Macroeconomic DevelopmentsMacroeconomic Developments, , OctoberOctober – – DecemberDecember 2006 2006

Radovan Jelašić – Governor

Belgrade, 29 January 2007

ContentsContents

Inflation

Monetary policy

Capital inflow and external position

Monetary aggregates

Current account balance

Economic growth

Lending activity of banks

Wages and productivity

Fiscal developments

All that was achieved in 2006 will be sustained in 2007All that was achieved in 2006 will be sustained in 2007!!

13.7

7.8

14.817.7

6.64.4

6.111.0

5.9

14.5

0

5

10

15

20

2002 2003 2004 2005 2006Retail prices Core inflation

0.0

-0.1

0.7

-0.2 -0.4

0.90.5 0.4

0.8 0.60.1 ?

1.6

0.10.8

1.81.4

2.2

0.4 0.3 ?0.00.20.7 0.40.60.8 0.6

-1.0

0.0

1.0

2.0

3.0

Dec-05

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec-06

Jan-07

-10-505101520

Retail prices Core inflation Year-on-year growth rates Year-on-year core inflation

Monthly inflation dynamics in 2006 (%) Annual inflation rates (%)

14.00

19.97 19.97

20.89 20.9420.77

20.22 20.13

18.4118.00 18.00

17.5016.50

10

12

14

16

18

20

22

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

Q1 Q2 Q3 Q4 2007

* Preliminary data until 29 January 2007.

Switch to 2W repo securities via fixed-rate auctions

NBS key policy rate in 2006 (%)

2.2

3.4

0.4 0.5

1.72.1

1.7

0.3

0

0.5

1

1.5

2

2.5

3

3.5

4

Q1 Q2 Q3 Q4

Retail prices Core inflation

Inflation rate in 2006 (%)

13,00%

For 2007, the National Bank of Serbia has planned only the For 2007, the National Bank of Serbia has planned only the

things it is certain to achievethings it is certain to achieve!!

Planned core inflation for 2007: 4 - 8%; NBS will target the lower band of

the corridor;

Target fulfillment alone will determine the future trajectory of the NBS

key policy rate in 2007!

Inflationary expectations are declining together with inflation!

Although there is still a need for a part of regulated prices to come closer

to market prices, it is important to mention prices that have in the

meantime moved down – Politika, petrol at NIS petrol stations, white

goods, etc.

Eltim - Serbia

Tehnomarket – Serbia

Tehnomania

Mediamarkt – Hungary

Topvision – Germany

RSD 86.195

RSD 64.999

RSD 77.999

HUF 159.999

EUR 1,098

EUR 828

EUR 994

EUR 625

EUR 549

Example: Samsung LE 27S71 LCD television set*

* Exchange rate: EUR 1 = RSD 78.5000

Differences between Serbian and foreign pricesDifferences between Serbian and foreign prices

cannot be put down to the exchange ratecannot be put down to the exchange rate!!

All All profit from price stabilization!profit from price stabilization!

Pensioners – semiannual indexation to price growth;

Our investors abroad – for every euro invested abroad, they need to

allocate (approximately) the same amount of dinars;

All people who save in Serbia – dinar and foreign currency savings,

voluntary pension funds, shares and other investments (which erode in

the context of dinar devaluation);

Corporate sector – price stability is the best way for the corporate sector

to finally focus on productivity and market competition, rather than price

and exchange rate movements!

Earlier criticisms such as “prices keep growing and the dinar is

unrealistically strong” are now obviously out of place!

Decision of the Monetary Policy Committee of 29 JanuaryDecision of the Monetary Policy Committee of 29 January

2007!2007!

The key policy rate of the National Bank of Serbia on 2-week repo

securities has been cut from 14.0% down to 13.0% per annum!

Key reasons:

Positive trend of declining core and headline inflation;

Need for additional sterilization in Q4 2006 due to

increased budgetary spending;

Lessened pressure on the dinar exchange rate;

Effects on inflation

Price movements in the first half of the year will be Price movements in the first half of the year will be

determined by the following factorsdetermined by the following factors

Low inflation rate in Q4 2006;

Appreciation effects;

Fall in prices of petroleum

products;

Restrictive monetary policy stance;

Strengthening of trust in the dinar.

Deferred price hikes – central

heating and electricity;

More expansive fiscal policies in

Q4 2006;

Constitution of Government;

...

Price reduction Price rise

412.4

0.00.010.018.2

120.3

0.0

-153.5

-259.4

-0.3-80.2

-2.5

-300

-200

-100

0

100

200

300

400

500

Aug Sep Oct Nov Dec Jan*

86

85

84

83

82

81

80

79

78

EUR mln

The National Bank of Serbia aims at notably reducing its The National Bank of Serbia aims at notably reducing its

role in exchange rate formationrole in exchange rate formation......

Net result in IFEM

Net purchase from exchange offices

Total effect on forex reserves

-40,1 -15,7 -9,7 +259,4 +153,5 -412,4

NBS interventions in IFEM August 2006 – January 2007 and RSD/EUR exchange rate

movements

* Until and including 25 January 2007.

Purchase

Sale

+162,1 +148,5 +154,4 +130,9 +86,0 +34,1

+122,0 +132,8 +144,7 +390,3 +239,5 -378,3

... ... and in 2006 its efforts in this direction were successfuland in 2006 its efforts in this direction were successful! !

0.79

1.552.03

5.87

0

1

2

3

4

5

6

7

2003 2004 2005 2006

1.491.69

1.931.75

0

0.5

1

1.5

2

2.5

2003 2004 2005 2006

3,8%44,1%50,9%69,1%

96,2%55,9%49,1%30,9%

0

1

2

3

4

5

6

7

2003 2004 2005 2006

Volume of interbank trade outside IFEM

Foreign exchange trade in and outside IFEM

Number of active days of NBS in IFEM

NBS purchases from exchange officesEUR bln

EUR bln

Banks – banks

Banks – NBS

EUR bln

* Until and including 26 January 2007.

-9,3%+14,2%

+13,4%+189%

251 252 240

203

131

0

50

100

150

200

250

300

2002 2003 2004 2005 2006

Foreign exchange market will be further liberalized over Foreign exchange market will be further liberalized over

the next three monthsthe next three months

As of 5 March, the functioning of the fixing session will change – the official middle exchange rate of the dinar

against the euro will be set based on the daily weighted average trade in currencies in the overall interbank

foreign exchange market;

As of 1 March, the NBS will receive only 3 currencies from exchange offices (EUR, USD, CHF);

On 1 January this year, the NBS cut the incentive fee for exchange offices to 0.5%; by the end of 2007, this

fee will be lowered to 0.1%.

2.19 2.282.84 3.12

4.94

9.02 8.87

0123456789

10

2001 2002 2003 2004 2005 2006 2007

NBS forex reservesEUR bln

For 2007, data as at 25 January.

Future exchange rate movements during 2007Future exchange rate movements during 2007

If necessary, the NBS will be ready to “iron out” excessive daily and

periodical oscillations, but without interfering with the overall exchange

rate trend;

Clients that have large foreign currency inflows and outflows should

safeguard against foreign currency risk – especially those that have

foreign currency inflow only!

The NBS aims to minimize the number of days of its participation in the

market in the capacity of buyer or seller!

Capital inflow in the first 11 months well exceeded the current Capital inflow in the first 11 months well exceeded the current account deficit – there is no 1990-1991 scenario!account deficit – there is no 1990-1991 scenario!

In December, annual growth rates of reserve money

and broad and narrow money supply stood at 41.7%,

39.8% and 37.1%, respectively;

Total sterilization in 2006 was RSD 239 billion – RSD

125 billion through repo operations and RSD 114 billion

against reserve requirement.

Import/export coverage ratio in the first 11

months of 2006 amounted to 58.1%, compared

to 49.8% in the same period in 2005 (excluding

effects of VAT introduction).

-1,602-2,248

1,4712,601

1,135

2,667

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

I-XI 2005 I-XI 2006

in EUR mln

Borrowing

Current account

Foreign direct investment

Import and export movements (January-November)

6,159

10,6119,553

4,762

-1,500

500

2,500

4,500

6,500

8,500

10,500

Export Import

in EUR mln

2005 2006

+11,1%

+29,3%

Ratio of current account deficit to GDP declined in 2006 and, Ratio of current account deficit to GDP declined in 2006 and, according to projections, will be lower than in the preceding according to projections, will be lower than in the preceding two yearstwo years

Current account balance is improving

regardless of 2006 appreciation!

-8.2

-11.0

-9.6

-12.4

-10.8 -10.5

-14

-12

-10

-8

-6

-4

-2

02001 2002 2003 2004 2005

2006projection

Current account balance excluding grants (in % of GDP)

Private debt is gaining predominancePrivate debt is gaining predominance in total external debtin total external debt

Strengthening of EUR against USD had a notable effect on total debt (debt increased by 27.2%

in USD terms and 13.7% in EUR terms compared to end-2005).

Public external debt of the Republic of Serbia

5.8 5.8 5.96.8

6.0

0

1

2

3

4

5

6

7

8

9

2002 2003 2004 2005 November2006

EUR bln

Private external debt of the Republic of Serbia

2.3 2.53.2

5.4

8.1

0

1

2

3

4

5

6

7

8

9

2002 2003 2004 2005 November2006

EUR bln

Level and structure of external debt of the Republic of Serbia

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

2002 2003 2004 2005 30.11.2006.

0

5

10

15

20

25

30

35

40

45

50

55

60

65

Share in GDP (right scale)

in EUR bln

65.7% 64.3% 59.7% 51.9%

25,8% 27,2%32.3%

41,2%

in %

8.99.1 9.9

13.1

8.6% 8.5% 8.1% 6.8%

Private debt

Public debt

Kosovo and Metohija

14.9

54,0%

40,0%

6,0%

Source: NBS.

Prices of petroleum products have now returned to their Prices of petroleum products have now returned to their June 2005 levelJune 2005 level

World oil price trends reversed in

August 2006. From close to USD

70 in July, the price of Ural oil

declined to around USD 50 in

January this year. Over the past

five months, this has led to a 20%

drop in prices of petroleum

products.

0

10

20

30

40

50

60

70

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1

2005 2006 2007

40

50

60

70

80

90

100

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1

2005 2006 2007

Retail price of petrol MB 95

Ural oil price per barrel (USD)

In Q3 2006, GDP growth was aroundIn Q3 2006, GDP growth was around 4.6% 4.6%

Industrial production grew by

4.6% and processing sector

production by relatively high

5.3% in the first 11 months of

2006 compared to the matching

period of 2005;

Key contributors to such growth

were the production of basic

metals and non-metals, food

and chemical products;

Overall economic growth, including industry, has been slowing down: 8.4% in 2004, 6.2% in

2005, but 5.8% (preliminary) in 2006!

Serbia needs another “injection” and acceleration of reforms!

6.8

4.4

8.3

13.8

4.6

7.8 7.4

5.0

6.25.6

4.6

0

2

4

6

8

10

12

14

16

I II III IV I II III IV I II III

2004 2005 2006

in %Real GDP growth

Source: RSO.

Industry unit labour costs have declinedIndustry unit labour costs have declined

Industry productivity gains

(12.3% in the first eleven

months) outstripped growth in

real gross wages (11.9%); unit

labour costs therefore declined

by around 0.4%.

Movements in productivity and real wages in industry(2005=100)

60

70

80

90

100

110

120

130

1 3 5 7 2004

9 11 1 3 5 7 2005

9 11 1 3 5 7 2006

9 11

Productivity Real gross wages

In the second half of 2006, growth in lending activity underwent a In the second half of 2006, growth in lending activity underwent a

slowdownslowdown!!

2005 credit growth stood at RSD 149.4 billion, while in 2006 it equaled RSD 105.4 billion.

Lending activity slowed down appreciably in the latter half of 2006: absolute growth was lower than a

year earlier;

Lending activity growth in Q4 2006 drew mainly on domestic sources of financing (corporate, household

deposits, etc.).

27.4

46.5

25.4

38.240.0

12.4

56.6

8.3

0

10

20

30

40

50

60

2005 2006 2005 2006 2005 2006 2005 2006

Q1 Q2 Q3 Q4

Growth in lending activity RSD bln

Dinar savings always beat inflation!Dinar savings always beat inflation!

The National Bank of Serbia launched a campaign promoting dinar

savings, which not only bear a higher interest rate than foreign currency

savings, but also invariably beat inflation!

For banks, dinar savings deposits are the most attractive source of

financing, as they are subject to a reserve requirement ratio of only 10%,

compared to 40% and 45% ratios on foreign currency savings deposits;

The aim of the campaign are not NBS savings bills, but dinar savings in

commercial banks;

Over the coming months, the NBS will actively promote dinar savings in

all media – the first who start saving in dinars will get the best interest and

the best earnings!

Thank you!

NBS Call Centre

Dial toll-free

0800-111-110