Economic environment, fundamentals and challenges

1 February 22February 22thth , Belgrade , Belgrade

Economic environment Economic environment - fundamentals and - fundamentals and

challengeschallenges

Rotary Club 2011

Zoran PetrovićZoran Petrović Deputy ChairmanDeputy Chairman

Board of ManagementBoard of Management

Raiffeisen bankaRaiffeisen banka


Content

I.I. Global economic environmentGlobal economic environmentA. Global Stability MapB. Global Imbalances

II.II. Economic environment in EU&CEEEconomic environment in EU&CEEA. Non uniform pace of economic growthB. ECB with a close eye on inflationC. Impact of the crises on CEE

III.III. Economic environment in SerbiaEconomic environment in SerbiaA. Positive record for Q3’10 GDP B. Boosting foreign trade volumesC. No consistent positive trend in production D. Budget gap under the 2010 thresholdE. Inflation corridor is piercingly kaputF. NBS tightens the belt further

G. Dinar should add to the economy competitiveness

Economic environment Economic environment - fundamentals and - fundamentals and challengeschallenges


Global Stability MapGlobal Stability Map

Global Economic environmentGlobal Economic environment

Source: Global Financial Stability Report, IMF October 2010Source: Global Financial Stability Report, IMF October 2010

Note: Away from center signies higher risks, easier monetary and Note: Away from center signies higher risks, easier monetary and fifinancial conditions, or higher risk appetitenancial conditions, or higher risk appetite


Global ImbalancesGlobal Imbalances


Source: IMF estimates, WEO, IMF January 2011Source: IMF estimates, WEO, IMF January 2011

CHN+EMA: China, Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan CHN+EMA: China, Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan

Province of China, and Thailand; DEU+JPN: Germany and Japan; OCADC: Bulgaria, Croatia, Czech Province of China, and Thailand; DEU+JPN: Germany and Japan; OCADC: Bulgaria, Croatia, Czech

Republic, Estonia, Greece, Hungary, Ireland, Latvia, Lithuania, Poland, Portugal, Romania, Slovak Republic, Estonia, Greece, Hungary, Ireland, Latvia, Lithuania, Poland, Portugal, Romania, Slovak

Republic, Slovenia, Spain, Turkey, and United Kingdom; OIL: Oil exporters; ROW: rest of the world; Republic, Slovenia, Spain, Turkey, and United Kingdom; OIL: Oil exporters; ROW: rest of the world;

US: United StatesUS: United States

C/A in % of GDP


Global ImbalancesGlobal Imbalances


Monetary tightening should continue in emerging economies where overheating pressures are starting to emerge:

recent policy rate hikes are beneficial, although in some cases more nominal exchange rate appreciation would have been preferable

yet, such tightening can exacerbate the strong capital inflows that many of these economies are now experiencing

therefore, prudential measures to keep increases in credit or asset markets from becoming excessive should also be considered

Renewed surge in capital inflows to some emerging markets, whether driven by stronger fundamentals in the emerging economies or by looser monetary policy in advanced economies, requires an appropriate policy response:

some economies quickly overcame the crisis and have continued to run C/A surpluses, yet their real effective exchange rates remain close to precrisis levels- response to renewed capital inflows has been to accumulate more FX reserves

for these countries, allowing currency to appreciate would help combat overheating pressures and facilitate rebalancing from external to domestic demand

in other countries, where the currency is above levels consistent with medium-term fundamentals, fiscal adjustment can help lower interest rates and restrain domestic demand


Non uniform pace of economic growth Non uniform pace of economic growth

Economic environment in EUEconomic environment in EU

At first glance the economic recovery in the Euro zone appears to be in full swingAt second glance, however, the situations in the individual countries are rather differentCountries such as Germany, Austria and Finland are enjoying a kind of mini-boom; the recovery in the Netherlands and Belgium is picking up paceYet, economic activity in France and Italy is disappointingly weakCountries like Spain, Portugal or Ireland are even at risk of falling back into recession in the course of the year, while Greece has yet to climb out in the first place


ECB with a close eye on inflationECB with a close eye on inflation


Consumer prices are increasing on a yoy basis to more than 2% due to higher commodity prices and partly due to the hike in excise duties in numerous Member States with a view to getting their public finances back under controlWithout increases in taxes and duties many countries in EU are more likely to face deflation rather than inflation If we exclude energy and foods, inflation in the Euro zone amounts to just 1.1% yoyIf Germany was the only country involved then the ECB would already be gearing up to lift the key rate, but the ECB has to shape its policy to suit the EU average


Impact of the crises on CEEImpact of the crises on CEE

Economic environment in CEEEconomic environment in CEE

At the start of the 2008 crisis many CEE countries had low public debt and deficits barely exceeded 2-3% of GDPYet, plunging economies and budget revenues with increasing social burdens pushed governments to adopt anti-cyclical budget policies As a result, in 2010 nearly all CEE governments were running large fiscal deficits, while public debt levels increased as wellExcept for Hungary, which is plagued by debt sustainability problems – countries public debt levels still remain acceptable in other CEE and at much lower levels than in established markets (i.e. EU)



Economic environment in CEEEconomic environment in CEE

Nearly all CEE countries also face some common issues regarding public finances, crucially mounting social expenses and a higher share of interest payments on their debt

Nearly all CEE governments, are running cyclically adjusted deficits which are unsustainably high over the medium term




EMBIG spreads remained rather volatile from the emerging of the crises, peaking in the beginning of 2009 With the EU response to the Debt crises contagion risk appetite enlarged again for the emerging markets Serbian USD EMBIG spread decreased tremendously from its peak in late 2008 (above 1300 bps) to current 399 bpsIn addition, Serbian EMBIG is getting closer to neighboring Hungary (350 bps) and Romania (309 bps), who did not fully recover to the pre-crises level

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-08

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-08

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-08

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8A

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8Se

p-08

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-08

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-08

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-08

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-09

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-09

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-09

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09

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ug-0

9Se

p-09

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-09

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-09

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-09

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10

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-10

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-10

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-10

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-10

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-10

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-10

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11

Bulgaria Hungary Kazakhstan RussiaSerbia Ukraine Romania

EMBIG spreads in CEE through the crises

Source: Statistical Office of Serbia, Raiffeisen RESEARCH



Almost all countries in CEE had positive GDP growth record in Q3 2010The real GDP in Serbia grow by 2.7% yoy in 3Q partly supported by low comparison base (i.e. GDP fell in 3Q/09 of 2.2% yoy), but also with positive development in exports and industrial production Looking in CEE region, Serbia is somewhere above the average growth rate of app. + 2% yoySeasonally adjusted data for 3Q 2010 show growth of 1.6% qoq (1Q: +0.3% qoq, 2Q: +0.8%), while flash GDP estimate for Q4 2010 shows growth of 1.8% yoyIn 2011 we expect Serbian GDP to grow at the rate of 2.5% yoy

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0%

1Q 09 0.8 -6.7 -3.9 -5.6 -8.2 -6.2 -3.5 -6.7 -4.1 6.0 -9.4 -20.2

2Q 09 1.1 -7.5 -5.2 -5.5 -9.2 -8.7 -4.9 -6.3 -4.2 5.3 -10.8-17.8

3Q 09 1.7 -7.1 -5.0 -4.9 -8.3 -7.1 -5.4 -5.7 -2.3 4.1 -7.7 -16.0

4Q 09 3.1 -4.0 -2.8 -2.6 -5.5 -6.5 -5.9 -4.5 -1.6 -0.8 -3.8 -6.8

1Q 10 3.0 0.1 1.0 4.7 -1.1 -2.6 -3.6 -1.8 0.4 2.0 3.1 4.9

2Q 10 3.5 1.0 2.9 4.2 2.1 -0.5 -1.4 -2.5 2.0 3.3 5.2 5.9

3Q 10 4.2 1.7 2.5 3.8 1.7 -2.5 0.5 0.2 2.7 4.9 2.7 3.4

PL HU CZ SK SI RO BG HR RS AL RU UA

CE SEE CIS

Source: Statistical Office of Serbia, Raiffeisen RESEARCH

Quarterly GDP trend in CEE (% yoy)



Economic environment in SerbiaEconomic environment in Serbia

Foreign trade volumes remained on the upside in Jan-Nov 2010 coming to EUR 18.08 bn (+13.4% yoy)Exports growth rates persistently overshoot imports growth, 22.3% yoy (EUR 6.67 bn) and 8.8% yoy (EUR 11.42 bn) in Jan-Nov 2010, respectivelyExport-import ratio came to 58.4% (52.1% in the same period last year)The trade deficit fell by 5.8% yoy coming to EUR 4.75 bn in Jan-Nov The C/A gap came in Jan-Nov 2010 to EUR 1.84 bn (-3.2.% yoy)The C/A gap came in November to EUR 159.7 mn, first month with green record in 2010 due to huge jump in current transfers to EUR 600 mn, out of which EUR 523 mn relates to private remittances

Boosting foreign trade volumesBoosting foreign trade volumes


After two consecutive months of negative industrial production (Oct: -3.2% mom and Nov: -1.1% mom), development changed, as indicator moved to positive territory in December (+1.1% mom), according to the seasonally adjusted mom dataIn Jan-Dec, industrial production increased by 2.9% yoy (vs -12.1% yoy in Jan-Dec 2009) Augment was led by mining & quarrying (+13.8% yoy) where the extraction of crude petroleum and gas was on the forefront (+34.9% yoy), followed by manufacturing industry (+3.9% yoy), while electricity, gas and water supply kept sliding further (-4.3% yoy)

No consistentNo consistent positive trend in positive trend in productionproduction



Budget deficit in 2010 came to RSD 100.3 bn compared to RSD 90.46 bn in 2009, being below the threshold set under the revised Law on budget for 2010Budget gap/GDP came to 3.4% in 2010 (according to the Raiffeisen Research GDP estimate for 2010), being significantly under the threshold of 4.75% agreed with IMFThe government approved a bill on the 2011 budget, envisaging a RSD 120 bn gap and a consolidated deficit of RSD 149 bn, or 4.1% of GDP, as agreed with the IMFPublic debt skyrocketed to EUR 12.2 bn, increasing by EUR 2.32 bn in 2010 (41% of GDPe for 2010)

Budget gap under the 2010 thresholdBudget gap under the 2010 threshold



CPI came in Jan-Dec 2010 to 10.3% yoy (Jan-Dec 09: 6.6% yoy), ending 2010 outside the NBS targeted range for 2010 (6.0%+/-2%)Looking in annual terms, dinar lost 9.1% while year end inflation difference (Serbia-EU) came to app. 8%Thus, competitiveness was preserved and slightly improved which was confirmed via positive record in exportsFor 2011 we expect inflation to reach 7.5% yoy, while NBS is sticking to its target (4.5%+/-1.5%)

Inflation corridor is piercingly kaputInflation corridor is piercingly kaput



The NBS decided to hike the key rate to 12% in the beginning of 2011This is the sixth consecutive rate increase (from the level of 8%) after the the NBS shifted the policy from continuous easing via sharp cuts in the key rate to policy tighteningIn addition, the NBS passed a new Decision on the mandatory reserve rate aiming to suppress inflationary expectationsThe measure is expected to prevent injecting additional liquidity, as it was envisaged under the previous Decision on the MRR, and in this way help reducing inflationary pressure

NBS tightens the belt furtherNBS tightens the belt further



By means of frequent and large interventions on the FX market the NBS drained RSD liquidity, which eventually resulted in the repo stock hitting its minimum level of EUR 354 mn in November 2010 (slightly recovering to 443 mn in December) since these operations were introduced in 2006Though some of the larger stock (EUR 3 bn in September 2008) was transferred to T-bills of the MoF (EUR 1.7 bn in December 2010) with more attractive yieldsConsequently, dinar broke depreciation trend in December gaining some 1.6% mom, while finally losing 9.1% yoy in 2010 while inflation difference (Serbia-EU) came to app. 8%

Dinar should add to the economy Dinar should add to the economy competitivenesscompetitiveness



The contents of this presentation do not constitute an offer or invitation to subscribe for or purchase any securities and neither this presentation nor anything contained herein shall form the basis of any contract or commitment whatsoever. This presentation is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. Any investment decision with respect to any securities of the respective company must be made on the basis of an offering circular or prospectus approved by such company and not on the basis of this presentation. Information for this presentation is obtained from sources that are believed to be reliable but their accuracy cannot be guaranteed. Relevant economic data has been taken from Statistical gazette of NBS, Economical gazette of NBS, Ministry of finance of Serbia internet page, NBS internet page, Republic of Serbia Statistic Department, IMF, Thomson Financial Datastream, Raiffeisen RESEARCH.

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Economic environment, fundamentals and challenges

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