REPUBLIC OF SERBIA Ministry of Finance Investor Presentation May - - PowerPoint PPT Presentation

Ministry of Finance Investor Presentation May 2014

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 4,453(1,2)



Nominal GDP: EUR 32.0bn(1,2)



Credit ratings: BB-/B+/B1



Currency: Serbian Dinar (RSD)



Current exchange rate: EUR/RSD = 115.6751 (3) USD/RSD = 83.7800 (3)

Vilnius

EU Non-EU

SERBIA

Nis Kragujevac Novi Sad

Belgrade

1 National Statistics Office as of 2013, 2 Excluding Kosovo and Metohija, 3 NBS as of 30 April 2014

Recent Milestones and Progress to EU accession

EU membership application Stabilisation and Association Agreement with the EU Responses to the European Commission’s Questionnaire

2008 2006 2009 2011 2008 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

Serbia’s Rating In Comparative Perspective

Serbia’s rating remained the same through the crisis, in contrast to downgrades for many higher rated regional sovereigns

Credit Rating History

 Standard and Poor's – In April 2014, the S&P affirmed ratings at BB- with negative outlook. S&P noted that high fiscal and external deficits and limited monetary flexibility are key constraints on the ratings while the economy's growth potential, stemming from its educated labour force and the prospect of EU membership are key drivers supporting the rating, although this is obstructed by large public sector, labor market inefficiencies, and uncertainty in the business environment.  Fitch Ratings – In January 2014, the Fitch downgraded Serbia’s rating by one notch, from BB- to B+, with stable outlook. The key drivers were uncertain

• utlook of public finances, public debt rising, fragile economic recovery. The uncertain result of Government’s plan for resturcturing of SOE.

 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

Apr-14 Jan-07 Change Jan -14 Jul -13 Change Jul-13 Serbia BB- BB- No Change B+ BB- B1 Bulgaria BBB BBB+ BBB- BBB Baa2 Croatia BB BBB BBB- BBB- No Change Ba1 Hungary BB BBB+ BB+ BBB+ Ba1 Romania BB+ BBB- BBB- BBB Baa3 Latvia BBB A BBB A- Baa2 Lithuania BBB BBB+ BBB A Baa1

• 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 Recovery

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

Real GDP Growth (Y-o-Y) Real GDP Growth 2011 – 2013 (Y-o-Y)

• The Republic of Serbia marked one of the highest real GDP growth

rates in the CEE region in 2013 (2.5%), while in the Q1 2014 growth was on the level of 0.4%

• Favourable trends observed at the end of the last year, continued

throughout January - March 2014, with economic activity being driven by the export oriented industries such as automobile and chemical industry

• In the period January - March 2014 value of goods exports increased by

17.9% comparing to corresponding period in 2013 while goods imports increased 0.6%

• Exports of motor vehicles keeps the leading role with 19.0% share (in

EUR terms growth was 39% Y-o-Y) followed by processed food products with 11% share (in EUR terms growth was 11.0% Y-o-Y)

• In the first quarter 2014 export-import ratio reached level of 75%

Source: National Bank of Serbia

Exports of Goods – Nominal Growth

6 18.8% 13.9% 3.8% 26% 0% 5% 10% 15% 20% 25% 30% 2010 2011 2012 2013

28.0 31.1 29.2 32.0 32.5

1.0% 1.6%

• 1.7%

2.5% 1.0%

• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 25 26 27 28 29 30 31 32 33 2010 2011 2012 2013 2014p GDP, EUR bn GDP growth rate

• 6.0%
• 4.0%
• 2.0%

0.0% 2.0% 4.0% 6.0% 8.0% 2011 2012 2013 -Q1 2013 -Q2 2013 - Q3 2013 -Q4 Serbia Romania Bulgaria Croatia Hungary

External Position

Exchange Rate USD/RSD (April 2013 – April 2014) Exchange rate EUR/RSD (April 2013 – April 2014)

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

• Comfortable level of FX reserves of EUR 10.4bn as 31 March 2014

(over 7 months of imports coverage) and net reserves amounting to EUR 7.0bn provide a good cushion for the Serbian external position

• The Government export-oriented policy provided significant results in

2013 with decreasing level of current account deficit to historical minimum, positive trends in 2014 can contribute more to strengthening

• f external position of Serbia
• External debt on the end of February 2014 was on the level of EUR

25.5bn, out of which private sector external debt was EUR 12.4bn

• In the period from April 2013 to April 2014 RSD/EUR showed limited

volatility (active managing role of NBS)

Foreign Exchange Reserves

7 10.0 12.1 10.9 11.2 10.4 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0 2010 2011 2012 2013 2014 - Q1 105.0 107.0 109.0 111.0 113.0 115.0 117.0 119.0 121.0 80.0 82.0 84.0 86.0 88.0 90.0

Trade Balance Significantly Improved with Trend Continuation

Balance of Payments (% of GDP)

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

Trade Deficit (% of GDP)

4.6 5.2 5.3 3.6 16.3% 16.4% 17.7% 11.1% 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 2010 2011 2012 2013 Trade deficit (EUR bn) Trade deficit (% of GDP)

• 6.7%
• 9.1%
• 10.5%
• 5.0%

3.4% 2.8% 8.9% 4.6% 3.1% 5.8% 0.8% 2.4%

• 15.0%
• 10.0%
• 5.0%

0.0% 5.0% 10.0% 15.0% 2010 2011 2012 2013 Net FDI Financial Account ex.FDI Current Account Source: National Statistics Office, National Bank of Serbia

External Liquidity Indicators (% of GDP)

• Current account deficit in 2013 reached historical minimum level of

5.0% of GDP, while projected CAD for 2014 is 4.2% of GDP

• The improvements were due to activation of export-oriented

investments in automobile, electronic and chemical industries, slower import growth and higher remittances inflow compared to the same period last year

• The export - import ratio showed strong upward trend - from 63% for

period January-March 2013 to 75% in the period January-March 2014

• In February 2014 the goods exports were 52.4% higher than exports

level in 2008, while imports were below 2008 level 9.5%

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

6.7% 9.1% 10.5% 5.0% 12.7% 13.0% 13.8% 11.6% 35.7% 38.3% 36.5% 34.1% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 2010 2011 2012 2013 CA Deficit Debt Repayments FX Reserves 8

Serbia’s Exports and Imports in the period January- March 2014

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% 8% 14% 10% EU CIS MEDA Other 63% 14% 6% 17% EU CIS MEDA Other 19% 13% 8% 7% 4% 5% 44% Italy Germany Bosnia and Herzegovina Russian Federation Montenegro Romania Others 12% 12% 11% 7% 5% 5% 48% Italy Germany Russian Federation China Hungary Poland Others 9

…And By Types Of Products

Source: National Statistics Office

Export Jan – March 2014 (FOB) Import Jan – March 2014 (CIF)

Source: National Statistics Office 4% 35% 27% 5% 21% 8% Energy Intermediate goods Capital goods Durable consumer goods Non durable consumer goods Unclassified by MIG destination 14% 32% 23% 2% 14% 15% Energy Intermediate goods Capital goods Durable consumer goods Non durable consumer goods Unclassified by MIG destination

External Trade as % GDP

• Serbia’s exports exhibit a healthy degree of product diversification,

covering the full range of products from intermediate inputs through consumer goods, to capital goods

• This demonstrates the extent to which Serbia is already being

integrated into the European trade system, supplying goods to multinational companies operating in the global supply chain

• Intermediate and capital goods have been the fastest growing

product categories, one of the results of the direct foreign investment that Serbia has attracted in recent years

Source: National Statistics Office * Projected GDP for 2013 26.4% 26.8% 29.5% 34.4% 44.4% 45.3% 49.4% 48.4% 0% 10% 20% 30% 40% 50% 60% 2010 2011 2012 2013 Export Import 10

FDI Expected to Increase in 2014

Net FDI Diversification by Geography Jan - Dec 2013* Net FDI Diversification by Sector* (2013) Net Foreign Direct Investment (EUR mln)

• FDI recovered in 2013 as a result of projects in the manufacturing

sector (24% of total), followed by finance (16%) and construction (12%)

• The Government dedicated to continue with implementation of

measures for improvement

• f

business environment and simplification of administrative processes

• One of the main new investments in 2013 was Etihad’s takeover of

the local carrier JAT Airways, and the subsequent creation of Air Serbia which started in October 2013

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) 4.3% 5.3% 5.7% 5.7% 5.9% 5.9% 6.3% 6.4% 17.1% 37.5% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 11 24.5% 22.6% 11.7% 7.5% 17.5% 8.7% 7.5% Manufacturing Wholesale and retail trade Construction Real estate activities Financial intermediation Transport and communication Agriculture 860 1,827 232 761 92 200 400 600 800 1000 1200 1400 1600 1800 2000 2010 2011 2012 2013 Feb-14

Inflation in the Target Band in 2014

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

• Since the end of 2012, inflationary pressures have been weakening due

to three main factors: the monetary policy measures that have been taken, the good agricultural season (reduced food costs) and the low aggregate demand

• Y-o-Y inflation continued down to 2.3% in March, thus temporarily

sliding below the lower bound of the target tolerance band (4±1.5%)

• CPI growth excluding food, energy, alcohol and cigarettes also declined

to 3.4% y-o-y

• Under the NBS estimate, y-o-y inflation will move around the lower

bound of the target tolerance band in the coming months, with some volatility due to last year’s base

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% 2.3% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 2010 2011 2012 2013 2014 - Q1

• 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)

• 8
• 3

2 7 12 17

Energy Unprocessed Food Processed food Industrial goods exluding food and energy Services

• 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

59% 13% 8% 10% 4% 6% Realized loans and deposits Callable loans and deposits Cash and cash equivalents Securities and stakes in companies Fixed assets Other assets 16.0% 43.0% 13.6% 6.4% 14.6% 6.4% Transaction deposits Other deposits Borrowings Other liabilities Share and other capital Reserves 14

Assets 2011 2012 2013 2014-Q1

• I. Foreign Assets

4,36% 5,36% 4,31% 5,08% Of which FX reserves 2,92% 3,81% 3,32% 2,95%

• II. Domestic credit

89,05% 88,16% 89,09% 88,42%

• f which Government

6,83% 9,19% 10,65% 12,28%

• f which reserves in NBS

16,71% 15,95% 19,30% 15,48%

• f which Companies

35,00% 35,38% 32,13% 30,72%

• f which Households

20,74% 20,66% 21,38% 21,62%

• III. Other Assets

6,59% 6,48% 6,60% 6,50% Total Assets (EUR bn) 27,73 27,78 27,49 27,12 Liabilities 2011 2012 2013 2014-Q1

• I. Foreign Liabilities

18,9% 18,4% 15,6% 14,5%

• II. Government depostis

0,7% 1,1% 1,6% 1,7%

• III. Transaction deposits

5,9% 5,9% 7,7% 7,0%

• IV. RSD deposits

6,7% 5,4% 5,1% 5,0%

• V. FX deposits

34,6% 36,6% 36,8% 37,3%

• VI. Other Liabilities

33,2% 32,6% 33,1% 34,4% Total Liabilities (EUR bn) 27,73 27,78 27,49 27,12

A Strong Capital Cushion Offsets Relatively High NPLs

Source: National Bank of Serbia Source: National Bank of Serbia * with profit/loss Source: National Bank of Serbia

Credit Growth Y-o-Y Capital Adequacy Ratio and NPL’s Banking Sector Ownership by Assets (Dec 2013)

15% 24% 14% 11% 11% 26% Austria Italy Greece France Other foreign banks Domestically owned banks

• At the end of February 2014 CAR stands at high level of 20.9%,

mainly due to capital increases, higher reserves from profit

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

regulatory provision (110% in February 2014) and IFRS provisions cover half of NPLs (55% in February 2014). NBS has adopted regulatory measures aimed at resolving NPLs (allowing the sale to non financial entities and better tax treatment on restructured debt among others)

• Liquidity ratio of the banking system is more than 2 times higher than

the regulatory limit (in February 2014 it was at 2.6) and liquid assets represent 38% of total assets in February 2014

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

conservative level in February 2014 (113%)

15 16.9% 19.0% 18.6% 21.4% 22.0% 19.9% 19.1% 19.9% 20.9% 20.9% 15.0% 16.0% 17.0% 18.0% 19.0% 20.0% 21.0% 22.0% 23.0% 2010 2011 2012 2013 February 2014 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

In April 2014 new Government was formed and announced new fiscal consolidation measures and structural changes:  Supplementary Budget by the end of June 2014  Public sector wage decrease (10%)  Public sector size decrease  Taxation procedure simplification, decrease of tax evasion  Privatization of SOE’s, finalization of privatization process  Privatization of Telekom Srbija, promotion of public-private partnership  Reduction of discretionary expenditures (goods and services)  Structural reforms (amandments to Labor Law, public administration reform, pension system reform, improvement of business environment)

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)

0% 5% 10% 15% 20% 25% 2010 2011 2012 2013 Other tax revenues Duties Profit tax Personal income tax Excises VAT 17 665 694 789 812 930 770 833 980 986 1.113

• 105
• 139
• 192
• 174
• 183
• 400
• 200

200 400 600 800 1,000 1,200 2010 2011 2012 2013 2014f Revenues Expenses Balance

• 1.8%
• 2.4%

0.8% 0.9%

• 1.9% -2.0%
• 2.6%
• 4.5% -4.6% -4.9%
• 6.4%
• 4.8%
• 7.0%
• 6.0%
• 5.0%
• 4.0%
• 3.0%
• 2.0%
• 1.0%

0.0% 1.0% 2.0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Active Debt Management Has Produced Stable Funding Base

Total foreign debt 60% Total domestic debt 40%

Other 8% IMF, 2% IDA, 2% Paris Club, 7% IBRD, 7% Other 5 % T-bills and T-bonds 27% Frozen FX bonds 8% Guaranteed external debt 10% Eurobond, 20% EIB, 4%

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 2014 with projections of 2015 and 2016

Public Debt Public Debt Service (RSD bn) Description of the Debt Structure (As of 31 March 2014) Development of the Currency Structure

89.3 112.4 106.5 127.1 423.3 463.5 495.1 445.1 100 200 300 400 500 600 700 2013 2014* 2015* 2016* Principal Interest 18 1283 1547 2015 2306 2366 44.5% 48.7% 60.2% 63.8% 62.3% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% 55.0% 60.0% 65.0% 70.0% 500 1000 1500 2000 2500 2010 2011 2012 2013 2014 - Q1 Public debt (in RSD bn) Public debt (% of GDP) 14.6% 14.4% 18.3% 20.3% 20.9% 60.0% 57.6% 51.0% 45.9% 45.8% 14.7% 18.8% 23.1% 27.7% 27.3% 7.9% 6.9% 5.7% 4.6% 4.5% 2.8% 2.3% 1.9% 1.5% 1.4% 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 2010 2011 2012 2013 2014 - Q1 Other SDR USD EUR RSD

Debt Mix and Currency Structure

Source: Ministry of Finance, as of 31 March 2014 Source: Ministry of Finance, as of 31 March 2014 Source: Ministry of Finance, as of 31 March 2014 20.9% 45.8% 27.3% 0.9% 4.5% 0.5% RSD EUR USD CHF SDR Others Source: Ministry of Finance, as of 31 March 2014

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

59.7% 40.3% Total foreign debt Total domestic debt 73.8% 26.2% Fixed interest rate Variable interest rate 7% 7% 10% 26% 10% 13% 7% 8% 12% 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

• Public debt of the central government level as of 31 March, 2014 was

EUR 20.5bn, out of which EUR 17.7bn were direct and EUR 2.8bn contingent liabilities (62.3% GDP)

• Total financing needs in 2014 are EUR 5.6bn, plan is to provide

financing through:  EUR 2.8bn government securities - domestic market  EUR 0.6bn Eurobond  EUR 2.2bn bilateral and multilateral budget support loans

• Share of marketable debt in total debt of the Republic of Serbia

reached 55% at the end of March 2014, out of which 36% dinar government securities

• Repayments on government securities in 2014 will be EUR 2.3bn

excluding short term bills (3M, 6M), while total repayments will be EUR 3.9bn

• Introduction of new instruments with longer maturity on domestic financial

market (EUR denominated 10Y bond issued in April 2014, and RSD 10Y denominated bond planned for the H2, 2014)

• In March 2014 the Republic of Serbia signed with Abu Dhabi authorities

USD 1.0 bn loan agreement

• By the end of April 2014 PDA successfully raised 54% of the planned

amount to be raised on domestic financial market

Maturity Distribution of Local Currency Government Securities (As of 31 March 2014) Maturity Distribution of EUR Denominated Government Securities (As of 31 March 2014)

1.2% 1.9% 23.7% 4.0% 30.3% 30.2% 4.8% 2.5% 1.3% 3M 6M 53W 18M 2Y 3Y 5Y 7Y CPI indexed 15.5% 5.4% 40.4% 15.2% 13.0% 10.4% 53W 18M 2Y 3Y 5Y 15Y 20

Government Securities – Domestic Market

Source: Ministry of Finance Source: Ministry of Finance 21 5 10 15 20 25 30 35 40 45 50 3M 6M 53W 2Y 3Y 5Y 7Y RSD Billions

Redemptions New Issuance

RSD securities - domestic market (up to April 2014) EUR securities - domestic market (up to April 2014)

10 20 30 40 50 60 70 80 90 100 53W 2Y 3Y 5Y 10Y EUR mln

Redemptions New Issuance

0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 In years

ATM of RSD securities

12.39% 11.95% 13.04% 13.68% 13.33% 15.21% 14.74% 9.52% 9.38% 10.10% 10.71% 11.02% 12.15% 12.49% 8.00% 9.00% 10.00% 11.00% 12.00% 13.00% 14.00% 15.00% 16.00% 3M 6M 53W 2Y 3Y 5Y 7Y 2012 2013

RSD weighted average accepted rate on primary auctions

Source: Ministry of Finance Source: Ministry of Finance