 100
• 133
• 192
• 174
• 176
• 400
• 200

200 400 600 800 1,000 1,200 2010 2011 2012 2013 2014 Revenues Expenses Balance 0% 5% 10% 15% 20% 25% 2010 2011 2012 2013 2014 Other tax revenues Duties Profit tax Personal income tax Excises VAT

• 1.8%
• 2.4%

0.8% 1.1%

• 1.4%
• 1.9%
• 2.6%
• 4.2% -4.5% -4.7%
• 6.1%
• 4.7%
• 4.5%
• 7.0%
• 6.0%
• 5.0%
• 4.0%
• 3.0%
• 2.0%
• 1.0%

0.0% 1.0% 2.0%

Active Debt Management Has Produced Stable Funding Base

Total foreign debt 61% Total domestic debt 39%

Other 13% IMF, 2% IDA, 2% Paris Club, 6% IBRD, 7% Other 4 % T-bills and T-bonds 30% Frozen FX bonds 5% Guaranteed external debt 8% Eurobond, 21% EIB, 3%

Source: Ministry of Finance Source: Ministry of Finance Source: Ministry of Finance (RSD bn) Source: Ministry of Finance *In accordance with the Fiscal Strategy for 2015 with projections of 2016 and 2017

Public Debt Public Debt Service (RSD bn) Description of the Debt Structure (As of 30 April 2015) Development of the Currency Structure

110.3 131.1 150.5 168.5 515.1 537.1 533.1 681 100 200 300 400 500 600 700 800 900 2014 2015* 2016* 2017* Principal Interest 18 14.4% 18.3% 20.3% 21.4% 21.3% 57.6% 51.0% 45.9% 41.7% 40.6% 18.8% 23.1% 27.7% 31.5% 32.7% 6.9% 5.7% 4.6% 4.2% 4.1% 2.3% 1.9% 1.5% 1.2% 1.3% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2011 2012 2013 2014 Apr-15 Other SDR USD EUR RSD 1,282.5 1,547.5 2,014.8 2,309.0 2,753.2 2,887.2 41.8% 45.4% 56.2% 59.6% 70.9% 72.3% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% 55.0% 60.0% 65.0% 70.0% 75.0% 500 1000 1500 2000 2500 3000 3500 2010 2011 2012 2013 2014 Apr-15 Public debt (in RSD bn) Public debt (% of GDP)

Debt Mix and Currency Structure

Source: Ministry of Finance, as of 30 April 2015 Source: Ministry of Finance, as of 30 April 2015 Source: Ministry of Finance, as of 30 April 2015 21.3% 40.6% 32.7% 0.8% 4.1% 0.5% RSD EUR USD CHF SDR Others Source: Ministry of Finance, as of 30 April 2015

Internal vs External Debt Interest Rate Mix Currency Breakdown Public Debt Residual Maturity Structure

60.9% 39.1% Total foreign debt Total domestic debt 77.1% 22.9% Fixed interest rate Variable interest rate 5% 6% 15% 25% 13% 12% 6% 10% 8% Up to 6 months Between 6 months and 1 year Between 1 and 2 years Between 2 and 5 years Between 5 and 7 years Between 7 and 10 years Between 10 and 15 years Between 15 and 20 years Over 20 years 19

Government Financing Needs

Source: Ministry of Finance Source: Ministry of Finance

• At the end of April 2015 Public debt of the central government stood at

EUR 24.0bn (72.3% GDP), out of which EUR 21.5bn were direct and EUR 2.5bn contingent liabilities

• Liquidity position was EUR 1.1bn as of 31 December, 2014, while

fiscal buffer in total was more than EUR 1.6bn

• Total financing needs in 2014 were EUR 5.2bn, financed:

√ EUR 4.0bn government securities domestic market, of which: * EUR 2.8bn denominated in dinars * EUR 1.2bn denominated in euros √ EUR 0.8bn Government of Abu Dhabi Emirate √ EUR 0.4bn IFIs loans

• Total financing needs in 2015 are EUR 5.8bn:

√ EUR 3.8bn government securities domestic market, of which: * EUR 2.8bn denominated in dinars * EUR 1.0bn denominated in euros √ EUR 1.5bn Eurobond √ EUR 0.5bn IBRD loans

• Repayments on government securities in 2015 will be EUR 3.0bn (EUR

2.6bn without short-term bills), while total repayments will be EUR 4.2bn

• In February 2015 successfully realized two benchmark size issues of

dinar denominated securities (3Yr and 7Yr)

• At the end of April 2015 liquidity position was EUR 1.3bn while fiscal

buffer in total was more than EUR 1.6bn

Maturity Distribution of Local Currency Government Securities (As of 31 May 2015) Maturity Distribution of EUR Denominated Government Securities (As of 31 May 2015)

14.1% 36.5% 21.1% 16.2% 5.6% 6.5% 53W 2Y 3Y 5Y 10Y 15Y 20 1.0% 0.6% 9.8% 30.8% 34.8% 6.0% 15.5% 1.5% 3M 6M 53W 2Y 3Y 5Y 7Y 10Y

Government Securities – Domestic Market

Source: Ministry of Finance Source: Ministry of Finance 21

RSD securities-domestic market (January - May 2015) EUR securities-domestic market (January – May 2015) ATM of Government securities RSD weighted average accepted rate on primary auctions

Source: Ministry of Finance Source: Ministry of Finance

10 20 30 40 50 60 70 3M 6M 53W 2Y 3Y 7Y

RSD Billions

Redemptions New Issuance 50 100 150 200 250 53W 2Y 3Y 5Y 10Y

EUR Millions

Redemptions New Issuance

12.39% 11.95% 13.04% 13.68% 15.21% 14.75% 9.52% 9.38% 10.10% 10.71% 11.02% 12.15% 12.49% 7.35% 7.54% 8.85% 9.21% 10.16% 10.93% 11.99% 12.99% 6.45% 7.00% 8.33% 8.43% 9.42% 11.99% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 3M 6M 53W 2Y 3Y 5Y 7Y 10Y 2012 2013 2014 2015 2.3 2.8 1 2 3 4 5 6 7 In years ATM RSD Securities ATM EUR Securities