the autumn report september, 2011 no 9, year xi autumn … · the government of the republic of...

THE AUTUMN REPORT September, 2011 No 9, Year XI

Apart from monthly publication on current economic developments(SED), in May and October more comprehensive analyses are prepared (Spring/Autumn Report on Economic Developments) that comprise both the analysis and the forecast of current economic developments. Autumn Report on Economic Developments compiled by the Ministry of Finance is a continuation of publications that had continually been released by the Republic Development Bureau since 2001 to meet the needs of the Government of the Republic of Serbia

The Autumn Report encompasses a more detailed analysis of current macroeconomic and economic developments in the first eight months of 2011 coupled with a forecast of developments of macroeconomic aggregates, as well as the analysis of some topical development issues.

In the compilation of The Autumn Report, official data provided by the Ministry of Finance, Ministry of Economy and Regional Development, line ministries, Republic Statistical Office, National Bank of Serbia, Republic Development Fund, Republic Privatization Agency, Republic Fund for PDI, National Employment Service, Belgrade Stock Exchange, Agency for Business Registers have been used as well as data obtained through a monthly survey on business climate (conducted by the Ministry of Finance – Department of National Development) on the basis of which short-term forecast for manufacturing industry is prepared in line with the European Commission methodology.

The Autumn Report was prepared by

Gordana Konjevic (Curent Trends, Prices, Monetary Trends, Public Finance), Svetlana Nikolic (Industry, Construction), Svetlana Milosevic (Employment, Earnings), Miodrag Trajkovic (International Economic Developments, Agriculture, Transport and Telecommunications, Retail Trade), Lidija Kuzmanov (Investment, Foreign Trade Activity), Danijela Ciric, MSc (Domestic Demand, Balance of Payments, External Debt), Leposava Ninkovic, Dragana Lazic (Privatization Results), Dijana Ilic-Zogovic (National Competitiveness by the World Economic Forum WEF), Petar Pavlovic (Business Analysis of the SMEE Sector for 2010), Miroljub Nikolic, MSc (Business Climate and Forecast of Trends in Manufacturing Industry), Sonja Tontic, MSc (Regional Development), Lucija Simeunovic (Stimulating Policy of the Fund for Development of the Republic of Serbia), Suzana Stojadinovic (Fiscal Capacity), Natasa Cokorilo, Bozidar Fekonja (Economic Growth, GDP Forecast for 2011, Main economic indicators), Goran Katic, MSc (Forecast of Developments of Economic Activity – Moderate Contraction Stage - Leading Indicator of Economic Activity of Serbia VIPAS).

Zlata Mitic (Statistical Processing of Data, Text Make-up), Sinisa Barjaktarevic (Graphic Design and Printing Preparation), Ana Miletic, Nevenka Zivkovic (Library)

Translator: Jasmina Petrovic

Print and distribution: MF Editor-in-chief

Edvard Jakopin, PhD

Editor Sonja Radosavljevic

Technical Editor Natasa Cokorilo

Ministry of Finance 4 Makedonska St, Belgrade, Serbia

Phone: (381 11) 3345-233, fax: 3345-531 http://www.mfin.gov.rs

Reprinting of the SED and its parts is permitted on condition that the original source is stated and the copy presented to the MF

C O N T E N T S Page

CURRENT TRENDS – SUMMARY 3

1. International Economic Developments 13

2. National Competitiveness by the World Economic Forum (WEF) 17

3. Economic Development 21

3.1. Economic Growth – GDP Forecast for 2011 21 3.2. Domestic Demand 23 3.3. Investments 25 3.4. Foreign Trade Activity 27 3.5. Industry and Business Climate 29 3.6. Construction 32 3.7. Agriculture 33 3.8. Transport and Telecommunications 36 3.9. Retail Trade 39

4. Labour Market 42

4.1. Employment 42 4.2. Earnings 44

5. Prices 46

6. Monetary Developments 48

7. Balance of Payments 51

7.1. Balance of Payments 51 7.2. External Debt 52

8. Public Finance 54

9. Privatization Results 57

10. Stimulating Policy of the Fund for Development of the Republic of Serbia 59

SPECIAL ANALYSES:

1. Forecast of Developments of Economic Activity – Moderate Contraction Stage - Leading Indicator of Economic Activity of Serbia (VIPAS)

64

2. Business Climate and Forecast of Trends in Manufacturing Industry 66

3. Business Analysis of the SMEE Sector for 2010 68

4. Fiscal Capacity 72

Forecast of main macroeconomic indicators in 2011

Real rise in % 2010 Forecast 2011

Gross domestic product 1.0 2.0 Gross value added by activities Industry* 0.2 4.0 Agriculture -0.4 1.0 Investment 1.0 11.0 Export of goods and services 18.8 17.0 Import of goods and services 9.3 12.0 The employed -4.9 0.1 The unemployed -0.3 0.0 Net earnings 0.7 2.1 Inflation 10.3 8.0 Budget deficit (% GDP) -4.6 -4.5

Source: RSO and Ministry of Finance * An estimated rise in the physical volume of industrial output in 2011 is 3.5%

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CURRENT TRENDS – SUMMARY

By the end of September 2011 the Board of Directors of the International Monetary Fund approved to Serbia a new stand-by precautionary arrangement that will be effective for 18 months and enable Serbia to access funds to the amount of about EUR 1.1bn. The new stand-by precautionary arrangement, which involves the possibility but not the obligation to withdraw funds, would consist of two main components: 1) compliance with fiscal accountability rules, and 2) enhancement of the investment climate (the Government of Serbia does not intend to withdraw funds unless there is marked deterioration of economic activities). The new arrangement serves to confirm that Serbia is pursuing a responsible economic policy, it will have beneficial effects on potential foreign investors and that contribute to the alleviation of potential consequences of the new crisis.

International Economic Developments. According to the assessment of the Organization for Economic Cooperation and Development (OECD) expressed in the September Interim Economic Assessment, the prospects of economic growth in developed countries heavily deteriorated in the second quarter and the recovery of global economy could be slower than expected in May.

On September 15 2011 the European Commission presented its latest assessment of economic perspectives in the euro-area and the entire EU for 2011 (EC Interim Forecast). It is noted that after a strong first quarter and heavy weakening in Q2, new projections by the end of the year suggest a slower recovery than expected through the spring forecast. Risks for further economic growth have augmented, in the first place because of the concern for an unaddressed crisis in the euro-zone and its effects on the robustness of financial markets, but also because of the global economic crisis.

The IMF in its report entitled ‘World economic outlook’ in September 2011 warns that the global economy has entered a dangerous phase and urges leaders to undertake a joint action urgently. What is positive is that economic growth is present but what is unfavourable is that it is rather slow. Assessing that the global economic growth is threatened by grave risks, the IMF emphasizes the relation between financial disturbances and a slow economic growth both in the USA and Europe. Weakening of the economy could be stopped by means of three basic measures. Firstly the state must defray its public debt. Secondly, the banking system must be endorsed and, thirdly, the USA is urged to reduce its enormous budget deficit and trade deficit. The IMF study praises Cyprus for turning less dependent on exports and for strengthening domestic consumption. Twenty economically strongest countries of the world will have a fierce and coordinated response to the crisis and continue supporting banks so that stability of the financial market could be preserved. The EU is asked to enforce urgent measures so as to prevent spreading of the debt contagion.

In the latest Competitiveness Report 2011-2012 of the World Economic Forum (WEF), which includes 142 countries (3 more than in the previous report), Serbia is ranked 95th and with GDP per capita of USD 5,233 is at the foot of the group of 28 countries (Stage 2) that through improvement of efficiency aim for achieving economic growth and improving the competitiveness position overall. Almost all of the countries adjacent to Serbia are in the second stage except for Hungary (48) and Croatia (76) that are moving to the group of most robust economies that already includes Slovenia (57) with GDP per capita of USD 23,706. According to rankings of the total of 105 indicators overall distributed under 12 pillars, competitive advantages (rank 0-50) and weaknesses (rank over 50) have been tracked for all the states. Competitiveness indicators of Serbia do not indicate that the economy is ready to evolve to a more advanced development phase. In Serbia

Autumn Report on Economic Developments

Recovery of global economy could be slower than expected

Low level of competitiveness of Serbia – 95th position (of 142 countries)

IMF approved to Serbia a new stand-by precautionary arrangement to the amount of about EUR 1.1bn

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only 13 indicators have a competitive advantage (or 12% of the total) while the most critical fields are Institutions (pillar 1) and Business sophistication (pillar 11), within which there is not a single competitive advantage.

Economic Development. The period of January-August 2011 is characterized by the slowing down of economic and external trade activity. Credit activity of banks slowed down and so did total households savings, foreign currency reserves were at a satisfactory level and above standard criteria of optimality. Higher market uncertainty since May, caused by the debt crisis in some countries of the euro area, led to a higher risk premium of the country. Strengthening of the dinar that began at the end of 2010 continued in early June when there were first depreciation pressures. After having reached its maximum in April, since May inflation’s rise has been slowing down but it was still high and above the upper limit of the allowed deviation from the target. Unemployment remains a key problem in 2011 and in the years to come until new productive jobs are created through economic growth and investments. Moderate economic recovery coupled with internal and external misbalance carries along short-term risks, which is why a further pursuit of an accountable economic policy (continuation of implementation of structural reforms in the real, financial, and public sector) is of key importance for macroeconomic stability and sustainable economic growth and development.

After a substantial rise in GDP of 3.7% in Q1 2011, it is estimated that in Q2 and Q3 we had a contraction of economic activity. It is estimated that in the first nine months of 2011 GDP of Serbia was rising at the rate of 2.5%. A lower estimated rise in GDP in Q2 and Q3 2011 is primarily a consequence of a drop in GVA of the trade sector (around -5%) and mild recession signals at the level of overall economy. In addition, sectors of agriculture and industry (sectors of tradable goods) had a very low growth in the first two, i.e. in the third quarter, respectively. In keeping with developments of the reference indicators, an estimated growth rate of GDP for entire 2011 is at the level of 2.0%.

Domestic Demand. An estimated development of components of domestic demand indicates its positive development in 2011 on 2010 owing to the recovery of investment. According to estimates, in 2011 a substantial rise in investment of around 11.0% is anticipated while final consumption will remain in the negative zone. The structure of domestic demand in Serbia in 2011 in comparison with 2010 has been characterized by an increase in the share of investment (from 18.8% to 20.4%, respectively), reduction of the share of public consumption (from 19.2% to 18.8%), as well as a decline in personal consumption (from 79.3% to 77.2%).

Investments. A new model of economic growth and development of Serbia, which the Government introduced in December 2010, recognizes investments as one of vital drivers of development. Development of indirect indicators in the first half of 2011 suggests a somewhat more dynamic rise in investment in 2011 after a drastic decline in 2009 (-23%) and an almost negligible rise in the course of 2010 (MF estimate at 1%). In the course of 2011 the share of investments in GDP (21.5%) increased somewhat at the expense of personal consumption, a positive tendency from the perspective of GDP usage but it also suggests that the standard of living dropped and that effects of the economic crisis are still not fully eliminated. Indications that economic activity is slowing down again, problems of irregular defrayment of completed construction works, as well as a tendency towards a decline in import of capital and intermediate products over the last few months could, however, cause a new slowing down of already fragile investments. Based on all that has been said, the MF estimate is that investments in the course of 2011 will go up by 11%.

Estimated rise in GDP over the

first nine months of 2.5% and in

2011 of about 2.0%

Within domestic demand, a substantial

rise in investment is estimated (around 11.0%) while final consumption will

remain in the negative zone


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Inflows of foreign direct investments in Serbia in the course of 2011 have a rising tendency. Based on developments we have seen so far and announcements made by some investors, it is estimated foreign direct investments in 2011 will reach the level of EUR 2.5bn. Net foreign direct investments in Serbia in the first seven months of 2011 reached the level of EUR 985.7m, by 89.7% more than in the same period last year. The record value of FDI-net in 2011 was realized in July (EUR 419.6m) owing to the payment of ‘Delhaize Group’ made for the purchase of shares of Delta Maxi.

Total foreign trade in January-August 2011 on the same period 2010 was up by 17.1% and amounted to EUR 14.8bn. The export of goods rose on the year-on-year level by 21.2% and equaled EUR 5.6bn. The import of goods went up by 14.8% and equaled EUR 9.2bn while deficit of trade of goods was up by 6.2% and equaled EUR 3.6bn. A substantial rise in exports results primarily from the rise in the export of metal ores, basic metals, agricultural products, and rubber and plastic products, which is a consequence of the rise in export demand. The coverage of import by export, as one of the important indicators of external trade, after a decline in 2008 caused by the economic crisis now continues to go up. In 2010 there was a record coverage of import by export of 58.6% and in the first eight months 2011 it increased and stood at 60.4%. The rise in the indicator was primarily a result of lower import than export growth rates. Most important foreign trade partners of the Republic of Serbia traditionally are Russian Federation, Germany, and Italy. In the region the most significant foreign trade partners in January-August 2011 were: Bosnia and Herzegovina, Romania, Hungary, Slovenia, Montenegro, and Croatia. By the geographic structure, the largest volume of foreign trade is achieved with countries of the European Union (more than a half of the total trade) while the greatest coverage of imports by exports was achieved with countries signatories of the CEFTA agreement and it stands at 193.1%. Global tendencies, however, suggest that the second wave of the economic crisis is present and that it will inevitably result in a decelerated growth of foreign trade activity of Serbia in the next few months and a continued faster rise of export than that of the import of goods. Estimates for 2011 are: a 17% rise in exports, a 12% rise in imports, and a slight decrease in foreign trade deficit. The physical volume of industrial output during the period January-August 2011 relative to January-August 2010 was up by 3.0%. The rise of output was recorded in all three industrial sectors: Mining, of 8.5%, Manufacturing, of 1.6%, and Electricity, gas, water, and steam supply and air conditioning, of 7.2%. The physical volume of industrial output in August 2011 on August 2010 was down by 0.3%. The fall of output was recorded in Manufacturing, of 1.6%, whereas a rise was registered in two industrial sectors: Mining, of 7.6%, and Electricity, gas, steam and air conditioning supply, of 2.2%. The volume of industrial output in August 2011 in comparison with August 2010 decreased with 14 areas (the share in the structure of industrial output of 53%) and increased with 15 (the share in the structure of industrial output of 47%). Sections that contributed most to the decline in industrial output in August 2011 were: Manufacture of food products, Manufacture of oil derivatives, Manufacture of basic metals, Manufacture of transport equipment, and Manufacture of beverages. A slower trend of growth of overall industrial output which began in May continued into summer months (June-August 2011) and this primarily resulted from a decline in manufacturing industry. Reasons why performance is poorer than expected are: a drop in domestic and foreign demand, a slower rise in investment activity, hindered transfer of domestic products to the southern Serbian province (since July 2011), diminished production of basic metals as a consequence of switching off of a blast furnace in Smederevo’s US Steel, as well

During the first eight months the year-on-year rise in exports at 21.2%, imports at 14.8%, and external trade deficit at 6.2%

Physical volume of industrial output up by 3.0%

Estimates say foreign direct investments in 2011 will reach the level of EUR 2.5bn


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as long-term problems of Serbian industry (non-liquidity, expensive loans, and poor technology). The physical volume of industrial output in August 2011 was down by 0.5% on July 2010.

However, in spite of all the problems industrial production is facing, the physical volume of industry in 2011 is estimated to go up by about 3.5%. The rise in industry is based on a higher competitiveness, export capacities, as well as attraction of large investors. Industry as well as agriculture needs to be taken greater care of in 2011 and 2012 as these are sectors that produce tradable goods that can be sold on the foreign market. Main propellers of industrial growth in 2011 have been car and food industry. There is a danger the debt crisis in some states of the euro-area leads to lower exports of our country to countries that are our important trade partners, which in turn would affect export-led industrial sections. Therefore in the period to come some measures need to be taken so as to prop up export-led economy.

According to surveyed producers of manufacturing industry, the output assessment is positive and by 10 percentage points up compared to July 2011. In comparison with August 2010 the output assessment was up by 5 percentage points and above the long-term and the average for 2011. A drop in the value of the Business Climate Indicator (BCI) of manufacturing industry arises from less optimistic assessments of businessmen regarding developments of overall order books and export order books. The development of the indicator was positively affected by businessmen’s assessments on developments of output and stocks of finished products as well as higher expectations regarding developments of future output. Based on production expectations and the Index of Industrial Production, in the next three months one could expect a rise in industrial output.

Construction is an economic sector that was hit hardest by the global economic and financial crisis because of a decline in domestic demand, reduced investment, and tightening of crediting conditions. In 2010 a drop of construction activity is around 12%. In the first half-year of 2011 a two figure decline of construction activity was ended. Data relating to the first half-year 2011 suggest an upward trend. The value of completed construction works of investors in January-June 2011 increased by 13.7% and the number of contracted works by 11.7% on the same period 2010. Expected recovery of construction in 2011 will be helped by increased domestic demand through realization of infrastructural projects, reconstruction and modernization of infrastructure in public companies, and development of rural infrastructure. It is estimated the value of completed construction works in fixed prices in 2011 will go up by 15-18%.

Agriculture. Agriculture and food industry are some of the priorities for overall economic development of Serbia. This section generates a substantial foreign exchange inflow from export, it is able to recover fast and to contribute to the alleviating of effects of the global economic crisis. The section of agriculture, forestry, and fishery accounted for 9.6% in gross value added in 2010 and 9.0% in the first half of 2011. Agricultural output in Q1 2011 registered a moderate year-on-year rise in GVA of 0.5% while in the second quarter of the year it remained on the level of the same period 2010. In comparison with the ten-year average, wheat output was up by 2.4% while anticipated output of maize was up by 6.9%, sunflower by 14.4%, soy by 24.6%, and the output of sugar beet was down by 2.4%. It is estimated agricultural output in 2011 will be average and the physical volume of output will be at a lower level compared to 2010. However, given a considerable increase in prices of food, it can be expected in 2010 GVA of agriculture, forestry, and fishery will rise slightly, by about 1.0%.

According to survey results, in

the next three months one can

expect a stable rise in production

activity in manufacturing

industry

In the first half of 2011 the year-on-

year rise in completed

construction works was 13.7%

and their estimated rise for

2011 is 15-18%

An estimated rise in GVA of

agriculture in 2011 is at about 1%

The physical volume of industrial output is estimated to go up by

about 3.5% in 2011


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Transport and Telecommunications. In the first half-year of 2011 the trend rise in the volume of transport services that began in early 2010 continues. The physical volume of services in total transport increased year-on-year by 12.1%. The sector of transport has a substantial share in GVA. This sector accounted for 5.8% of gross value added of the country in 2010 and 6.0% in the first half of 2011. As a result of such positive developments, the area of transport and storage has been a major propeller of overall economic growth. It is estimated that the sector of transport and telecommunications in 2011 will see an increase in GVA of about 6.0% compared to 2010. The volume of postal activities in the first half of 2011 was up by 1% in comparison with the same period 2010. Telecommunications have constantly been registering a strong year-on-year quarterly rise in the physical volume of services but at a somewhat slower pace. In the mobile network there were by 11.6% more minutes of calling than in the first six months of 2010. In fixed network the number of impulses was lower in interior transport by -12.3% and in international transport by -14.9%.

Unfavourable tendencies within retail trade continued and so a trend decline in retail trade turnover that began in early 2011 deepened. Under the impact of a lower domestic demand in the first eight months of 2011 retail trade turnover fell in real terms by -16.7% on the same period 2010. Retail trade turnover in August on the year-on-year level was down in real terms by 18.3% while in relation to July 2011 it was up in real terms by 3.4%. An estimated drop in GVA of the trade sector for 2011 is about -2.0% in comparison with 2010.

Labour Market. In 2010 despite the recovery of economic activity employment fell by 4.9%. According to data obtained from the Labour Force Survey of April 2011 the employment rate fell by 1.6pp on October 2010 and equaled 45.5%, while the rate of unemployment of working age population (15-64) rose by 2.9pp and stood at 22.9%.

During the period January-August 2011 the tendency of a declining overall employment continued and employment went down by 3.3% (60,771 persons). In enterprises, institutions, and organizations employment went down by 0.7% and with private entrepreneurs and their employees by 11.2%. The period January-August 2011 saw the tendency towards a slight rise in the number of the unemployed. The tendency of a moderate increase in the number of the unemployed was registered in the period January-August 2011. An average number of the unemployed in the period January-August 2011 was 759,171 persons, by 0.5% more than in the same period 2010. The number of the unemployed in August compared to July decreased by 0.4% and increased by 3.0% compared to August 2010. The skill structure of the unemployed is unfavourable – the shares of unskilled (28.4%), semi-skilled and workers with low degrees of education (4.5%) in overall unemployment are obviously high. The rate of registered unemployment in August 2011 was at 29.8% (27.3% if insured agricultural producers are included).

Deteriorated conditions on the labour market were to some extent neutralized through enforced measures for stimulating new employment that contain incentives for employees that employ new workers. Moreover, the National Employment Action Plan for 2011 defines priorities and goals of the employment policy as well as programmes and measures that will be realized in 2011 in order to fulfill goals and achieve a sustainable rise in employment. Envisaged funds for the realization of programmes and measures of active employment policy and allocations for local and regional employment action plans in 2011 amount to 5,350 million dinars.

Estimates suggest employment will go up by mere 0.1% and the number of the unemployed will remain unchanged in 2011 on 2010.

In the first half of 2011 the year-on-year rise in the physical volume of overall transport was 12.1% while for 2011 an estimated rise in GVA of the transport sector was about 6.0%

In the first eight months the year-on-year drop in the number of employees of 3.3%

Estimates for 2011 are: a slight rise in employment (0.1%) and an unchanged number of persons seeking employment


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In the first eight months of 2011 the tendency of falling real average gross and net earnings in comparison with the same period 2010 continued. Average gross earnings disbursed during the period Jan-Aug equaled 51,492 dinars, in real terms down by 1.4%, while net earnings equaled 37,091 dinars, down in real terms by 1.3%. In august on the year-on-year level average disbursed net earnings was up in real terms by 2.4% and in comparison with the previous month it was down by 1.9%. Viewed at the level of areas in August 2011 the ratio between the highest and the lowest average disbursed net earnings was very prominent and it stood at 10.3:1. Regional differences between disbursed earnings in August 2011 were still very prominent. In comparison with adjacent countries in 2011 earnings in Serbia are higher than in Bulgaria, Romania, and Macedonia, and lower than earnings in Slovenia, Croatia, Hungary, and Bosnia and Herzegovina. In 2011 earnings are envisaged to go up by 2.1%.

Average pension in Jan-Jul 2011 amounted to 21,016 dinars, down in real terms by 6.3% on the same period 2010. Average disbursed pension in July 2011 was up on June by 0.5% in real terms. The ratio between the total number of employees and the total number of pensioners in July stood at 1.07. At the same time, an average pension accounted for 55% of average net earnings.

Prices. Inflation in the period January-August 2011 equaled 6.2% (August 2011/ December 2010). The year-on-year inflation, after having reached its maximum in April (14.7%) since May has been in decline and in August stood at 10.5% (but it was much above the upper limit of the allowed deviation from the August target of 5.0%±1.7%). In the first eight months of 2011 a general rise in prices was determined by an above average rise in prices of goods (6.8%) while prices of services rose by 3.7%. On a monthly level inflation generated over the previous period of 2011 has been characterized by a high level of the monthly rise in prices in the first quarter (from 1.4% to 2.6%), the slowing down in April (1.1%) and in May (0.4%), the lowering of consumer prices in June (0.3%) and July (0.5%, while in August consumer prices saw a zero rise. Given that inflation largely depends on prices of food (as the share of food in the index of consumer prices is high, of 37.8%), the second and the third quarter saw a reverse in developments of prices of food and a decline in inflationary pressures stemming from this; according to the first signals, this year’s agricultural season could be more successful than last year’s and thus in addition to a strong disinflation factor of low aggregate demand, one could expect a more moderate rise in regulated prices by the end of the year. It is estimated that the slowing down of the rise in inflation will continue in the following period as well and that inflation in 2011 will be one-figure and somewhat above the upper limit of the allowed deviation from the target (4.5%±1.5%). According to NBS estimates, the year-on-year inflation should return to the targeted range in the first half of 2012.

Monetary Developments. With the view of providing monetary stability and in keeping with current economic developments, by April 2011 the NBS had pursued a restrictive monetary policy. During the period January-April the key policy rate was raised from 11.5% to 12.5%. As it is anticipated in the following period disinflation pressures will prevail, in June 2011 the relaxing of the monetary policy began through the lowering of the key policy rate. In the period June-September the key policy rate was lowered from 12.5% to 11.25%. In the first eight months of 2011 credit activity of banks and total household savings slowed down (by 3.3% and 1.9%, respectively); foreign currency reserves are at a satisfactory level and above standard criteria of optimality (they provide the coverage of money supply M1 of 413.0%, short-term debt of 1,269.0%, and more than seven months of the import of goods and services). The debt crisis in some countries of the euro-zone led to increased risk premium of Serbia. The value of the EMBI index for all transition countries

The year-on year drop in real net

earnings of 1.3%

Over the first eight months inflation was

at 6.2%, and on the annual level at 10.5%

In the first seven months pensions

on the year-on-year level down in real

terms by 6.3%

Relaxing of the monetary policy

began in June 2011

In 2011 the tendency of rising nominal

and falling real earnings continued


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increased, whereby the increase in the index for Serbia was somewhat more marked (the risk premium for Serbia is among the highest in Europe and higher than in all countries of the region). Strengthening of the dinar that began by the end of 2010 continued into early June when there were depreciation pressures. The dinar rate at the end of August 2011 nominally was up by 5.6% and in real terms by 10.4%. The main objective of the monetary policy will still be to maintain price stability, to preserve and strengthen stability of the financial system, the policy of managed floating foreign exchange rate will be pursued, and the economic policy of the Government will be endorsed as it stimulates sustainable economic growth and development.

September saw a continued negative trend of developments of the value of index market indicators. Since the beginning of 2011 primary stock market indicators BELEX15 and BELEXline compared to the end of 2010 saw a drop of 15.2% and 15.6%, respectively. Such a situation, however, was not of local character but to a great extent marks the entire region of Southeast Europe (on the regional stock markets the value of key indexes also went down). Belgrade Stock Market turnover was 22.3 billion dinars in the first nine months of 2011 (up by 85.8%), whereby turnover of shares increased 2.3 times while turnover of bonds decreased by 32.8%. Balance of Payments. Current account deficit in January-July 2011 on the same period last year registered an increase of 3.5%, i.e. of EUR 53.4m and now stands at EUR 1.6bn. The increase in current account deficit resulted from an increase in foreign trade deficit of 7.4% (i.e. EUR 202.0m) as well as an increase in deficit of income of 5.7% (EUR 22.9m). Total balance of payments in the period January-July 2011 was in surplus of EUR 496.3m, whereas in the same period 2010 it was in deficit of EUR 845.3m. External debt at the end of July 2011 equaled EUR 23.1bn and in comparison with 2010 it went down by 2.8%, i.e. by EUR 671.4m. In the structure of total external debt long term liabilities accounted for 96.4% of the debt and in comparison with December 2010 they rose by 4.1%. Long-term liabilities in July 2011 compared to December 2010 went up by 1.5% (i.e. by EUR 337.5m). In the structure of long-term liabilities the public sector in July 2011 accounted for 42.6%, to the amount of EUR 9.5bn. In the period of reference the private sector accounted for 57.4% of long-term liabilities, i.e. EUR 12.68bn. The share of the debt of the banking sector in the private sector was 27.1%, and of companies 72.9%. In the structure of total external debt the short-term debt in July 2011 accounted for 3.6%. The short-term debt was characterized by a dominant share of the debt of banks of 90.6%, while the share of the sector of companies was 9.4%. At the end of the second quarter 2011 the nominal value of external debt decreased as a result of currency differences, i.e. appreciation of the euro against the dollar as well as special drawing rights. The currency structure of external debt is characterized by a dominant share of the euro of 77.3%, the dollar of 9.4%, special drawing rights of 8.5%, Swiss franc of 4.1%, and other currencies of 0.7%.

Public Finance. Fiscal developments in the period January-July 2011 show that public revenues of the state sector (712.7 bn dinars) nominally were up by 6.7% and in real terms down by 5.6% on the same period 2010. Consolidated budget expenditure in the first seven months of 2011 (801.7bn dinars) rose nominally by 9.4% and fell in real terms by 3.2% on the same period 2010. Deficit of the consolidated state sector rose from 64.9bn dinars in Jan-Jul 2010 to 89.0bn dinars in the period January-July 2011 (4.5% of GDP).

Fiscal deficit increased (4.5% of GDP)

Negative trends of values of stock market indicators continued

Current account deficit rose by 3.5%

External debt down by 2.8%


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Budget revenues in January-August 2011 amounted to 475.3bn dinars, and budget expenditure 569.4bn dinars. In comparison with the same period 2010 budget revenues went down in real terms by 5.9% and budget expenditure by 0.4%. Budget deficit increased from 59.3bn dinars in the first eight months of 2010 to 94.1bn dinars in the first eight months of 2011.

At the end of September Serbia sold for the first time euro-bonds on the capital market to the amount of USD 1bn (ten-year state bonds with the annual interest rate of 7.25%). These are long-term sources of funding and will be used to gradually cover budget liquidity. Serbia has reached an agreement with the World Bank and the International Monetary Fund on the withdrawing of the first installment of the earlier agreed World Bank’s loan of USD 200m. A half of these funds will be used to support the budget and the second half for the system of energy supply, road safety, and health care.

In the following period fiscal policy will be pursued in keeping with rules of fiscal accountability. The Government has taken on responsibility to strengthen discipline in the area of public finance and to keep fiscal deficit in 2011 at 4.5% of GDP (public debt somewhat above 40% of GDP) and in 2012 at 4% of GDP, as well as to reduce it gradually in the years to come to the level of 1% and to prevent public debt from surpassing 45% of GDP. In order to attain this, it will take to undertake a systemic reform of the public sector and increase efficiency of main state functions, as well as to reduce public consumption.

Privatization. During the period 2002-2011 in the Republic of Serbia 3,017 companies were privatized by the method of tender and auction privatization and the sale of minority share packages in the capital market; privatization revenues of EUR 3.7bn were generated and EUR 1.4bn of investment was provided. However, due to non-compliance with contracted commitments on the part of purchasers of the total number of signed contracts 636 were broken (21%) so the net effect of privatization is 2,381 sold enterprises, EUR 2.6bn of privatization revenues, and EUR 1.1bn of investment. In the period January-September 2011 through the method of tender and auction privatization and the sale of minority share packages on the capital market 12 companies were privatized and privatization revenues of EUR 13.1m were generated and investment of EUR 4.3m contracted. Due to the failure to meet contracted obligations 4 tenders and 27 auctions were annulled from January to September 2011.

Stimulating Policy of the Fund for Development of the Republic of Serbia. By September 2010 the Fund for Development for 381 long-term investment programmes approved loans to the total amount of 8.4bn dinars for 110 municipalities (of which 9 are in the territory of Kosovo and Metohija). Through realization of these programmes the opening of 3,215 new jobs is planned. As for the territorial breakdown of funds, the largest share was that of Belgrade (24.3% of total funds for 24 programmes). For a faster development of extremely underdeveloped municipalities, 1.7bn dinars were allocated for 63 programmes (20.6% of approved loans). The realization of these programmes is planned to create 955 new jobs. Of 46 extremely undeveloped municipalities, only 28 attracted Fund’s allocations and so the financial sum and the number of loan applications were lower in comparison with the same period last year (by 49%, i.e. 4 times) in relation to the same period last year. For 15 devastated municipalities 995.4m dinars was approved for 25 programmes, which accounts for 11.8% of total funds. Realization of these projects, of which 59.2% is accounted for by investment in modernization, is planned to create 562 new jobs.

In 2002-2011: 2,381 enterprises sold,

privatization revenues at EUR

2.6bn and EUR 1.1bn of investment

By September 2-11 Fund for

Development for 381 long-term investment programme approved loans of 8.4bn dinars

For the first time Serbia sold euro-

bonds on the foreign market to

the amount of USD 1bn


11

Results of special research and analyses:

Forecast of Developments of Economic Activity – Moderate Contraction Stage - Leading Indicator of Economic Activity of Serbia (VIPAS). The analysis of developments of the leading indicator of economic activity of Serbia has as its goal to track business cycles of economic activity and is a key element of the GDP forecast. The leading indicator VIPAS indicates that the peak of the expansion cycle was reached at the end of 2010 and that there was a move from the expansion stage to the stage of moderate contraction of the economic cycle of Serbia at the start of the first quarter of 2011. It should be noted that the Leading Indicator of Economic Activity of Serbia also envisaged contraction tendencies until the 4th quarter. In the next 5 months, i.e. by the second quarter of 2012 one can expect for the economic activity to stagnate unless there are marked changes to the economic environment in global terms. Business Analysis of the SMEE Sector for 2010 shows that recession effects (a decline in external and domestic demand, investment, the rise in risks and investment costs, as well as a fear of failure) negatively impacted on operations of economic entities. Statistically, the SMEE sector in 2010 accounted for 45.4% of overall employment, 43.9% of total investments, generated 44.5% of exports, 52.3% of imports, 63.3% of external trade deficit in Serbian economy, and accounted for around 33% in Serbia’s GDP. The comparative analysis of development of the SMEE sector in Serbia and EU countries shows that by the share in the number of enterprises and employment as well as generated turnover and GVA, the SMEE sector of Serbia was at the level of the EU average. Still, the SMEE sector of Serbia lags behind the EU average a lot if we analyze turnover per employee, GVA per employee, and profit per employee. The comparative analysis of investments per employee and investments per enterprise in adjacent countries and EU-27 indicates a much lower level of these indicators in Serbia, both for the SMEE sector and for entire economy. Fiscal Capacity. If we try to analyze a relative fiscal capacity, i.e. revenues per capita, we will see that in most cities and municipalities they are below the national average, which clearly indicates that their total fiscal capacity is weak. The capital has at its disposal 50,888 dinars of budget revenues per capita, i.e. almost five times higher revenues than Bogatic and Zitoradja that are at the bottom of the list. Cities (without Belgrade and Novi Sad) have at their disposal 19,186 dinars per capita, which is 73.2% of the republic average (26,211 dinars). Revenues per capita in extremely underdeveloped municipalities equal only 14,235 dinars, i.e. 54.3% of the republic average. That the situation is serious is indicated by the fact that as much as 62 units of local self-government generate revenues per capita lower than 60% of the country’s average; of this number 26 municipalities and cities have revenues lower than 50% of the republic average. The City of Belgrade accounts for 43.7% of generated budget revenues of the Republic. Other 22 cities account for 30.1% in generated revenues (558.5m euros), while 142 municipalities account for 26.3% (487.7m euros). Law on Amendments to the Law on Funding Local Self-government, which will take effect on October 1 2011, is a major step toward fiscal and financial decentralization. It envisages twice as much revenues from the salary tax for cities and municipalities, i.e. instead of 40% they will get 80%. The City of Belgrade as the most developed city will have 70% from the salary tax and it will not receive transfers from the republic budget as these funds will go to the newly formed solidarity transfer. Undeveloped cities and municipalities will receive an unchanged sum of the transfer from the republic budget while developed cities will get twice as less transfers but will have twice as much funds from the salary tax as well as funds from the solidarity transfer.

Leading indicator VIPAS indicates contraction tendencies by Q4 2011 and stagnation of economic activity by Q2 2012

In 2010 SMEE accounted for 45.4% of overall employment, 43.9% of investments, 44.5% of exports, 52.3% of imports, 63.3% of external trade deficit, and around 33% of GDP

Most cities and municipalities have revenues per capita that are below the national average

New Law on Funding Local Self-government is a major step towards fiscal and financial decentralization


12

Main macroeconomic indicators of Serbia

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011**

GROSS DOMESTIC PRODUCT

GDP, real growth in % 5.3 4.3 2.5 9.3 5.4 3.6 5.4 3.8 -3.5 1.0* 2.0

GDP in current prices, RSD bn 762.2 972.6 1125.8 1380.7 1683.5 1962.1 2276.9 2661.4 2713.2 2986.6* 3359.2

GDP per capita, in current prices, RSD bn

101,577 129,677 150,501 185,004 226,251 264,731 308,455 362,082 370,616 401,453** 461,670

GDP, EUR m 12,820.9 16,028.4 17,305.9 19,026.2 20,305.6 23,304.9 28,467.9 32,668.2 28,883.4 28,985.0** 32,813

GDP per capita, EUR 1709 2137 2313 2549 2729 3144 3857 4444 3945 3967** 4518

GDP, PPS ЕU-27=100 21 26 26 29 32 33 34 36 37 37 -

POPULATION, EMPLOYMENT, EARNINGS, PRODUCTIVITY

Population, in thousand 7503.4 7500.0 7480.6 7463.2 7440.8 7411.6 7381.6 7350.2 7320.8 7291.4 7276.2

Unemployment rate - - - 29.1 30.0 31.1 29.8 27.4 28.3 29.3 29.3

Unemployment rate (ILO survey)

- - - 19.5 21.8 21.6 18.8 14.4 16.9 20.0 22.9

Gross earnings per employee, growth rate in %

- - 14.0 11.1 6.8 11.4 14.1 3.9 0.2 0.6 2.1

Net earnings per employee, growth rate in %

- - 13.6 10.1 6.4 11.4 19.5 3.9 0.2 0.7 2.1

Unit labour costs, real growth rate in %

- - - 3.5 1.7 3.3 5.7 -1.4 -2.4 -5.4 0.1

Labour productivity (GDP PPS), ЕU-27=100

- 39 40 44 48 52 56 58 59 58.7 -

DOMESTIC DEMAND

Final consumption. % GDP 104 107.0 103.0 97.1 95.9 96.0 96.9 97.1 99.8 98.5** 96.2

Personal consumption. % GDP 83.1 84.3 80.4 77.22 77.1 77.1 76.3 77.0 79.9 79.3** 77.3

Public consumption. % GDP 21.0 22.7 22.6 19.8 18.8 19.0 20.5 20.1 19.9 19.2** 18.8

Gross investment in main funds. % GDP

10.7 12.4 16.8 19.2 19.0 21.0 24.3 23.8 18.8 18.8** 20,5

INTERNATIONAL TRADE

Exports of goods and services. growth rate in %

20.7 16.0 23.1 16.3 19.1 30.4 25.0 16.9 -16.5 18.8 16.0

Imports of goods and services. growth rate in %

32.3 27.2 12.9 32.4 0.7 24.5 33.8 17.6 -27.9 9.3 10.0

Current account balance. ЕUR m

282 -671 -1347 -2620 -1778 -2356 -5025 -7054 -2084 -2082 -

as a % of GDP 2.2 -4.2 -7.8 -13.8 -8.8 -10.1 -17.7 -21.6 -7.2 -7.3 -7.6

External debt. ЕUR m 10,968 9,402 9,678 9,466 12,196 14,182 17,138 21,088 22,487 23,786.4 -

as a % of GDP 85.5 58.7 55.9 49.8 60.1 60.9 60.2 64.6 77.9 83.5 75.0

EXCHANGE RATE AND PRICES

Real exchange rate. RSD/EUR 59.78 60.68 65.05 72.57 82.92 84.16 79.98 81.44 93.96 103.04 -

Real exchange rate. RSD/USD 66.68 64.46 57.56 58.39 66.70 67.10 58.44 55.76 67.60 77.91 -

Inflation. end of the period 40.7 14.8 7.8 13.7 17.7 6.6 10.1 6.8 6.6 10.3 8.0

Inflation. average of the period 91.8 19.5 11.7 10.1 16.5 12.7 6.8 10.9 8.4 6.5 9.4

Source: RSO, NBS *Preliminary data by RSO ** Estimate by MF


13

1. International Economic Developments

According to the assessment of the Organization for Economic Cooperation and Development (OECD) expressed in the September Interim Economic Assessment, the prospects of economic growth in developed countries heavily deteriorated in the second quarter and the recovery of global economy could be slower than expected in May.

Economic recovery has come to a standstill in major industrialized countries, which is why the latest forecast is much worse than the forecast released in May. OECD predicts that economic growth in seven developed countries of the world (G7), namely the USA, Great Britain, Canada, France, Germany, Italy and Japan, from July till September will be around 1.6% at the annual level and in the last quarter only 0.2%. It is predicted that American economic growth in the third quarter will be about one percent at the annual level but in the fourth quarter it will slow down to 0.4%. For three largest economies of the euro-zone, Germany, France, and Italy, OECD expects a combined growth of 1.4% in the third quarter and a drop of 0.4% in the fourth quarter. The year-on-year economic growth in G7 without Japan will have a rate lower than 1% in the second half of 2011. Uncertainty related to this projection is unusually high. The risk of an even higher negative economic growth in the future has become bigger in some major economies of OECD but a drop such as was in 2008/09 is not anticipated.

Global economy stagnated in the second quarter, only partially due to disturbances in global chains of supply after March catastrophe in Japan (not only when motor vehicles are concerned). The revitalization of the supply chain should foster growth in the remaining part of the year.

Earlier improvements on the labour market are weakening at the moment, employment intentions are diminishing, and risks that a high unemployment rate could set in are becoming greater.

Investment in many OECD countries is still below the historic average and thus offers an opportunity for the recovery of corporate consumption in the months to come should uncertainty weaken.

It is stressed that confidence in governments has suffered a major deterioration, both with companies and with households. The message to governments is to try and regain confidence, primarily through solid mid-term plans, but also to be ready for quick, short-term measures should the situation worsen. Central banks are asked to retain interest rates on low levels and be ready to undertake other incentives.

Chart 1 Year-on-year quarterly GDP 2011, in %

0,80,4

1,6

0,2

1,6

0,71,1

0,20,4

1 1,1

0,4

-3,6

-1,3

4,1

0

3,6

-0,4

1

1,9

3,7

0,5

1,4

-0,4

3,6

-0,4

1

1,9

-4

-3

-2

-1

0

1

2

3

4

5

Q1 Q2 Q3 пр

Q4 пр

Q1 Q2 Q3 пр

Q4 пр

Q1 Q2 Q3 пр

Q4 пр

Q1 Q2 Q3 пр

Q4 пр

Q1 Q2 Q3 пр

Q4 пр

Q1 Q2 Q3 пр

Q4 пр

Q1 Q2 Q3 пр

Q4 пр

G7 G7 without Japan

USA Japan Канада Euro 3 Canada

Source: Interim Economic Assessment, September 2011, OECD


Global economy has weakened, global misbalances still present

According to OECD findings, prospects of economic growth are weak while recovery is slowing down

14

On September 15 2011 the European Commission presented its latest assessment of economic perspectives in the euro-area and the entire EU for 2011 (EC Interim Forecast). The document comprises assessments for the rise in GDP and inflation in the EU and the euro-area as well as detailed projections for seven largest EU member states: Germany, Spain, France, Italy, The Netherlands, Poland, and Great Britain. It is noted that after a strong first quarter and heavy weakening in Q2, new projections by the end of the year suggest a slower recovery than expected through the spring forecast. Risks for further economic growth have augmented, in the first place because of the concern for an unaddressed crisis in the euro-zone and its effects on the robustness of financial markets, but also because of the global economic crisis.

Although forecast for GDP growth for 2011 generally remains on an unchanged level of 1.6% in the euro-area and 1.7% for the EU, the slowing down is expected in the second half of the year. A downward revision refers to Q3 and Q4 in the EU as a whole and in the euro-area. Growth rates of GDP for both areas have been revised downward for 0.2 that is 0.3 percentage points. Several factors suggest a slower growth: a net rise in exports, that was a major driver of growth, in the second quarter is slowing down while the weakening of business operations and the indicator of consumers’ sentiment (ESI) are suggesting a weaker domestic demand. Tension on the financial market and debtor’s crises have left an impact on the confidence and increased investment costs.

After acceleration in the first half of the year due to a rise in prices of energy substances, one can expect a gradual slowing down of inflation. Lower prices of consumer goods, improved global demand, and a moderate rise in salaries are expected to moderate inflationary pressures. Inflation as measured by the harmonized index of consumer prices (HICP) for the EU and the euro-area has been forecast to 2.9% and 2.5%, respectively, for the entire year.

The IMF in its report entitled ‘World economic outlook’ in September 2011 warns that the global economy has entered a dangerous phase and urges leaders to undertake a joint action urgently. What is positive is that economic growth is present but what is unfavourable is that it is rather slow.

Real GDP growth

Country

Quarterly GDP (%, quarter-on-quarter) Annual GDP (%, year-on-year)

Generated Forecast Generated Forecast

2011/Q1 2011/Q2 2011/Q3 2011/Q4 2010 Маy 2011

September 2011

GROSS DOMESTIC PRODUCT

Germany 1.3 0.1 0.4 0.2 3.7 2.6 2.9Spain 0.4 0.2 0.1 0.1 -0.1 0.8 0.8France 0.9 0.0 0.2 0.2 1.5 1.8 1.6Italy 0.1 0.3 0.0 0.0 1.3 1.0 0.7Nederland 0.8 0.1 0.1 0.1 1.8 1.9 1.7Euro zone 0.8 0.2 0.2 0.1 1.8 1.6 1.6Poland 1.1 1.1 0.6 0.5 3.8 4.0 4.0UK 0.5 0.2 0.4 0.3 1.4 1.7 1.1ЕU27 0.7 1.0 0.2 0.2 1.8 1.8 1.7

HICP inflation

Germany 2.2 2.5 2.5 2.0 1.2 2.6 2.3Spain 3.2 3.3 2.8 2.3 2.0 3.0 2.9France 2.0 2.2 2.1 2.1 1.7 2.2 2.1Italy 2.3 2.9 2.5 2.5 1.6 2.6 2.6Nederland 2.0 2.4 2.8 2.7 0.9 2.2 2.5Euro zone 2.5 2.8 2.5 2.2 1.6 2.6 2.5Poland 3.6 4.0 3.7 3.4 2.7 3.8 3.7UK 4.1 4.4 4.9 4.2 3.3 4.1 4.4ЕU27 2.9 3.2 3.0 2.7 2.1 3.0 2.9

Source: European Economic Forecast, September 2011, European Commission

EC predicts slowing down of economic

activities by the end of the year

Estimated rise in GDP in the EU-27

of 1.7% in 2011


IMF assesses a slower global

economic growth, at rising risks

15

Assessing that the global economic growth is threatened by grave risks, the IMF emphasizes the relation between financial disturbances and a slow economic growth both in the USA and Europe. In Europe, as the IMF report notes, the debtor’s crisis made banks reduce funds for crediting. At the same time in the USA a steep decline in prices of shares negatively affected confidence of consumers and their business confidence and it will probably contribute to a decline in consumption. This slowed down growth and made many investors relocate their money, i.e. they shift from investment in shares to safer investment such as state bonds.

The IMF urges Europe and the USA to be more resolute about reducing budget deficit. In addition, the IMF underlined that European banks need to increase their reserves as soon as possible and that above the new minimum level that is to be effective as of 2019. At the same time the American economy faces numerous problems, the IMF states and points particularly to the unemployment rate which is expected to develop around the average of 9% by 2012.

A series of adverse events (the earthquake and tsunami in Japan, uprisings in oil-rich countries, the debt crisis in some countries of the euro-are, and a gigantic deficit of the USA) made the IMF revise growth estimates for this and the year ahead. Global economic growth will be at only four per cent instead of the previously envisaged 4.5%. Because of pessimistic prospects for global economic recovery, the IMF lowered its economic growth forecasts for the next year even for other economies, e.g. for China (from 9.5% to 9%). However, the decrease is unevenly distributed. This year emerging market economies saw a growth of 6.5% and this is encouraging; at the same time developed economies are growing by only 1.6%. The IMF lowered its forecast of economic growth of the USA this year to only 1.5% in June from the forecast 2.5%. Next year the IMF expects growth of 1.8% in the USA while in spring it forecast growth of 2.7% for 2012. The IMF lowered its growth assessment for the euro-area (17 members) to 1.6% this year and 1.1% next year. Only three months ago the Fund forecast growth of two per cent in the euro-zone this year and 1.7% next year.

Weakening of the economy could be stopped by means of three basic measures. Firstly the state must defray its public debt, whereby savings rules must not be that brutal to threaten perspectives and growth. Secondly, the banking system must be endorsed and, thirdly, the USA is urged to reduce its enormous budget deficit and trade deficit. The IMF study praises Cyprus for turning less dependent on exports and for strengthening domestic consumption. Twenty economically strongest countries of the world will have a fierce and coordinated response to the crisis and continue supporting banks so that stability of the financial market could be preserved. The EU is asked to enforce urgent measures so as to prevent spreading of the debt contagion.

Chart 2 Gross Domestic Product

Source: World Economic Outlook, September 2011, IMF

-4.2

-4.9-1.6

-2.7

9.1

-7.6

1.8

7.61.9

2.9

10.3

4.0

1.8

5.6 3.2

2.69.3

4.5

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

12,0

World Europe Euro Area Emerging Europe

USA China

Ann

ual p

erce

nt c

hang

e

2010 2011 estimate 2012 estimate


16

Gross domestic product and unemployment

Country

GDP Unemployment

Generated Forecast Generated Forecast

2010 2011 2012 2010 2011 2012

World Output 5.1 4.0 4.0 - - -

Euro-area 17 1.8 1.6 1.1 10.1 9.9 9.9

Germany 3.6 2.7 1.3 7.1 6.0 6.2

Spain -0.1 0.8 1.1 20.1 20.7 19.7

France 1.4 1.7 1.4 9.8 9.5 9.2

Italy 1.3 0.6 0.3 8.4 8.2 8.5

Austria 2.1 3.3 1.6 4.4 4.1 4.1

Slovenia 1.2 1.9 2.0 7.3 8.2 8.0

Slovakia 4.0 3.3 3.3 14.4 13.3 12.3

Emerging and Developing Economies 4.5 4.3 2.7 - - -

Poland 3.8 3.8 3.0 9.6 9.4 9.2

Romania -1.3 1.5 3.5 7.6 5.0 4.8

Hungary 1.2 1.8 1.7 11.2 11.3 11.0

Bulgaria 0.2 2.5 3.0 10.3 10.2 9.5

Serbia 1.0 2.0 3.0 19.6 20.5 20.6

Croatia -1.2 0.8 1.8 12.2 12.7 12.2

USA 3.0 1.5 1.8 9.6 9.1 9.0

Japan 4.0 -0.5 2.3 5.1 4.9 4.8

Russia 4.0 4.3 4.1 7.5 7.3 7.1

China 10.3 9.5 9.0 4.1 4.0 4.0

Source: World Economic Outlook, September 2011, IMF


17

2. National Competitiveness by the World Economic Forum (WEF)

For more than three decades annual competitiveness reports released by the World Economic Forum through the analysis of numerous factors enable national economies to identify potential institutional and market obstacles to achieving sustainable economic growth and long-standing prosperity, taking into account effects of current activities on future development. Since 2005 the WEF has based its competitiveness analysis on the composite Global Competitive Index (GCI), which defines competitiveness as a set of institutions, policies, and factors that determine the level of productivity of a country (expressed as GDP per capita in USD) which, in its turn, determines the level of development that can be attained. In other words, although productivity of a country clearly determines its ability to generate higher levels of income for its citizens, this is also one of the central determinants of return of investment, a key driver of economic growth.

The Global Competitiveness Index (GCI) comprises twelve pillars grouped under three sub-indicators: Basic Requirements, Efficiency Enhancers, and Innovation and Sophistication Factors, which all indicate the quality of attained development of selected economies. Countries have been classified into three groups according to the realized level of GDP per capita, the first group comprising all the countries whose exports is dominated by primary products accounting for more than 70% (a five-year average), irrespective of the level of productivity.

According to the data released by the IMF, from 2005 to 2008 Serbian GDP per capita was rising annually 19% on average but in 2009 and 2010 under circumstances of the global economic crisis this indicator dropped. By 2008 GDP per capita of Serbia was close to the average of Western Balkans countries and in 2008 surpasses the average by 2 percentage points. However, this indicator in 2009 was by 3pp lower and in 2010 by 7pp lower than the average for Western Balkans countries – from this fact we can infer that recession of global economy hit Serbian economy more than economic of other countries in this group. In addition, the index of GDP per capita of Serbia is among the lowest in Europe and 3 times lower than the average of the European Union.

Serbia by competitiveness indicators in comparison with EU-27 and WB average

IMF GDP 2010 In USD Index

2010/2009 2010/2005 EU27=100 WB=100 GDP per capita 5,233 92.8 154.3 17.2 93.4 WЕF Global Competitiveness Index (GCI) 2012/2011

rank value Value index

2011/2010 2011/2007 EU27=100 WB=100 GCI 82 3.88 101.0 102.6 82.3 96.3 Subindex A: BASIC REQUIREMENTS 72 4.28 103.1 102.1 82.2 94.9

1st pillar: Institutions 87 3.15 98.7 93.5 68.5 84.8 2nd pillar: Infrastructure 80 3.67 108.3 134.9 72.2 95.0 3rd pillar: Macroeconomic environment 71 4.48 110.6 97.2 90.7 95.4 4th pillar: Health and primary education 58 5.82 97.8 96.4 93.7 100.9 Subindex B: EFFICIENCY ENHANCERS 84 3.73 99.5 104.8 80.0 96.7

5th pillar: Higher education and training 71 3.98 99.3 109.0 78.3 95.9 6th pillar: Goods market efficiency 88 3.49 97.8 98.9 75.7 86.1 7th pillar: Labor market efficiency 80 3.94 97.0 102.1 87.9 92.8 8th pillar: Financial market development 85 3.74 97.4 100.3 84.2 97.7 9th pillar: Technological readiness 64 3.63 106.5 108.7 71.5 93.9 10th pillar: Market size 96 3.61 100.3 111.8 84.1 120.9 Subindex C: INNOVATION AND SOPHISTICATION FACTORS 95 2.99 98.4 90.6 69.0 92.3

11th pillar: Business sophistication 98 3.08 97.8 87.3 66.7 86.9 12th pillar: Innovation 90 2.90 99.0 94.2 71.7 98.8 Note: ranking of 142 selected countries; the index value of the maximum 7; the value for Western Balkans is

calculated as an average of values for Albania, Bosnia, Macedonia, Croatia, Montenegro, and Serbia. Source: IMF - The World Economic Outlook, WEF - Global Competitiveness Report

Low level of Serbian competitiveness...

... recession effects more prominent than in other Western Balkans countries


18

In the latest Competitiveness Report 2011-2012, which includes 142 countries (3 more than in the previous report), Serbia is ranked 95th and with GDP per capita of USD 5,233 is at the foot of the group of 28 countries (Stage 2) that through improvement of efficiency aim for achieving economic growth and improving the competitiveness position overall. Almost all of the countries adjacent to Serbia are in the second stage except for Hungary (48) and Croatia (76) that are moving to the group of most robust economies that already includes Slovenia (57) with GDP per capita of USD 23,706.

In 2011 Serbia improved its rankings by one position but it is still one of the least competitive countries in the European continent – only BiH is worse ranked than Serbia. A higher rank is achieved owing to improvements within Pillar 3. Macroeconomic environment of 18 positions (improved budget balance, higher gross national savings deposits, lower interest rates) although there was also an increased share of public debt in GDP (this indicator dropped from 53rd to 85th position). Progress in the area of Infrastructure over the last two years has been achieved owing to inclusion of the indicator of the number of mobile telephony subscribers and fixed line subscribers, while the development of other infrastructural factors lags behind significantly (the assessment of the quality of roads 2.4 and railway 1.7).OF the European countries that are in the Stage 2 group, Albania has made the largest leap of 10 positions, BiH progressed 2 positions, while a drop was registered by Montenegro (11 positions), Romania (10), and Bulgaria (3).

Global Competitiveness Index – comparisons of adjacent countries

GCI rank GDP per capita,

In USD 2011 2010 change

Hungary 48 52 -4 12,879 Slovenia 57 45 12 23,706 Montenegro 60 49 11 6,589 Bulgaria 74 71 3 6,334 Croatia 76 77 -1 13,720 Romania 77 67 10 7,542 Albania 78 88 -10 3,677 Macedonia 79 79 0 4,431 Serbia 95 96 -1 5,233 Bosnia 100 102 -2 4,319

Source: WEF

In Serbia there is still obviously a considerable impact of the state on economic developments but the efficiency of economy is not improved enough, which is why Serbia fails to realize better competitive positions on the global rankings like other Western Balkans countries do. For countries in the development stage to which Serbia also belongs achieved values of the indicator within Subindex B – Efficiency Enhancers are most important. Although this subindex increased by 3 positions, on the basis of achieved results Serbia is in a very unfavourable competitive position as according to most indicators it is below the average of stage 2 countries and this means that it is far from the average of European Union member states. Unless there is modernization of production capacities, and constant investment in education and promotion of the expertise, Serbia cannot improve its efficiency wither in some other economic spheres nor can it reach a higher development degree. In the long run human capital and technology are two key factors that determine sustainable economic growth and a competitive position of an open market economy.

Compared to European

countries, Serbia is more

competitive than BiH only

Improved value of sub indexes A and

B...

... but the majority of indicators are

below the average of Stage 2 countries and far from the

average of EU member states


19

Chart 3

Annual change in rankings of competitiveness indicators of Serbia (2010-2011)

Source: WEF

Serbia is constantly above the average of the group of countries it belongs to only in the field of health and primary education (all the indicators are ranked between 17nd and 65th position), in 2011 an above average ranking it registers in Pillar 9 – Technological readiness and Pillar 10 – Market size, while it is getting closer to the average in the field of higher education and training, largely because of greater inclusion of higher education.

Areas in which Serbia significantly lags behind countries in the group are institutions, labour market efficiency, and business sophistication, where most of the indicators are above 130th

.

Chart 4 Competitiveness indicators of Serbia and efficiency-driven economies 2011

The most serious deterioration in Serbian ranking and a drop of 11 positions in 2011 is within the subindex C Innovation factors. This indicator as well as pillars within has been in constant decline since 2007, which are main reasons and limits as to why Serbia cannot make substantial improvement of its competitive position. Tightly related to this problem is inefficiency of the labour market in Serbia (pillar 7) whose ranking in relation to the previous year is down by 10 positions: for years Serbia has had a brain drain (136th position), not only because of better salaries for highly trained individuals abroad but also better conditions for scientific

-9-5

-112

9-2

-10-7-7

3-2

189

-15

1

-15 -10 -5 0 5 10 15 20

12. Innovation11. Business sophistication

SubIndex C: Innovation and sophistication factors 10. Market size

9. Technological readiness8. Financial market development

7. Labor market efficiency6. Goods market efficiency

5. Higher education and trainingSubIndex B: Efficiency enhancers

4. Health and primary education3. Macroeconomic stability

2. Infrastructure1. Institutions

SubIndex A: Basic requirements GCI

improvement │ deterioration

1

2

3

4

5

6

7Institutions

Infrastructure

Macroeconomic stability

Health and primary education

Higher education and training

Goods market efficiency

Labor market efficiency

Financial market development

Technological readiness

Market size

Business sophistication

Innovation

Source: WEF

Efficiency-driven economies Serbia

In pillars 1, 6, and 11 very low rankings of most indicators

Constant drop in the value of innovative factors since 2007


20

and research work, which requires undertaking of stimulating measures for the survival of best graduates and researchers, as well as adoption of a long-term plan of the return of our scientists from abroad. There are also other limitations that undermine efficiency of talent exploitation, and thus productivity and creativity of employees most often is not a criterion for the salary while managerial positions are usually occupied persons who are not professional managers selected for their skill and work merits.

Chart 5 Subindex C: Innovation factors 2006-2011

Source: WEF

According to rankings of the total of 105 indicators overall distributed under 12 pillars, competitive advantages (rank 0-50) and weaknesses (rank over 50) have been tracked for all the states. Competitiveness indicators of Serbia do not indicate that the economy is ready to evolve to a more advanced development phase.

In Serbia only 13 indicators have a competitive advantage (or 12% of the total) while the most critical fields are Institutions (pillar 1), and Business sophistication (pillar 11) within which there is not a single competitive advantage.

Indicators of (non-)competitiveness of Serbia

Competitive advantages pillar rank Most critical fields pillar rank

fixed telephone lines 2 26 protection of minority shareholders’ interests 1 140 mobile telephone subscriptions 2 28 efficiency of regulative in settling disputes 1 137 business impact of HIV/AIDS 4 17 efficacy of corporate boards 1 136 HIV prevalence 4 21 burden of government regulation 1 134 business impact of tuberculosis 4 34 extent of market dominance 6 139 infant mortality 4 40 effectiveness of anti-monopoly policy 6 137 tuberculosis incidence 4 43 intensity of local competition 6 136 tertiary education enrollment rate 5 50 buyer sophistication 6 136 total tax rate 6 50 brain drain 7 139 No. days to start a business 6 51 cooperation in labor-employer relations 7 136 redundancy costs 7 50 firm-level technology absorption 9 136 legal rights index 8 20 nature of competitive advantage 11 136 internet bandwidth 9 34 willingness to delegate authority 11 136

Source: WEF Global Competitiveness Report 2010/2011

2,85

2,90

2,95

3,00

3,05

3,10

3,15

3,20

3,25

3,30

3,35

3,40

3,45

3,50

3,55

2006 2007 2008 2009 2010 2011

SubIndex C: Innovation and sophistication factors 11. Business sophistication 12. Innovation

Competitive advantage only

with 13 indicators


21

3. Economic Development

3.1. Economic Growth – GDP Forecast for 2011

After a substantial rise in GDP of 3.7% in Q1 2011, it is estimated that in Q2 and Q3 we had a contraction of economic activity. It is estimated that in the first nine months of 2011 GDP of Serbia was rising at the rate of 2.5%. A lower estimated rise in GDP in Q2 and Q3 2011 is primarily a consequence of a drop in GVA of the trade sector (around -5%) and mild recession signals at the level of overall economy. In addition, the sector of industry since mid quarter has registered the slowing down of growth. In keeping with developments of the reference indicators of the sectors of GDP formation, an estimated growth rate of GDP for entire 2011 is at the level of 2.0%1.

Growth rates in %

GDP Activities GVA

2010 1.0 1.2

2011Q1 3.7 3.6

2011Q2 2.4 2.1

2011Q3 1.2 1.1 Source: RSO, MF estimate for Q3 2011

It is estimated that in the first three quarters of 2011 the sector of industry had a growth rate of GVA of 4.2% relative to the same period last year while its contribution to GDP growth was 0.9 percentage points. The estimate of the rise in GVA of the industrial sector was computed in line with development of the physical volume of industrial output (the rise of 3% in January-August). Since May 2011 there has been a decelerating trend of growth of industrial output and gross value added of industry that continued during summer months as well and primarily results from the slowing down of growth of manufacturing industry as well as a decline in domestic and foreign demand and the stalling of a blast furnace in Smederevo’s steel works US Steel. However, in spite of these tendencies, it is estimated that the rise in GVA of industry in 2011 will be at about 4%.

Chart 6 Sectors that form GDP, growth rates in %

1 All estimates of sector GVA developments in economy are based on developments of the group of reference indicators of the sector of GVA formation used as part of the method for nowcasting economic growth, as well as a group of leading indicators used as part of the VIPAS method for forecasting economic growth.

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

12,0

2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3

GDP Industry Transport Informing Trade%

Source: RSO, MF estimate for Q3 2011


GDP growth rate for 2011 estimated at 2%

Growth of GVA in industry in 2011 estimated at 4%

22

After major negative effects that the global economic crisis had on the construction sector over the previous period, in the first three quarters of 2011 this sector managed to stop a several year long decline in GVA and to enter the zone of positive growth rates. The value of completed construction works over the period January-June 2011 was up by 13.7% and the number of contracted works by 11.7% on the same period last year. In keeping with the development of these indicators, the growth rate of GVA of construction for the first nine months is estimated at 3.7% and contribution to GDP growth at a little over 0.1pp. Forecasts of economic activity in the following period are also positive: realization of infrastructural projects, reconstruction and modernization of infrastructure within public enterprises, and development of rural infrastructure are to help keep gross value added of this sector at the existing level of growth.

It is estimated that in the first three quarters of 2011 agricultural output was at a similar level as in the same period last year. In keeping with such a development of output, an estimated growth rate of GVA for the first three quarters is at around 0.5%, the contribution to GDP growth being marginal (in the first half-year the rise in GVA of the agricultural sector was close to zero while in the third quarter the rise was relatively substantial and stood at 2%). Despite mediocre agricultural output in 2011, the rise in food prices will certainly have a positive effect on the rise in GVA of this sector and thus the projected growth rate of GVA for entire 2011 is at the level of about 1%.

In the first nine months of 2011 a much lower rise in the sector of services was estimated in comparison with the trend of the previous period – the growth rate of 1.5% with contribution of GDP growth of 0.9pp. A major reason for an inadequately high growth of the service sector lies in a substantial drop in GVA of the trade sector. A drop in GVA of the trade sector in the first three quarters on the same period last year of -3.6% is estimated on the basis of developments of retail trade turnover of goods (in Jan-Aug a drop in retail trade turnover in current prices stood at 6.3%) and developments of leading indicators in economy. An estimated negative contribution of this sector to GDP growth is at -0.4 percentage points. By the end of the year one could expect contraction of negative developments in the trade sector and, accordingly, a projected rate of fall of this sector of about -3.5%. On the other hand, it is estimated that subsectors of services information and communications, and transport and storage in the first three quarters of 2011 still presented major propellers of economic growth. In this period the highest estimated growth rate of GVA in economy was that of the sector of information and communications, and that 7.1%, whereas contribution to GDP growth was 0.3pp. An estimated rise in GVA of the sector of transport and storage for the same period was somewhat lower and stood at 6.3% while contribution to GDP growth was 0.3pp. It is expected that in the transport sector by the end of the year there will be rather moderate growth contractions and thus for entire 2011 an estimated growth rate of GVA of this sector is at the level of about 6%.

Growth rates of GDP sectors, in %

2010 2011Q1 2011Q2 2011Q3 Agriculture -0.4 0.5 0.0 2.0 Industry -0.2 7.2 5.0 1.0 Construction -7.8 -0.9 7.0 5.0 Services 2.6 3.0 1.2 0.5 Trade 1.7 0.9 -4.6 -7.0 Transport 8.3 8.9 3.1 7.0 Informing -3.3 5.4 9.9 6.0 Financial services 5.7 6.3 1.1 3.0 Activities GVA 1.2 3.6 2.1 1.1 FISIM 5.1 6.7 0.2 2.0 Net taxes 0.4 4.6 3.6 3.0 GDP 1 3.7 2.4 1.4


GVA of the trade sector dropped

in 2011

The sector of construction

recovers moderately in 2011

Sectors of transport and information

most propulsive in 2011


23

Chart 7 Sector contributions to GDP growth

In relation to economies of adjacent and EU-27 countries, GDP of Serbia still has the highest growth rates. One should also note that mild recession tendencies in Q2 2011 are not a characteristic of Serbian economy only but also of economies of selected countries.

International comparisons, growth rate

2010 2011 Q1 2011 Q2

EU-27 1.9 2.4 1.7 Bulgaria 0.2 3.3 2.0 Hungary 1.3 1.7 1.2Romania -1.9 0.8 0.8Croatia -1.2 -0.6 /Serbia 1.0 3.7 2.4

Source: RSO, EUROSTAT

3.2. Domestic Demand

Economic activity of Serbia in the course of 2011, by estimates, saw a growth rate of about 2.2%, which suggests gradual revival in relation to the previous crisis-laden period. On GDP usage side, the realized growth rate was most affected by the rise in investment (of about 11.0%) and the rise in exports (of about 17%). An estimated development of components of domestic demand indicates its positive development in 2011 on 2010 owing to the recovery of investment. According to estimates, in 2011 there has been a substantial rise in investment of around 11.0%. Final consumption in 2011 will remain in the negative zone.

Personal consumption of households in the course of 2011 has negative trends as well. Real net earnings as an indicator of developments of personal consumption during the period Jan-Aug 2011 compared to the same period last year went down by 1.3%. A drop of retail trade turnover during the period Jan-Aug went down by 16.7%, a consequence of a decline in purchasing power of the population. In the first eight months of 2011 compared to 2010 household debt to banks rose by 3.3% and it accounts for 34.5% of total bank loans. Household debt (by types of bank loans) at the end of August 2011 in relation to the end of 2010 rose by 5.2%. Viewed by types of bank loans, cash loans increased most, by 6.8%, and housing loans by 6.2%, while agricultural loans fell by 2.5%. According to developments of available indicators of personal consumption in 2011, it is roughly estimated to go down by about 0.5% in 2011.

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

Agriculture Industry Construction Services


10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q310Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3

Mild recession tendencies noticed in adjacent countries as well


Considerable rise in investment in 2011 of about 11.0% while final consumption is in the negative zone

Personal consumption in 2011 fell by about 0.5%

24

Public consumption in the second quarter 2011 went down in real terms by 3.6% on the same quarter last year. Current expenditure registered a real decrease and capital expenditure a real increase, and so as a result there was a qualitative change to the structure of expenditure. In the structure of expenditure, in relation to the same period last year, the share of expenditure on employees and pensions slightly increased and this is a result of the de-freezing since January 2011. Other transfers to households such as social assistance, sickness leave, benefits for the unemployed etc. viewed in sum total register a real drop in relation to the same period last year. After the arrangement with the IMF fiscal deficit for 2011 has been reviewed from 4.1% to 4.5% of GDP. A new precautionary arrangement brokered with the IMF by September of the current year is of significance for further efficient management of the economic and particularly fiscal policy in the following period. Based on developments of available fiscal data, in the course of 2011 one can expect an unchanged level of public consumption.

Gross fixed capital formation as a component of domestic demand in the course of 2011 on the previous period continued to recover markedly. Based on developments of indirect indicators, in the first two quarters of the current year one could notice a dynamic growth of investment activity. However, in the following period certain turbulences such as the slowing down of economic activity, irregular payment of completed construction works, and a drop in the import of capital and intermediate products could slow down investment. Based on developments of available indirect indicators, an estimated investment rate in 2011 is at about 11.0%.

Chart 8

Contribution of domestic demand to GDP growth

The structure of domestic demand in Serbia in 2011 in comparison with 2010 has been characterized by an increase in the share of investment (from 19.4% to 21.5%, respectively), reduction of the share of public consumption (from 19.1% to 18.5%), as well as a decline in personal consumption (from 79.1% to 77.0%). These changes are taking place as a part of a new model of economic development of Serbia that the Government adopted in December 2010 by which one of the major drivers of development is the rise in investment activity.

In most countries of Central and East Europe in the first half of 2011 domestic demand remained strong. Tighter fiscal adjustment continued so that the risk of unexpected adjustment of the current balance account in the period to come would be reduced. The share of gross fixed capital formation in GDP in 2011 in all countries of reference (except for Hungary) increased. Public consumption in 2011 compared to 2010 in all countries saw a decrease in the GDP share. Serbia, Macedonia, and Poland in 2011 saw a decrease in the share of personal consumption in GDP.

3.8

-3.5

1.02.0

-8

-6

-4

-2

0

2

4

6

8

2008 2009 2010 2011

final consumption gross fixed capital formation GDP

estimate

Source: RSO, MF

Unchanged level of public consumption

in 2011


25

Aggregates of domestic demand in % GDP

Private

consumption Public

consumptionGross fixed capital

formation 2010 2011 2010 2011 2010 2011 Bulgaria 61.2 - 15.8 - 23.5 - Romania 62.5 63.4 16.4 15.7 22.7 23.2 Czech Republic 50.3 50.5 21.4 20.6 24.4 24.8 Hungary 53.5 54.2 21.8 20.7 19.6 19.4 Poland 61.5 61.3 18.8 18.5 19.7 20.9 Croatia 56.7 57.1 20.5 20.3 21.6 21.6 Macedonia 75.8 74.6 18.4 18.0 18.8 20.3 Serbia 79.1 77.2 19.1 18.8 19.4 20.4 Source: Eurostat, MF estimate for Serbia

3.3. Investments

The role of gross fixed capital formation in the recovery and modernization of existing capacities and creation of new ones is unarguable, and this yields a higher level of competitiveness of economy, raises export prospects, creates new jobs, etc. A new model of economic growth and development of Serbia, which the Government introduced in December 2010, recognizes investments as one of vital drivers of development.

Development of indirect indicators in the first two quarters of 2011 suggests a somewhat more dynamic rise in investment in 2011 after a drastic decline in 2009 (-23%) and an almost negligible rise in the course of 2010 (MF estimate at 1%). Indications that economic activity is slowing down again, problems of irregular defrayment of completed construction works, as well as a tendency towards a decline in import of capital and intermediate products over the last few months could, however, cause a new slowing down of already fragile investments. Based on all that has been said, the MF estimate is that investments in the course of 011 will go up by 11%.

Indirect indicators of gross fixed capital formation, y-o-y growth rates in %

2008 2009 2010 I-VI 2011 Construction Value of construction works 3.4 -21.5 -6.0 13.7 Production Capital goods 5.5 -22.1 -9.0 13.2 Intermediate goods 0.0 -22.2 10.8 8.2 Import Capital goods 9.5 -29.4 4.9 28.3 Intermediate goods 7.8 -27.8 18.7 24.3 Loans* Short term 87.7 64.2 122.9 -28.5 Long term 65.6 71.5 92.6 52.4 Private savings* 32.8 153.4 168.8 10.7

Source: RSO, NBS * growth in RSD bn A decline in investment and their slow recovery as a consequence of the economic crisis have led to a reduced rate of investment that even before the crisis had not had satisfying levels. In the course of 2011 the share of investments in GDP (21.5%) increased somewhat at the expense of personal consumption, a positive tendency from the perspective of GDP usage but it also suggests that the standard of living dropped and that effects of the economic crisis are still not fully removed.

As different from global tendencies in industrial production and trade that in the course of 2010 returned to the level before the crisis, global flows of foreign direct investments despite a dynamic rise and the level of USD 1.24bn went down by 15% compared to the pre-crisis FDI. UNCTAD estimates that in the course of 2011 flows of foreign direct investments will fully recover and reach the level of USD 1.4-1.6bn.


Growth of gross fixed capital formation in 2011 estimated at 11%

Investment rate low in relation to development needs

26

Gross Fixed Capital Formation, % GDP

2007 2008 2009 2010 2011 EU 27 21.1 20.9 18.9 18.4 18.5Bulgaria 28.7 33.6 28.9 23.5 -Czech Republic 27.0 26.8 24.8 24.4 24.8Latvia 34.1 29.7 21.6 19.5 20.7Lithuania 28.1 25.3 17.2 16.3 17.9Hungary 21.8 21.7 20.7 18.0 17.8Poland 21.6 22.3 21.2 19.9 21.1Romania 30.2 31.9 24.4 22.7 23.2Slovenia 27.8 28.8 23.4 21.6 21.5Slovakia 26.1 24.7 20.6 20.3 20.7Croatia 26.2 27.7 24.9 21.6 21.6FYR Macedonia 19.6 21.0 19.9 18.8 20.3Montenegro 32.3 38.2 26.8 21.1 -Albania 38.7 38.1 - - -Serbia 24.3 23.8 18.8 19.4* 21.5*Source: Eurostat, Monstat for Montenegro, Instat for Albania, RSO and MF for Serbia * MF estimate

For the first time developing countries and transition economies together attracted more than a half of global flows of foreign direct investments. Investment outflows from these countries go to other undeveloped countries and they have also reached record values while inflows to developed countries continued to go down. Inflows of foreign direct investment to Southeast Europe, however, register a sharp decline for the third year in a row, mostly due to lower investments coming from the European Union.

Inflows of foreign direct investments in Serbia in the course of 2011 have a rising tendency. Based on developments we have seen so far and announcements made by some investors, it is estimated foreign direct investments in 2011 will reach the level of EUR 2.5bn. Net foreign direct investments in Serbia in the first seven months of 2011 reached the level of EUR 985.7m, by 89.7% more than in the same period last year. The record value of FDI-net in 2011 was realized in July when they equaled EUR 419.6m owing to the payment of ‘Delhaize Group’ made for the purchase of shares of Delta Maxi. In the period January-July the greatest net investor was Luxembourg (EUR 377.8m), The Netherlands (EUR 198.5m), and Russian Federation (EUR 67.6m). On the other hand, the greatest net outflow of FDI from Serbia was to Slovenia (EUR 18.8m), Bosnia and Herzegovina (EUR 13.2m), and Albani9a (EUR 6m). In the first two quarters of 2011 the greatest portion of FDI was invested in manufacturing industry (35%) and within it in manufacture of basic metals (19% of the total inflow of FDI), followed by financial activities and insurance activity (14%), and wholesale and retail trade (13%).

Chart 9 Foreign Direct Investment, net

0

500

1000

1500

2000

2500

3000

3500

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

I-V

II 2

011

EU

R, m

ill

Source: NBS

For the first seven months of 2011 net

inflow of foreign direct investment

in Serbia amounted to EUR

985.7m


27

3.4. Foreign Trade Activity

Growth of GDP in 2010 was realized exclusively owing to the recovery and growth of foreign demand, i.e. economic growth of countries with whom Serbia has a developed foreign trade cooperation. A similar trend continued overt the first few months of 2011. Global tendencies, however, suggest that the second wave of the economic crisis is present and that it will inevitably result in a decelerated growth of foreign trade activity of Serbia in the next few months and thus on a slower rise in GDP in 2011. Based on developments so far, we cannot but infer that this year’s rise in GDP will be realized exclusively owing to the recovery and growth of investments while contribution of foreign trade will remain negligible.

Total foreign trade in January-August 2011 on the same period 2010 was up by 17.1% and amounted to EUR 14.8bn. The export of goods rose on the year-on-year level by 21.2% and equaled EUR 5.6bn. The import of goods went up by 14.8% and equaled EUR 9.2bn while deficit of trade of goods was up by 6.2% and equaled EUR 3.6bn. A substantial rise in exports results primarily from the rise in the export of metal ores, basic metals, agricultural products, and rubber and plastic products, which is a consequence of the rise in export demand. The degree of coverage of imports by exports is higher and stood at 60.4%.

Exports in August 2011 equaled EUR 709.4m and on the year-on-year level it was up by 18.8%. Import (EUR 1.1bn) was up by 2.9% while the deficit (EUR 382.7m) went down by 17.5% on August 2010.

Chart 10

External trade

The regional structure of external trade indicates that the Belgrade Region and the Region of Vojvodina dominate greatly. Export of the Region of Vojvodina of EUR 266.6m accounted for 37.6% of total August exports. The structure of Vojvodina’s export, which corresponds with the structure of total exports, is prevailed by intermediate goods and non-durable consumer goods. The second largest exporter is Belgrade Region with EUR 170m, i.e. 24% of the total exports, followed by the Region of Sumadija and West Serbia (EUR 147.5m, 20.8%), and the Region of South and East Serbia (EUR 118.3m, 16.7%), while about 1% of exports is territorially undistributed.

-10000

-5000

0

5000

10000

15000

20000

2006 2007 2008 2009 2010 I-VIII 2011

EU

R, m

ill

Source: RSO

Export Import Deficit


Exports went up by 21.2% and imports by 14.8% in the first eight months of 2011

Belgrade Region and the Region of Vojvodina dominate the regional breakdown of external trade

28

The largest share in Serbian imports was that of the Belgrade Region (EUR 537.8m, 49.2%), followed by the Region of Vojvodina (EUR 251.8m, 23%), the Region of Sumadija and West Serbia (EUR 164m, 15%), the Region of South and East Serbia (EUR 110.8m, 10.1%), while around 2.5% of imports is territorially undistributed. The import structure does not differ much among regions – it is largely prevailed by intermediate, capital, and non-durable consumer goods.

The greatest deficit is registered in the Belgrade Region (EUR 367.8m), while the Region of Vojvodina and the Region of East and South Serbia had surplus of external trade of goods (EUR 14.9m, i.e. EUR 7.5m).

Chart 11 Regional distribution of external trade

The economic recovery of international environment (and thus of foreign demand) is extremely important for the economic recovery of Serbia as it rests upon a new growth model and boosted exports. Most important foreign trade partners of the Republic of Serbia traditionally are Russian Federation, Germany, and Italy. Trade with Russia is characterized by high deficit (EUR 834m) and a very low coverage of import by export (30.2%) in the first eight months of 2011. A high misbalance in trading with Russian Federation was to a key extent impacted by: a non-elastic import of energy substances and production materials and a non-dynamic export. The second important foreign trade partner of Serbia is Germany (EUR 630.8m of exports and EUR 1,013.9m of imports). Trading with Italy is somewhat more balanced (EUR 637.6m of exports and EUR 767.8m of imports) and so the coverage of import by export is at a solid level of 83%.

In the region the most significant foreign trade partners in January-August 2011 were: Bosnia and Herzegovina, Romania, Hungary, Slovenia, Montenegro, and Croatia. Trade surpluses and thus the degree of coverage of imports of above 100% were generated with: Montenegro (EUR 358.8m), Bosnia and Herzegovina (EUR 244m), Macedonia (EUR 103.2m), and Albania (EUR 56.1m).

By the geographic structure, the largest volume of foreign trade is achieved with countries of the European Union (more than a half of the total trade) while the greatest coverage of imports by exports was achieved with countries signatories of the CEFTA agreement and it stands at 193.1%. Trade surplus in trading with these countries has been generated largely owing to the export of agricultural products (corn and corn products, as well as various sorts of beverages) and iron and steel. On the import side electricity, iron, and steel dominate, as well as coal, non-ferrous metals, fruits and vegetables.

-400

-300

-200

-100

0

100

200

300

400

500

600

City of Belgrade Region of Vojvodina

Region of Sumadija and

Western Serbia

Region of South and East Serbia

EU

R, m

ill

Source: RSO

Export Import Deficit

Greatest trade with Russia, Germany,

and Italy


29

The coverage of import by export, as one of the important indicators of foreign trade, after a drop in 2008 due to the economic crisis, now continues to rise. In 2010 there was a record-high coverage of import by export of 58.6% and it was surpassed in the first eight months of 2011 (60.4%). A rise in this indicator is primarily a result of import rates being lower than export growth rates. The global economic crisis has made a major effect on a decline in the income of the population, which led to substantial reduction of domestic consumption and thus of reduced imports.

Chart 12 Export-import ratio

3.5. Industry and Business Climate

The physical volume of industrial output during the period January-August 2011 relative to January-August 2010 was up by 3.0%. The rise of output was recorded in all three industrial sectors: Mining, of 8.5%, Manufacturing, of 1.6%, and Electricity, gas, water, and steam supply and air conditioning, of 7.2%. As for purpose groups, the rise in production was registered with energy, of 3.9%, intermediate goods, except energy, of 6.1%, capital goods, of 7.7%, while a drop was registered with: durable consumer goods, of 9.9%, and non-durable consumer goods, of 0.5%. As for purpose groups, the greatest rise in output was registered in the category of capital goods, a result of the rise in production of: metal products, electrical equipment, motor vehicles and trailers, whereas the steepest drop was registered in the category of durable consumer goods> furniture, textile, rubber, and plastic.

The physical volume of industrial output in August 2011 on August 2010 was down by 0.3%. The fall of output was recorded in Manufacturing, of 1.6%, whereas a rise was registered in two industrial sectors: Mining, of 7.6%, and Electricity, gas, steam and air conditioning supply, of 2.2%.

The volume of industrial output in August 2011 in comparison with August 2010 decreased with 14 areas (the share in the structure of industrial output of 53%) and increased with 15 (the share in the structure of industrial output of 47%). Sections that contributed most to the decline in industrial output in August 2011 were: Manufacture of food products, Manufacture of oil derivatives, Manufacture of basic metals, Manufacture of transport equipment, and Manufacture of beverages. The physical volume of industrial output in August 2011 was down by 0.5% on July 2010. A fall in output was registered in manufacturing industry, of 3.1%, while the rise was registered in the remaining two industrial sectors: mining, of 23.4%, and electricity, gas, steam, and air conditioning supply, of 1.6%.

0

10

20

30

40

50

60

70

2006 2007 2008 2009 2010 I-VIII 2011

%

Source: RSO

Record coverage of import by export (60.4%)


Industry in Jan-Aug 2011 rose by 3.0%

In August 2011 industry fell by 0.3%

30

A slower trend of growth of overall industrial output which began in May continued into summer months (June, July, and August 2011) and this primarily resulted from a decline in manufacturing industry. Reasons why performance is poorer than expected are: a drop in domestic and foreign demand, a slower rise in investment activity, hindered transfer of domestic products to the southern Serbian province (July 2011), diminished production of basic metals as a consequence of switching off of a blast furnace in Smederevo’s US Steel, as well as long-term problems of Serbian industry (non-liquidity, expensive loans, and poor technology).

Chart 13 Manufacturing

However, in spite of all the problems industrial production is facing, the physical volume of industry in 2011 is estimated to go up by about 3.5%. The rise in industry is based on a higher competitiveness, export capacities, as well as attraction of large investors. Industry as well as agriculture needs to be taken greater care of in 2011 and 2012 as these are sectors that produce tradable goods that can be sold on the foreign market. Main propellers of industrial growth in 2011 have been car and food industry. Should Serbia be hit by the second wave of the crisis, there is a danger our exports to relevant trading partners will be diminished, which in turn would affect export-led industrial sections. Therefore in the period to come some measures need to be taken so as to prop up export-led economy.

Growth rates of industrial output

2010VII 2011 VII 2010

VIII 2011 VIII 2010

I-VIII 2011 I-VIII 2010

INDUSTRY - total 2.5 -3.3 -0.3 3.0

Mining 5.8 -10.8 7.6 8.5

Manufacturing 3.9 -2.2 -1.6 1.6

Electricity, gas, steam and air conditioning supply -4.4 -5.0 2.2 7.2Source: RSO

Stocks of finished industrial products in August 2011 in comparison with August 2010 were up by 4.1%. The fall in stocks was registered with Mining, of 7.3% while the rise was registered with Manufacturing industry, of 4.5%. As to purpose groups, the fall in stocks was recorded with intermediate good, of 5.2%, durable consumer goods, of 0.4%, whereas the rise in stocks was registered with energy, of 15.8%, capital goods, of 37.6%, and non-durable consumer goods, of 7.8%. Stocks of finished industrial products in August 2011 were down by 8.9% compared to the 2010 average. Stocks were down in the sector of Mining, by 6.6%, and Manufacturing, of 9.0%.

According to surveyed producers of manufacturing industry, the output assessment is positive and by 10 percentage points higher compared to July 2011. In comparison with August 2010 the output assessment was up by 5 percentage points and above the long-term and the average for 2011. A drop in the value of the

Industrial growth in summer months of

2011 is slowing down…

... but estimates are in 2011 it will have a positive growth rate

of 3.5%


31

Business Climate Indicator (BCI) of manufacturing industry stems from diminished assessments of businessmen regarding developments of overall order books and export order books. Development of the indicator was positively affected by businessmen’s assessment on developments of output and stocks of finished products as well as higher expectations regarding developments of future output. Based on production expectations and the Index of Industrial Production, in the next three months one could expect a rise in industrial output.

Chart 14 Industrial Production Index (IPI) and production expectations

The recovery of global economy continues but with high unemployment in developed countries and rising inflation in developing countries. The recovery of industrial output also continues but the rate of recovery varies. In many transition countries the level of industrial output is higher than before the economic crisis but most countries in the second quarter 2011 register slower growth rates. The greatest rise in January-July 2011 industrial output registered in Bulgaria (7.8%), then in Hungary (7.0%), Romania (6.6%), Bosnia and Herzegovina (4.7%), and Serbia (3.5%), while Croatia registered a fall (-1.2%).

Chart 15 Industrial output of Serbia and other countries in transition

(growth rate relative to the same period last year, %)

fore cast

-3 0

-2 0

-1 0

0

10

20

0

10

20

30

40

50

60

70

dec 0 4 j ul 0 5 fe b 0 6 sep 06 a pr 07 nov 0 7 jun 0 8 jan 09 a vg 0 9 mar 1 0 okt 10 maj 1 1

y oy

balance

se asona lly adj usted da ta

produc tion expectat ions IPI

Source : MF

2.54.2

-1.4

2.1

5.5

10.5

3.5 4.7

-1.2

7.86.6 7.0

-20

-15

-10

-5

0

5

10

15

Serbia Bosnia and Herzegovina

Croatia Bulgaria Romania Hungary

2010 I-VII 2011

Source:: RSO, National statistics given to countries

%

Industrial growth in transition countries slows down somewhat


32

3.6. Construction

Construction is an economic sector that was hit hardest by the global economic and financial crisis because of a decline in domestic demand, reduced investment, and tightening of crediting conditions. In 2010 a drop of construction activity is around 12% while data for Q1 and Q2 2011 suggest an upward trend. The value of completed construction works of investors in Serbia in January-June 2011 increased by 13.7% and the number of contracted works by 11.7% on the same period last year.

In Q2 2011 the value of completed works of investors rose by 18.8% in comparison with Q2 2010, in current prices, while viewed in fixed prices the increase is 13.3%. OF the total value of completed works in Q2 2011, the value of works in the territory of Serbia equals 91.7% and abroad 8.3%.

By administrative districts, the greatest construction activity was made by investors from the city of Belgrade, as much as 46.5% of the total value of completed works. It is followed by Zlatibor (9.2%), South Backa (9.0%), and Raska district, while shares of other districts are in the range of 0.3% to 3.1%.

The value of contracted works of investors from Serbia in Q2 2011 fell by 13.4% on Q2 2010. In July 2011 612 construction permits were issued, by 9.1% more than in July last year. The index of anticcipated value of works in July 2011 was up by 81.2% on July 2010. Viewed by types of buildings, in July 2011 77.5% of building permits and 22.5% of permits for other civil engineering work was issued. If only buildings are viewed, 68.8% refers to resident and 31.2% to non-resident buildings while other construction work refers largely to pipelines, communication and electrical lines (55.1%). The anticipated value of work on new buildings in July 2011 is at 80.6% of the total anticipated value of works. The most voluminous construction activity, viewed by administrative districts, was registered in the city of Belgrade, at 57.1% of the total anticipated value of new construction. Despite numerous problems the sector of construction has been faced with over the previous period and two-figure fall rates, in the first half-year of 2011 it managed to put a stop to a two figure decline through a moderate rise. Forecasts on construction activity in the following period are still somewhat more favourable. Expected recovery of construction in 2011 will be helped by increased domestic demand through realization of infrastructural projects, reconstruction and modernization of infrastructure in public companies, and development of rural infrastructure.

It is estimated the value of completed construction works in fixed prices in 2011 will go up by 15-18%.

Chart 16 Indexes of the number of issued permits for new construction

020406080

100120140160180

I II III IV V VI VII VIII IX X XI XII

2009 2010 2011


It is expected in 2011 construction activity will recover and rise

slightly

In Jan-Jun 2011 the value of

construction works up by 13.7%

33

3.7. Agriculture

Agriculture and food industry are some of the priorities for overall economic development of Serbia. This section generates a substantial foreign exchange inflow from export, it is able to recover fast and to contribute to the alleviating of effects of the global economic crisis that seriously undermines recovery and development of economy. The section of agriculture, forestry, and fishery accounted for 9.6% in gross value added in 2010 and 9.0% in the first half of 2011. Agricultural output in Q1 2011 registered a moderate year-on-year rise in GVA of 0.5% while in the second quarter of the year it remained on the level of the same period 2010.

Chart 17 Growth rates of gross value added in fixed prices Changes relative to the same quarter of the previous year, in %

In 2010/2011 agricultural output is under a major impact of the climate and faces a high rise in prices of food and oil that is present in developed countries as well. The supply of food is in serious disorder in the entire world, which is why a danger of famine looms over heads of almost a billion people.

Spring harvest was done at arable land of about 2,500,000 ha. The largest surface of land is sown with maize, vegetables, sunflower, corn, soy, sugar beet, etc.

Sown land and expected yield

Harvested

area, ha Index

Yield,t/ha

Output estimate, t

Index

Maize 1,261,212 102.0 5.0 6,267,200 87.0 Sugar beet 55,655 97.0 46.3 2,574,786 77.0 Sunflower 174,621 102.0 2.4 415,177 110.0 Soya 165,335 97.0 2.5 415,782 77.0 Tobacco 6,251 106.0 1.6 9,718 104.0 Source: RSO

Land sown with maize in 2011 is by about 2% larger than last year’s. The output of around 6.3m tonnes is anticipated, by about 13% lower than in 2010. It is expected this year’s output of maize will be able to satisfy domestic demand that amounts to around 4.6m tonnes and that there will be market surplus for export of over a million tonnes. Wheat output of 2,093,198 tonnes is anticipated, by 28.4% more than in 2010. It is expected this year’s what yield will be in the category of a good market quality. The expected output of sugar beet of 2.6 million tones will give around 375,000 tonnes of sugar, by 22.6% less than in 2010. Sunflower in 2011 was sown at about 2% larger area while it is expected overall output will be by 10% larger than last year’s. The output of soy is expected to be lower by 23.1% whereas output of tobacco is expected to be by 4% higher than in 2010.

In comparison with the ten-year average, output of wheat is up by 2.4% while expected output of maize is up by 6.9%, sunflower by 14.4%, soy by 24.6%, and sugar beet down by 2.4%.

Q1 Q2 Q3 Q4 Q1 Q2

Agriculture, forestry and fishery 3,5 -1,0 -2,9 0,2 0,5 0,0

GVA fixed prices -0,3 1,2 1,9 1,4 3,5 2,2

-4

-3

-2

-1

0

1

2

3

4

Source: RSO


34

This year’s yield of raspberry is estimated at around 85,000 tonnes, more than in 2010. The purchasing price of raspberry is lower than last year’s because of stocks in cold storage plants, severe competition, and lower demand on the EU market. The yield of strawberry, apricot, sweet cherry, peach, and plum is better than last year’s and demand is greater. These sorts for the most part will be exported to the Russian market. The expected yield of grapes is at the last year’s level. The yield of most vegetable sorts is excellent and it will satisfy domestic needs.

In seven months of 2011 agriculture realized export of USD 1,485m, while surplus in comparison with the first seven months of 2010 rose by 54.0%. In comparison with the same period 2010, the export of the agricultural sector was up by 36.0% while, at the same time, import increased by 18.7%.

Chart 18 Structure of agricultural exports I-VII 2011

Chart 19

Structure of agricultural imports I-VII 2011

Source: RSO, Customs Administration

It is estimated agricultural output in 2011 will be average and the physical volume of output will be at a lower level compared to 2010. However, given a considerable increase in prices of food, it can be expected in 2010 GVA of agriculture, forestry, and fishery will rise slightly, by about 1.0%.

Performances of agricultural production in Serbia in 2011 will manage to meet balance needs of the country for basic food products, it will ensure engagement of manufacturing industry, further recovery of livestock production and production of meat, and solid stocks and reserves a part of which could be exported.

For the last ten years production and processing of organic food has become ever more appealing as it can be very profitable. In 2009 in Serbia to 2,876.5ha methods of organic production were applied. Almost 90% of organic products from Serbia are made for export. In Serbia there are about 80 registered producers of organic food,

Feed; 4% Coffee, tea; 3%

Cereals; 30%

Fruit and vegetables;

23%

Sugar; 5%

Oil; 8%

Drink; 8%

Tobacco; 2%More; 11%

Feed; 3% Coffee, tea; 15%

Cereals; 5%

Fruit and vegetables;

27%

Sugar; 3%Meat; 4%Drink; 5%

Tobacco; 5%

Fish; 6%

Мilk products; 4% More; 4%

GVA of agriculture is expected to go

up by about 1% in 2011

Agricultural export USD 1,485m


35

and the goal is by 2014 to increase the total arable area certified as organic to 50,000ha.

The acute problem of providing mineral fuels and their greater usage is still not resolved. The structure of mineral fuels does not respond to needs, and their prices surpass the purchasing power of potential beneficiaries. Consumption of substances for plant protection has been in constant decline since 1985. Since 1990 consumption of mineral fuels has tripled down and Serbia is at the very bottom in Europe by usage of active matter by hectare of arable land. Ever lower usage of mineral fuels seriously jeopardizes agricultural production in Serbia as the impact of fuels on agricultural yield is very high and stands at 49%. In order to raise the usage of mineral fuels and thus to increase output (quantity and quality) and, consequently, competitiveness of produced agricultural products, Regulation on refunding for production materials has been adopted in 2011 (the refundable sum is set at 6,000 dinars/ha).

Agriculture in Serbia has extremely low productivity, unfavourable competitiveness on (both the domestic and foreign) market, and extraordinary low profitability. A dominant source of investment in agriculture since the 1990s is the agricultural budget that is of vital importance for rural inhabitants that make living of agricultural production. Today not a single agricultural producer could survive without protection and subsidies of the state. On the other hand, the agricultural budget oscillated heavily and for the last three years has had a tendency towards both absolute and relative decline. Under circumstances of the economic crisis and a steep drop in economic activity, the agricultural budget has been reduced to 2.6% of the total budget of the Republic of Serbia for 2011.

By mid September 2011 the Government of the Republic of Serbia had adopted 17 regulations on incentives in agriculture and food industry. When it comes to implementation of the Regulation on agricultural production through credit support (short- and long-term loans), by subsidizing a part of the interest rate in 2011 ten commercial banks and three insurance companies have contracts concluded with the Ministry of Agriculture, Trade, Forestry and Water Management.

As part of this year’s autumn sowing around 1,000,000ha of arable land will be sown. Programme of autumn sowing 2011

Crop Area, ha Share, %

TOTAL 1,000,000 100 Wheat 550,000 55 Rye, oats, barley 150,000 15 Industrial plants 40,000 4 Fodder crops 90,000 9 Vegetables 90,000 9 Other crops 80,000 8

Needs for the mineral fertilizer – NPK for the autumn sowing are at about 450,000 t, which is the minimum for realizing the planned yield. The ratio between the price of mineral fuels and main agricultural products is unfavourable at the expense of agricultural products. Therefore, this year as well the usage of fertilizers will be at the level of a third of the needed amount, which will have a negative effect on the yield next year.

Financial resources are needed for efficient realization of autumn agricultural work. For the purchase of industrial agricultural products (sunflower, soy, and sugar beet), fruits and vegetables and market-conditioned amount of maize for domestic needs, around 60bn dinars will be needed minus the share of food industry (crediting) in the stage of starting this production. The share of funds for the purchase of these products in the total value of this production is at about 30%. For providing production materials (seed, mineral fertilizers, diesel fuel) for production of commodity, around 10bn dinars will have to be provided.


36

3.8. Transport and Telecommunications

The cycle of the physical volume of transport (as measured by the index of cyclical deviation of the long-term average) reached a recession bottom in the third quarter of 2009, which was followed by the phase of recovery and expansion that lasts to this very day. In the first half-year of 2011 the trend rise in the volume of transport services that began in early 2010 continues. The physical volume of services in total transport increased year-on-year by 12.1%. The total volume of transport of goods was up by 14.3% owing to a substantial increase registered with major mainstays of road freight transport of 25.4%, and railway freight transport of 10.6%. The physical volume of services in passenger transport increased by 11.2%, whereby the volume of air transport of passengers increased most (26.8%), it increased slightly in road passenger transport (1.0%), and dropped a bit in railway passenger transport (-0.4%). The volume of turnover of passengers at airports increased by 19.2%, whereby the volume of turnover of passengers by foreign planes increased by 22.5%. 4.2% less cargo was reloaded in ports and piers, while the volume expressed as an operating tone increased by 4.2%. The transit of road freight vehicles intensified – by 10.8% by road freight vehicles, in railway transport by 7.5%, but on inland waterways it was down by 23.8%.

Physical volume of transport services

When one takes a look at the seasonally adjusted series, it is clear that the economic cycle of transport is in the expansion stage. If the seasonal impact is annulled, the volume of transport services in the first half of 2011 was by 11.2% above the volume of services in comparable months of 2010 and by 9.2% above the 2010 average. In the seasonally adjusted series the volume of transport and storage services in the first two quarters was rather close to the level reached before the economic crisis.

Chart 20 Physical volume of transport services, January 2001=100

90100110120130140150160170180190200210

1.10

.200

41.

1.20

051.

4.20

051.

7.20

051.

10.2

005

1.1.

2006

1.4.

2006

1.7.

2006

1.10

.200

61.

1.20

071.

4.20

071.

7.20

071.

10.2

007

1.1.

2008

1.4.

2008

1.7.

2008

1.10

.200

81.

1.20

091.

4.20

091.

7.20

091.

10.2

009

1.1.

2010

1.4.

2010

1.7.

2010

1.10

.201

01.

1.20

111.

4.20

11

Seasonally adjusted Original

Source: MF and RSO

2008

2009

2009

2010 2011 Q1-2/2010 Q1-2

Transport total

Passenger transport

Freight transport

Total -14.8 7.7 12.1 11.2 14.3

Railway transport -29.2 16.0 9.2 -0.4 10.6

Road transport -0.5 12.6 9.0 1.0 25.4

Urban transport -7.6 5.0 2.7 2.7 -

Pipeline transport -12.2 8.9 -1.3 - -1.3

Inland waterways -36.6 0.8 -0.1 - -0.1

Air transport -22.4 1.7 26.7 26.8 5.4

Source: RSO


In the first half of 2011 the volume of transport services

increased by 12.1% in relation to the

same period 2010

37

The sector of transport has a substantial share in GVA. This sector accounted for 5.8% of gross value added of the country in 2010 and 6.0% in the first half of 2011. This was supported by much higher year-on-year growth rates of GVA of this sector than the total gross value added in base prices. As a result of such positive developments, the area of transport and storage has been a major propeller of overall economic growth.

Chart 21 Growth rates of gross value added in constant prices

(changes relative to the same quarter last year)

Signals of the weakening of dynamics of economic activity in the country, as well as the slowing down of economic recovery in the second half of the year on the global market that warn of a danger of a new global crisis will affect negatively the sector of transport as well. It is estimated that the sector of transport and telecommunications in 2011 will see an increase in GVA of about 6.0% compared to 2010.

According to findings in the International Road Assessment Programme (IRAP) of 2009, Serbia is ranked 30th in Europe by the quality of road infrastructure and has better roads than Romania, Bulgaria, and Macedonia. By the World Bank’s assessment, roads in Serbia are ranked 134th in the world by quality and safety. It is necessary to improve their condition and therefore the World Bank, European Investment Bank, and European Bank for Reconstruction and Development were asked to jointly extend us a loan to the total of EUR 300m for reconstruction of roads in Serbia. In May 2012 we will be able to withdraw the first installment while the rest will be gradually withdrawn over a four-year period. It takes 2-2.2bn euros to reconstruct about 16,000km of state roads in Serbia and bring them into a good shape. For the first time in 19 years a tender is to be announced for the maintenance of the network of highways, semi-highways, main, and regional roads in the country.

The northern section of Corridor 10 through Serbia is being built intensively. In July motorway sections from Hrogos to Bikovo was finished (28km) as well as the section from Zednik to Backa Topola (12km), and they were opened for transport. In August motorway sections from Srbobran to Sirig (13km) and from Backa Topola to Feketic (21km) were finished and opened for transport. The construction involved also the construction of three bridges. At the end of September the section from Feketic to Vrbas to the length of 10km was opened for transport. The total of 84km of the motorway Corridor 10 is opened now. What remains to be done is to complete the construction of the most complicated section of Horgos-Novi Sad that is five kilometers long. This section is to be opened for transport by the end of the year and thus we will have the entire northern section of Corridor 10 exploited. In

Q1 Q2 Q3 Q4 Q1 Q2

Transport and storage 4,4 8,2 9,5 10,7 8,9 3,1

GVA fixed prices -0,3 1,2 1,9 1,4 3,5 2,2

-1

0

1

2

3

4

5

6

7

8

9

10

11

Source: RSO

According to estimates, GVA of transport, storage and communications in 2011 up by about 6%

Intensive modernization of transport infrastructure


38

addition, the ring road around Dimitrovgrad with seven bridges is to be completed by May 2012.

Construction of a new bridge over the Danube by Beska at Corridor 10 is finished and the bridge is open for transport now. By the end of 2011 it has been envisaged to complete the ring road around Novi Sad.

At the ring road around Belgrade the section from Batajnica to Dobanovci is being built, as well as the interchange Batajnica, three bridges from ORlovaca to the tunnel of Strazevica, and a section of about three kilometers. These works are to be fully completed by April 2011.

Works at full reconstruction of the ‘Gazella’ bridge will have been completed by the end of February next year but transport in all six lanes will be normalized in mid November.

Construction of the eastern side of the road Corridor through Serbia from Prosek by Nis to Crvena Reka, to the length of 23km, is to begin by the end of the year. Construction of this section will include a full-profile motorway with 15 bridges and a tunnel Bancarevo to the total length of about 750km. The deadline for construction of this part of Corridor 10 is 720 days and works will be financed by the EIB.

A positive trend of a declining number of the injured and traffic accidents of 2010 (when enforcement of the new Law on Road Transport Safety commenced) has nto continued into 2011. According to official data released by the Ministry of the Interior, in the first seven months of 2011 there were 23,000 traffic accidents in which 348 persons died and 9,980 persons were injured. In comparison with the same period last year the number of traffic accidents fell by 9.9% but the consequences are far more serious as 7.1% more lives were lost and there were by 0.7% more injured. Most frequently the cause of accidents is non-compliance with the speed limit (34.6%), unsafe overtaking, turning, and driving backward (25.7%), and non-abiding by the rule of priority passage (12.9%). Drink-driving caused 6.4% of accidents.

With the view of more efficient operations in the area of railway transport, a new Law on railway transport has been drafted and now is in the parliamentary procedure of adoption. The previous law had to be adjusted to new ‘packages’ of EU directives, it was also necessary to expand competences of the Directorate for Railways by adopting the implementing legislation needed for safe and undisturbed railway transport, as well as to correct mistakes and ambiguities registered in the course of implementation of the previously enforced law. Moreover, the Draft Law on railway transport is designed to be in accord with the new Law on railway transport safety (that is being drafted simultaneously with the Draft Law on railway transport). Special attention is paid to regulation of combined transport for which railway boasts huge significance and potential but this has been overlooked in the Law on Railway that is currently in force. The Draft Law details the access and usage of railway infrastructure. The novelty is also the National Programme for Railway Infrastructure that, at the proposal of the Government, will be adopted by the National Assembly and it presents a programme document of national interest for the domain of railways.

The volume of postal activities in the first half of 2011 was up by 1% in comparison with the same period 2010. The volume of express mail (23.6%) increased most, letter delivery went up by 5.0% and parcel delivery by 2.4%, while payment services went down by 1.6%.

Telecommunications have constantly been registering a strong year-on-year quarterly rise in the physical volume of services but at a somewhat slower pace. After liberalization of the market of mobile communications (2006), owing to competition the

In seven months the number of

traffic accidents decreased but

consequences are graver

The volume of postal activities

increased by 1% in the first half of 2011

A new Law on railway transport

drafted and now in the process of

adoption

The volume of telecommunications increased by 11% in the first half of 2011


39

number of subscribers increased markedly (penetration larger than 130%), the quality of services improved, and prices of services fell. In the mobile network there were by 11.6% more minutes of calling than in the first six months of 2010 while there was fewer text (SMS) and multimedia (MMS) messages, by -6.2% and -5.3%, respectively. Regulation of the area of VOIP (Voice over Internet Protocol) ensured international calling at much lower prices, which resulted in a lower number of impulses in fixed telephony. In fixed network the number of impulses was lower in interior transport by -12.3% and in international transport by -14.9%.

3.9. Retail Trade

After four successive quarters, in Q2 2011 wholesale and retail trade registered the steepest drop in gross value added of all economic activities, and that of 4.6%.

Chart 22 Year-on-year real rise in GVA of trade

Unfavourable tendencies within retail trade continued and so a trend decline in retail trade turnover that began in early 2011 deepened. After a steep drop in July (19.5%), in August this year there was also in the original series a considerable drop in retail trade turnover of 18.3% on the same month last year. At the same time the nominal turnover also dropped, by -9.4%. Real retail trade turnover in August 2011 was below the average for 2010 by -11.4%. Available funds for household consumption decreased because of the slowing down of a real rise in earnings and a decline in consumer and cash loans. Under the impact of a lower domestic demand, cumulatively, in the first eight months of 2011 retail trade turnover fell in real terms by -16.7% while the nominal fall was -6.3% on the same period 2010.

If the cyclical component of the physical volume of retail trade is analyzed, one will notice that at the beginning of the year economic activity in trade dropped. What is positive is that in the second half of the year the decline is slowing down. If the tendency of the slowing down of economic activity of trade continues, one could expect that by the end of the year we will have a recession bottom of the trade cycle established (local minimum). Once we eliminate the seasonal effect, the real retail trade turnover in Jan-Aug 2011 was by 1.5% below the turnover of comparable months of 2010. The seasonally adjusted index in August was up by 2.2% on July 2011 but was down by 4.4% on August 2010. The volume of turnover is still extremely small. In the seasonally adjusted series the real value of retail trade turnover in August 2011 corresponds to the level of the end of 2006.

Q1 Q2 Q3 Q4 Q1 Q2

Trade -3,3 2,1 5,1 2,4 0,9 -4,6

GVA fixed prices, 2002 -0,3 1,2 1,9 1,4 3,5 2,2

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

Source: RSO


GVA in Q2 rose by 4.6%

In the first eight months the real year-on-year fall in retail trade of 16.7%

40

220

260

300

340

380

420

460

500

5401.

10.2

004

1.1.

2005

1.4.

2005

1.7.

2005

1.10

.200

51.

1.20

061.

4.20

061.

7.20

061.

10.2

006

1.1.

2007

1.4.

2007

1.7.

2007

1.10

.200

71.

1.20

081.

4.20

081.

7.20

081.

10.2

008

1.1.

2009

1.4.

2009

1.7.

2009

1.10

.200

91.

1.20

101.

4.20

101.

7.20

101.

10.2

010

1.1.

2011

1.4.

2011

1.7.

2011

Seasonally adjusted Original

Source: MF and RSO

Chart 23 Chart 24 Retail trade turnover Retail trade turnover, October 2004-August Oct. 2004-Aug. 2011 (Jan. 2001=100) Ø2010=100

Further recovery of domestic consumption in 2011 will be limited by the cost of living that is high and slim chances for more income and new employment. Unemployment continues to be a key problem both in the current and the years to come until economic growth and investment create new productive jobs in industry, agriculture, and the entire export sector. For the rest of 2011 trade will be under pressure because of a smaller volume of turnover and so for 2011 a drop in retail trade GVA of around -2.0% on 2010 is estimated.

In relation to Q1 2011, in the structure of retail trade turnover in Q2 2011 the share of turnover of fuels for motor vehicles and motorcycles increased most (by 4.5 percentage points), followed by that of household products (0.3pp), and tobacco (0.2pp), while the largest decrease is in the share of turnover of food products and clothing and footwear (3.2pp), and pharmaceutical, cosmetic, and hygiene products (2.2pp).

Chart 25 Structure of retail trade turnover by groups of products, Q2 2011

Turnover of goods in European and adjacent countries. Retail trade turnover in August 2011 in comparison with July 2011 in the euro-zone 17 went down by 0.3% and in EU-27 by 0.2%. Turnover of food, beverages, and tobacco was slightly up by 0.1% in the euro-zone and by 0.3% in EU-27, while in the non-food sector it was down by 0.6% in both zones. Among EU member states for which data are available, retail trade turnover was up with 9 countries and down with 12. The largest increase

-25

-20

-15

-10

-5

0

5

10

15

20

I 2010

II III IV V VI VII VIII IX X XI XII I 2011

II III IV V VI VII VIII

Source: RSO

real nominal

Food and beverages, 32,8%

Tabacco, 3,3%

ICT equipment, 1,8%Household

goods, 8,9%

Products for culture and

recreation, 1,3%

Pharmaceuthical, 13,6%

Fuel for motor vehicles and

motorcycles, 29,6%

Other, 8,7%

Source:МF and RSO

GVA of trade estimated to fall by 2% in

2011


41

was registered in Slovenia (+3.1%), Luxembourg (+2.8%), and Lithuania (+2.5%), while the steepest fall was recorded with Romania (-3.1%), Germany (-2.9%), and Finland (-2.2%). Retail trade turnover in August 2011 in comparison with August 2010 was down by 1.0% in the euro-zone and by 0.8% in EU-27. Turnover of food, beverages and tobacco in the euro-zone was down by 0.2% and by 0.5% in the EU-27. Turnover of non-food products was down by 1.3% in the euro-zone and by 0.7%, respectively. Turnover increased in 12 countries and decreased in 9. The greatest increase was in Luxembourg (+11.7%), Lithuania (+10.1%), and Latvia (+7.4%), and the greatest decrease in Malta (-8.8%), Romania (-6.7%), and Spain and Portugal (both of -4.6%).

Retail trade turnover, rates in %

IV 11 IV 10

V 11 V 10

VI 11 VI 10

VII 11 VII 10

VIII 11 VIII 10

IV 11 III 11

V 11 IV 11

VI 11 V 11

VII 11 VI 11

VIII 11 VII 11

Serbia, nominal -2.0 -5.3 -5.5 -9.8 -9.4 7.7 -3.3 1.1 5.2 3.6

Serbia, real -14.1 -16.1 -16.0 -19.5 -18.3 6.7 -4.0 1.1 5.4 3.4

ЕA17 1.1 -1.9 -0.8 -0.4 -1.0 0.8 -1.2 0.6 0.2 -0.3

ЕU27 1.9 -1.4 -0.5 -0.3 -0.8 1.0 -1.2 0.5 0.1 -0.2

Bulgaria 0.5 1.7 -0.8 -2.8 -2.9 0.2 -0.8 -1.3 -0.8 -0.5

Czech Rep. 3.2 0.5 -0.8 -1.9 - -1.0 -1.3 -0.4 -0.4 -

Hungary -1.2 0.7 -0.4 -1.4 - -0.3 0.5 -0.4 -0.2 -

Poland 5.9 0.6 -2.0 -1.4 -2.0 0.3 1.2 -0.6 1.6 -1.9

Romania -5.9 -5.0 -7.8 1.4 -6.3 -1.5 0.8 -0.4 2.0 -3.1

Slovenia 1.4 1.8 -2.0 0.0 6.5 1.1 -1.7 0.6 1.5 3.1

Slovakia -0.3 -3.5 -4.2 -4.3 -3.8 0.5 -1.3 -0.2 -0.5 -0.1

Croatia 3.7 1.0 1.0 0.9 - 0.5 -0.1 1.3 16.8 -

Fed B and H 16.1 10.7 12.1 9.5 11.3 20.0 -5.5 4.0 12.0 -0.9

Rep. of Srpska 12.5 7.0 9.0 1.8 7.3 20.8 -6.3 1.5 7.9 6.1 Source: PM10, RSO; Euro-indicators 146/2011, Eurostat; statistics of selected countries


42

4. Labour Market

4.1. Employment

The total number of employees according to the Labour Force Survey in April 2011 fell by 3.4% (i.e. by 78,173 persons) in comparison with October 2010 and by 3.8% (i.e. by 87,112 persons) in comparison with April 2010. The rate of employment fell by 1.6 percentage points in comparison with October 2010 and by 1.7 percentage points in comparison with April 2010 (from 47.2% in April 2010 to 4.5% in April 2011).

The total number of the unemployed according to the Labour Force Survey of April 2011 was up by 14.7% (83,275 persons) in relation to October 2010 (and by 13.4% (76,654 persons) in relation to April 2010. The unemployment rate of the working age population (15-64) also rose from 20.1% in April 2010 to 22.9% in April 2011. In addition, the share of long-term unemployment is still high and in 2011 it rose to 73.3% in long-term unemployment.

According to the data released by the Republic Statistical Office (RAD-1) in the period January-August 2011 overall employment went down by 3.3% (60,771 persons); in enterprises, institutions, and organizations by 0.7% (8,927 persons), and private entrepreneurs and their employees by 11.2% (51,844 persons) in comparison with the same period 2010. The greatest decrease of the employed at the level of activity was registered in manufacturing industry, of 3.0% (9,241 persons), wholesale and retail trade, of 2.1% (3,924 persons), transport and storage, of 3.0% (2,700 persons), agriculture, hunting, forestry, and fishery, of 6.7% (2,557 persons), construction, of 2.1% (1,598 persons), and mining, of 5.9% (1,351 persons), while the number of employees rose in education, by 1.8% (2,459 persons), professional, scientific, innovation, and technical activities, by 4.6% (2,319 persons), health care and social insurance, by 1.2% (1,940 persons), information and communications, by 5.2% (1,845 persons), and other service activities, by 14.6% (1,817 persons).

The total number of employees in August 2011 stood at 1,754,831 persons, down by 0.03% on July and by 2.8% on August 2010. The number of employees in enterprises, institutions and organizations in August 2011 was 1,349,355 workers, by 0.04% down on July and by 0.1% down on August 2010.

Effects of the economic crisis negatively influenced the level of employment – a drop in employment (5.5%) was almost twice as high as a drop in output (3.0%) in 2009. The main reason for a steep fall in employment lies in unsuccessful privatizations – namely, owners used the crisis as an excuse for substantial layoffs. Employees in the private sector have suffered most from the global economic crisis so far, as in this sector employment dropped drastically. In 2010 despite the recovery of economic activity, employment went down by 4.9% and this continued in the period January-August 2011 (by 3.3%).

The period January-August 2011 saw the tendency towards a slight rise in the number of the unemployed. According to the National Employment Service data, an average number of the unemployed in the period January-August 2011 was 759,171 persons, by 0.5% more than in the same period 2010. The number of the unemployed in August was 745,956 persons and compared to July it decreased by 0.4% and increased by 3.0% compared to August 2010. The rate of registered unemployment in August 2010 was at 26.2%. The skill structure of the unemployed is unfavourable – the shares of unskilled (28.4%), semi-skilled and workers with low degrees of education (4.5%) in overall unemployment are obviously high. The rate of registered unemployment in August 2011 was at 29.8% (27.3% if insured agricultural producers are included).


Employment and the rate of employment fell,

while unemployment and the unemployment

rate rose in April 2011 (Labour Force Survey)

Employment in Jan-Aug dropped

by 3.3% on the same period 2010

Employment in the private

sector dropped

The tendency of a moderate increase

in the number of the unemployed in the period January-August 2011 (0.5%)

43

Deteriorated conditions on the labour market were to some extent neutralized through enforced measures for stimulating new employment that contain incentives for employees that employ new workers. Moreover, the National Employment Action Plan for 2011 defines priorities and goals of the employment policy as well as programmes and measures that will be realized in 2011 in order to fulfill goals and achieve a sustainable rise in employment. Priorities of employment policy in 2011 are:

to harmonize supply and demand on the labour market; to create new jobs; to enhance education and trainings with the view to developing a skilled

labour force; to stimulate employment of hard-to-employ persons and vulnerable

categories; decentralization and stimulation of development of the regional and local

employment policy. Envisaged funds for the realization of programmes and measures of active employment policy and for the funding of local and regional employment action plans in 2011 amount to 5,350 million dinars. Estimates suggest employment will go up by mere 0.1% and the number of the unemployed will remain unchanged in 2011 on 2010. A further rise in economic activity in 2011 had an impact on the stabilization of employment and a slight rise in adjacent countries. The labour market in 2010 both in our country and in adjacent countries is characterized by a drop in employment and the rise in unemployment despite positive developments of economic activity.

Forecast of developments on the labour market for 2011 and 2012

Employment (yoy) Rate unemployment (%) 2010 2011 2012 2010 2011 2012

EU-27 -0.5 0.4 0.7 9.4 9.5 9.1 Bulgaria -5.9 0.5 1.0 9.6 9.4 8.5 Czech Republic -0.8 0.0 0.0 7.1 6.8 6.4 Germany 0.5 0.9 0.5 6.8 6.4 6.0 Hungary 0.2 0.4 3.0 10.9 11.0 9.3 Austria 1.0 0.8 0.7 4.5 4.3 4.2 Poland 0.4 1.1 1.0 9.2 9.3 8.8 Romania -1.8 0.1 0.6 7.2 7.2 6.8 Slovenia -2.2 -1.3 0.3 7.2 8.2 8.0 Slovakia -1.4 0.6 0.9 14.2 14.0 13.3 Croatia -4.0 -0.2 1.2 11.8 11.3 9.8 Macedonia 1.3 2.0 2.5 32.0 31.4 30.5 Serbia -4.9 0.1 1.4 20.0 22.9 20.0

Source: Economic Forecast spring 2010 (European Commission)

Chart 26 Employment and unemployment

-15.0

-10.0

-5.0

0.0

5.0

10.0

2005 2006 2007 2008 2009 2010 2011 2012yoy

%

Employment Unemployment

Forecast

Source: RSO, NSE, MF

It is estimated employment will rise by 0.1% and the number of the unemployed will remain unchanged in 2011


44

On the EU labour market in 2010 employment went down by 0.5% while unemployment and the rate of unemployment rose to reach the level of 9.4%. In 2011 a 0.4% rise in employment is forecast as well as the rise in unemployment and the unemployment rate to 9.5%. We can notice similar developments in adjacent countries as well.

4.2 Earnings

In the course of 2011 the tendency of rising nominal and falling real average gross and net earnings in comparison with the same period 2010 continued. Average gross earnings disbursed during the period Jan-Aug equaled 51,492 dinars, nominally up by 11.1% and in real terms down by 1.4%, while net earnings equaled 37,091 dinars, up nominally by 11.2% and down in real terms by 1.3%.

Average disbursed gross earnings of employees in August amounted to 53,285 dinars and nominally and in real terms, in comparison with July, it was down by 1.6%. Average disbursed net earnings in August amounted to 38,389 dinars, having decreased in relation to the previous month nominally and in real terms by 1.9% and in relation to the same month last year it was up nominally by 13.1% and in real terms by 2.4%.

Viewed at the level of activity, the highest net earnings in August was registered in manufacture of tobacco products (87,751 dinars), financial services except insurance and pension funds (78,129 dinars), manufacture of coke and oil derivatives (77,205 dinars), management and counseling (75,571 dinars), air transport (73,624 dinars), extraction of crude oil and natural gas (66,759 dinars), mining service activities (66,130 dinars), while the lowest earnings were registered in cinema, TV and music production (8,499 dinars), fishery and aqua culture (17,938 dinars), manufacture of wood and wood products except furniture (19,449 dinars), and activities of preparing and serving food and drinks (19,877 dinars).

Regional differences between disbursed earnings in August 2011 were still very prominent. Viewed by regions, in comparison with the average of earnings in the Republic, the highest average net earnings in August 2011 was disbursed to employees on the territory of the City of Belgrade (47,353 dinars – 23.4% above the average of the Republic), and the lowest on the territory of the Sumadija and West Serbia (33,061 dinars – 13.9% below the republic average).

Viewed by areas, in August the highest average net earnings was disbursed to employees in Belgrade (47,353 dinars), and the lowest in Toplica area (26,418 dinars). The highest net earnings at the level of cities-municipalities was disbursed in Surcin (66,109 dinars), Novi Beograd (58,376 dinars), Lazarevac (55,645 dinars), Kostolac (54,425 dinars), Lajkovac (52,608 dinars), Vracar (50,962 dinars), and Stari Grad (50,344 dinars).

Employees and beneficiaries of pensions 2011

Employees Beneficiaries of pensions

Average earning

Average pensions

Share of pensions in

earnings

I 1.775.193 1.628.715 34.009 20.367 60

II 1.775.529 1.630.129 35.538 20.372 57

III 1.754.691 1.631.008 35.777 20.374 57

IV 1.754.875 1.629.973 39.298 21.495 55

V 1.755.163 1.630.063 35.362 21.500 61

VI 1.755.238 1.629.595 39.322 21.501 55

VII 1.755.372 1.630.149 39.127 21.503 55 Source: RSO and Pension Fund


In 2011 the tendency of rising nominal

and falling real earnings continued

Highest earnings in manufacture of tobacco products

(87,751 dinars)

Regional disparities still

marked

45

Average pension in Jan-Jul 2011 amounted to 21,016 dinars, down in real terms by 6.3% on the same period 2010. Average disbursed pension in July 2011 amounted to 21,235 dinars, up on June by 0.5% in real terms. The total number of pension beneficiaries was up on June by 0.03% (i.e. by 554 pensioners). The ratio between the total number of employees and the total number of pensioners in July stood at 1.07. At the same time, an average pension accounted for 55% of average net earnings.

Average net earnings fell from EUR 400 in 2008 to EUR 338 in 2009. In 2010 we saw continuation of the tendency towards the slowing down of earnings in dinars and a decline in earnings in euros. Average net earnings in 2011 (July) rose to EUR 382. In comparison with adjacent countries in 2011 earnings in Serbia are higher than in Bulgaria, Romania, and Macedonia, and lower than earnings in Slovenia, Croatia, Hungary, and Bosnia and Herzegovina.

Net earnings (EUR) 2008 2009 2010 2011(VII)

Slovenia 900 930 960 975

Croatia 738 737 743 716

Hungary 460 458 465 483

Bosnia and Herzegovina 408 410 408 416

Serbia 400 338 331 382

Romania 373 349 343 340

Macedonia 260 325 336 338

Bulgaria 226 237 259 276 Source: RSO, national statistics

In 2011 earnings envisaged to go up (2.1%).

Law on Amendments to the Law on the Budget System envisages that after two years of ‘frozen’ salaries in the public sector in 2011 earnings will be adjusted three times (in January, April, and October). In 2012 and 2013 there will be two indexations of earnings and that in April for inflation over the last three months raised by half of the real rise in GDP, and in October for inflation over the past six months.

Chart 27 Nominal earnings

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2004 2005 2006 2007 2008 2009 2010 2011

yoy growth rates (gross) Trend (gross) yoy growth rates (net) Trend (net)

Source: RSO

Disbursed pension in Jan-Jul 2011 was 21,016 dinars – down in real terms by 6.3%


46

5. Prices

Inflation in the period January-August 2011 equaled 6.2% (August 2011/ December 2010). The year-on-year inflation, after having reached its maximum in April (14.7%) since May has been in decline and in August stood at 10.5% (but it was much above the upper limit of the allowed deviation from the August target of 5.0%±1.7%). In the first eight months of 2011 a general rise in prices was determined by an above average rise in prices of goods (6.8%) while prices of services rose by 3.7%. Viewed by groups of products and services, the most intensive rise in consumer prices in the first eight months of 2011 was registered in groups: Alcoholic drinks and tobacco (12.8%), Transport (7.9%), Housing, water, electricity, gas and other fuels (7.6%), and Food and beverages (6.6%). Other groups of products and services registered a below average rise in prices in the range of 2.2% and 5.7%, except in Clothing and footwear which registered a drop in prices of 0.2%.

On a monthly level inflation generated over the previous period of 2011 has been characterized by a high level of the monthly rise in prices in the first quarter (from 1.4% to 2.6%), the slowing down in April (1.1%) and in May (0.4%), the lowering of consumer prices in June (0.3%) and July (0.5%, while in August consumer prices saw a zero rise. Viewed by main groups of products and services in August in relation to the previous month the largest rise in prices was registered in groups of Communications (5.4%), due to higher prices of services of fixed telephony, and Recreation and culture (2.7%), due to higher prices of textbooks, while the steepest drop in prices was registered in the group of Food and beverages (-1.3%), because of lower prices of vegetables and fruits.

Given that inflation largely depends on prices of food (as the share of food in the index of consumer prices is high, of 37.8%), the second and the third quarter saw a reverse in developments of prices of food and a decline in inflationary pressures stemming from this; according to the first signals, this year’s agricultural season could be more successful than last year’s and thus in addition to a strong disinflation factor of low aggregate demand, one could expect a more moderate rise in regulated prices by the end of the year. It is estimated that the slowing down of the rise in inflation will continue in the following period as well and that inflation in 2011 will be one-figure and somewhat above the upper limit of the allowed deviation from the target (4.5%±1.5%). According to NBS estimates, the year-on-year inflation should return to the targeted range in the first half of 2012.

Chart 28 Inflation

1.4 1.3 1.0

1.5

0.3

1.4 1.5

2.6

1.1

0.4

-0.3 -0.5

0.0

2.1 2.1

1.21.1

0.8 0.8

1.3

2.0

0.40.3 0.3

0.5 0.4

0

2

4

6

8

10

12

14

16

-1

0

1

2

3

VIII IX X 2010

XI XII I II III IV 2011

V VI VII VIII

y-o-y

rates

mon

rhly

rates

Consumer prices, monthly levelCore inflation, monthly levelConsumer prices, annual levelCore inflation, annual level

Source: RSO, NBS


It is estimated that inflation in 2011

will be one-figure and somewhat

above the upper limit of the allowed deviation from the

target (4.5% ±1.5%)

Over the first eight months inflation was at 6.2%, and

on the annual level at 10.5%

47

Industrial producer prices in January-August 2011 rose by 8.9% (August 2011/December 2010), and their year-on-year rise was 13.4%. Viewed by the purpose of consumption, the rise in producer prices in industry in the first eight months of 2011 was determined by the rise in producer prices of energy (15.3%), non-durable consumer goods (10.0%), and intermediate goods, except for energy (3.7%). Viewed on a monthly level, over the previous period of 2011 there was a high level of the monthly rise in industrial producer prices over the first four months (from 1.9% to 2.5%), then a decline in May (-0.5%), and after a zero rise in June and a slight increase in July (0.1%), in August we had the decline again (0.3%).

International comparisons in August 2011 show that Serbia has a high inflation (10.5%) that is much above the level of inflation in the EU (2.9%) and adjacent countries. In comparison with adjacent countries a high average annual rise in inflation was registered in BiH (4.9%) and Romania (4.3%), while all other countries registered a lower inflation: Macedonia and Montenegro 3.6%, Hungary 3.5%, Bulgaria 3.1%, Croatia 2.0%, and Slovenia 1.2%.

Inflation – Consumer Price Index, growth rates

Aug 2011 Aug2010

Aug2011 Jul 2010

Dec 2010 Dec2009

EU 2.9 0.2 2.6 Hungary 3.5 -0.1 4.6 Slovenia 1.2 0.3 2.2 Bulgaria 3.1 -0.1 4.4 Romania 4.3 -0.3 7.9 Croatia 2.0 -0.1 1.8 Bosnia and Herzegovina 4.9 -0.3 3.1 Macedonia 3.6 -0.1 3.0 Montenegro 3.3 0.7 0.7 Serbia 10.5 0.0 10.3

Source: Eurostat, RSO, websites of national statistics

Industrial producer prices rose by 8.9% and at the annual level by 13.4%

Inflation in Serbia was high and much above the level of inflation in the EU and adjacent countries


48

6. Monetary Developments

With the view of providing monetary stability and in keeping with current economic developments, by April 2011 the NBS had pursued a restrictive monetary policy. During the period January-April the key policy rate was raised from 11.5% to 12.5%. As it is anticipated in the following period disinflation pressures will prevail, in June 2011 the relaxing of the monetary policy began through the lowering of the key policy rate. In the period June-September the key policy rate was lowered from 12.5% to 11.25%.

In the first eight months of 2011 credit activity of banks and total household savings slowed down; foreign currency reserves are at a satisfactory level and above standard criteria of optimality (they provide the coverage of money supply M1 of 413.0%, short-term debt of 1,269.0%, and more than seven months of the import of goods and services). The debt crisis in some countries of the euro-zone led to increased risk premium of Serbia. The value of the EMBI index for all transition countries increased, whereby the increase in the index for Serbia was somewhat more marked (the risk premium for Serbia is among the highest in Europe and higher than in all countries of the region).

Developments of major monetary aggregates at the end of August 2011 in relation to the end of 2010 were marked with an increase in M1, M2, and the widest monetary aggregate M3, by 1.1%, 4.6%, and 3.3%, respectively, while the dinar reserve money decreased by 1.4%.

The dinar reserve money at end August 2011 amounted to 185.5bn dinars, having fallen by 1.4% relative to the end of 2010, to the previous month by 5.6%, and compared to the same month 2010 by 1.1%.

Money supply M1 at end August 2011 amounted to 256.1bn dinars, having increased by 1.1% compared to the end of 2010, compared to the previous month by 1.0%, and to the same month 2010 by 7.4%.

Money supply M2 at end August 2011 amounted to 429.4bn dinars, having increased in relation to the end of 2010 by 4.6%, in relation to the same month 2010 by 8.2%, and compared to the previous month it rose by 4.6%.

Money supply M3 at end August 2011 amounted to 1,405.8bn dinars, having increased in relation to the end of 2010 by 3.3%, compared to the same month 2010 by 9.1%, and to the previous month by 1.0%.

Chart 29 Monetary aggregates

-40

-30

-20

-10

0

10

20

30

VIII IX 2010

X XI XII I II III IV V VI 2011

VII VIII

y-o-

y rat

es, %

Source: NBS

M1 M2 M3 Reserve money


Relaxing of the monetary policy

began in June through the

lowering of the key policy rate from 12.5% to

11.25% in September

49

Foreign currency reserves of the NBS at the end of August 2011 equaled EUR 10.4bn and compared to the end of 2010 they rose by EUR 0.4bn (4.2%). This was largely a result of inflow from loans and donations and a rise in the price of gold. Foreign exchange reserves of commercial banks by the end of August 2011 amounted to EUR 1.0bn and in relation to the end of 2010 they went down by EUR 0.6bn (38.4%). Total foreign currency reserves at the end of August 2011 amounted to EUR 11.5bn.

Foreign currency market. Strengthening of the dinar that began by the end of 2010 continued into early June when there were depreciation pressures. Acute market uncertainty registered since June, caused by the debt crisis in some countries of the euro-zone and an increased risk premium, led to depreciation pressures. The dinar rate at the end of August 2011 equaled EUR 101.58 and USD 70.40, and in comparison with the end of 2010 nominally it was up by 5.6% and in real terms by 10.4%. In August the dinar strengthened nominally against the euro by 0.5% and against the dollar by 1.2%.

Monetary policy in the next period will be based on the NBS Memorandum on the monetary strategy and NBS Memorandum on targeted inflation rates from 2010 to 2012, and it will be implemented in line with the Monetary Policy Programme of the NBS in 2011. Monetary policy measures will be aimed at targeted inflation in the mid run. In addition, without jeopardizing its major goal, the NBS will contribute to the keeping and maintaining of stability of the financial system and it will support the economic policy of the Government that stimulates sustainable economic growth.

In the banking sector of Serbia at the end of the second quarter 2011 33 banks were operating and they employed 29,925 people. Total bank assets amounted to RSD 2,476.3bn and in relation to the end of 2010 they decreased by 2.3%. The ownership bank structure in Serbia at the end of the second quarter 2011 was marked by the dominance of foreign shareholders that own 21 banks (73% of total balance assets, 71% of equity, 71% of the total number of employees, and 76% of sector profit was in the majority ownership of foreign banks) whereas 12 banks are owned by domestic entities (8 banks owned by the state and 4 banks owned by natural persons). The banking sector of Serbia made positive financial performance while business indicators suggest that liquidity of the banking sector is satisfactory (all indicators of liquidity of the banking sector were, as in previous years, high above the required minimum). The banking sector has enough capital given a high level of an average indicator of capital adequacy (19.7%) that is much above the prescribed minimum (12% according to Basel II standards). The total profit of the banking sector in the first six months of 2011 amounted to 17.8bn dinars and it was by 17.1% higher than in the same period 2010.

In the first eight months of 2011 the banking sector was recording a slowdown in credit activities. Bank loans at the end of August 2011 (RSD 1,712.2bn) recorded an increase of 3.3% compared to late 2010 (1.656,9bn dinars). Loans to households rose by 3.3% and loans to businesses 2.7%. Corporate loans accounted for 61.9%, while loans to households accounted for 34.5% of total loans.

The total household savings at the end of August 2011 equaled 759.7bn dinars (foreign savings equaled 744.8bn dinars and dinar savings 15.0bn dinars) and in relation to end 2010 it went up by 1.9% (foreign currency by 1.7% while the dinar increased by 12.1%). The year-on-year growth rate of total household savings equaled 10.9% (foreign currency 10.6% and the dinar 27.6%). Viewed by the currency structure of savings deposits, what dominates are foreign exchange savings deposits (98.0% of overall savings deposits). In the foreign currency savings structure, savings deposits of up to one year prevail, with the share of 42.0%.

Slower rise in credit activity of the banking sector (3.3%)

Relatively stable developments on the foreign currency market

Forex reserves of the NBS (EUR 10.4bn) provide the coverage of M1 of 413% and the import of more than 7 months


50

Demand deposits have a share of 21.7%, savings of up to two years of 12.6%, and savings of up to six months of 12.0%.

Financial markets. September saw a continued negative trend of developments of the value of index market indicators. Since the beginning of 2011 primary stock market indicators BELEX15 and BELEXline compared to the end of 2010 saw a drop of 15.2% and 15.6%, respectively. Such a situation, however, was not of local character but to a great extent marks the entire region of Southeast Europe (on the regional stock markets the value of key indexes also went down). Belgrade Stock Market turnover was 22.3 billion dinars in the first nine months of 2011 (up by 85.8%), whereby turnover of shares increased 2.3 times while turnover of bonds decreased by 32.8%. In the turnover structure, shares of companies dominated (90.9%). In the same period the total number of transactions of securities rose from 162,595 to 2,691,705. An increase in the total number of transactions in securities during this period was achieved due to the listing of shares of NIS and Nikola Tesla Airport. The participation of foreign investors in the total turnover on the BSE in January-September 2011 equaled 42.2%, an increase of 19.5% compared to the same period of 2010. The share of foreign investors in share trading amounted to 45.6% (an increase of 15.4%), while the share in trading with RS bonds was reduced by 56.6% and equaled 8.5%. The value of the total market capitalization at the end of September 2011 amounted to RSD 853.5bn (EUR 8.4bn), which is a decrease of 3.6% compared to the previous month and of 8.6% compared to the end of 2010.

At the end of September 2011 Serbia for the first time sold euro-bonds on the foreign market to the amount of USD 1bn (ten-year state securities at the annual interest rate of 7.25%). These are long-term sources of funding and they will be used for gradual coverage of budget liquidity, primarily for the refinancing of short-term dents such as short-term state bonds.

Chart 30

Belgrade Stock Exchange turnover

0100200300400500600700800900

0

500

1000

1500

2000

2500

3000

3500

4000

IX X XI XII I II III IV V VI VII VIII IX

No in thousandsRSD m

Turnover value Shares No

Source: Belgrade Stock Exchange

2010 2011

Stock market indexes dropped

in value while turnover, the

number of transactions, and

the share of foreign investors

rose


51

7. Balance of Payments

7.1. Balance of Payments

Current account deficit in January-July 2011 on the same period last year registered an increase of 3.5%, i.e. of EUR 53.4m and now stands at EUR 1.6bn. The increase in current account deficit resulted from an increase in foreign trade deficit of 7.4% (i.e. EUR 202.0m) as well as an increase in deficit of income of 5.7% (EUR 22.9m).

The export of goods in the period of reference rose by 22.0%, import rose by 16.7%, and this resulted in an increase in trade deficit of 9.1%.

The balance of services in the same period registered a surplus of EUR 48.8m. The export and import of services rose by 14.2% and 10.9%, respectively.

External trade balance of goods and services in the period of reference saw an increase in deficit of 7.4% (i.e. of EUR 202.0m).

The income position in January-July 2011 on the same period last year registered an increase in deficit of 5.7% (i.e. of EUR 22.9m).

The position of current transfers saw an increase in surplus of 10.7% (i.e. of EUR 171.6m). The largest impact on the increase in surplus of current transfers was that of the increase in remittances of 11.6% (i.e. of EUR 131.9m).

Capital and financial account (reduced by the change of foreign currency reserves) in the period January-July 2011 in comparison with the same period last year registered an increase in surplus, from EUR 617.2m to EUR 1,823.2m.

The inflow of foreign direct investments - net in January-July 2011 amounted to EUR 985.7m, an increase on the same period last year of 89.7%, i.e. EUR 466.0m. Viewed on a monthly level, the lowest inflow of investments was in February (EUR 42.2m) and the highest in July (EUR 419.6m).

Portfolio investments in the period of reference also registered a substantial rise, from EUR 77.0m to EUR 896.9m, and the rise stems from the inflow of debtor’s securities (from EUR 27.8m to EUR 800.0m).

Other investments in the same period shifted from an inflow of EUR 20.5m to an outflow of EUR 56.8m.

Most important foreign direct investors in the first half of 2011 were: The Netherlands (EUR 170.6m), Austria (EUR 73.3m), Spain (EUR 51.9m), France (EUR 47.0m), Germany (EUR40.4m), Switzerland (EUR 27.9m), Slovenia (EUR 26.6m), Cyprus (EUR 17.4m), Italy (EUR 16.0m), and Hungary (EUR 15.2m).

Q1 2011 was dominated by investment in the following activities: manufacturing industry (EUR 99.9m), financial activity and insurance (EUR 53.4m), information and communications (EUR 48.3m), wholesale and retail trade (EUR 35.7m), and real estate activities (EUR 33.0m).

In Q2 2011 most substantial investments were those in manufacturing industry (EUR 136.5m), wholesale and retail trade (EUR 52.7m), financial activity and insurance (EUR 39.4m), real estate activities (EUR 35.3m), and construction (EUR 20.6m).

Total balance of payments in the period January-July 2011 was in surplus of EUR 496.3m, whereas in the same period 2010 it was in deficit of EUR 845.3m.


Current account deficit in Jan-Jul 2011/ Jan-Jul 2010 rose by 3.5%

Deficit of external trade balance in the same period rose by 7.4%

The inflow of FDI in Jan-Jul 2011 was EUR 985.7m

52

Current account balance in % GDP

2009 2010 2011

Hungary 0.4 2.1 2.0

Poland -4.0 -4.5 -4.8

Romania -4.2 -4.3 -4.5

Bulgaria -8.9 -1.0 -1.6

Croatia -5.2 -1.1 -1.8

Montenegro -30.3 -25.6 -24.5

Macedonia -6.7 -2.8 -5.5

Albania -13.5 -11.8 -10.9

Bosnia and Herzegovina -6.2 -5.6 -6.2

Serbia -7.1 -7.2 -7.7 Source: IMF, WEO September 2011

Chart 31

The inflow of investments by months in 2011

7.2 External Debt

At the end of the second quarter 2011 the nominal value of external debt decreased as a result of currency differences, i.e. appreciation of the euro against the dollar as well as special drawing rights. The currency structure of external debt is characterized by a dominant share of the euro of 77.3%, the dollar of 9.4%, special drawing rights of 8.5%, Swiss franc of 4.1%, and other currencies of 0.7%.

The structure of external debt by maturity in the second quarter compared to the first improved by the share of the short-term debt having dropped from 4.9% to 4.3%.

External debt at the end of July 2011 equaled EUR 23.1bn and in comparison with 2010 it went down by 2.8%, i.e. by EUR 671.4m. In the structure of total external debt long term liabilities accounted for 96.4% of the debt and in comparison with December 2010 they rose by 4.1%. Long-term liabilities in July 2011 compared to December 2010 went up by 1.5% (i.e. by EUR 337.5m).

-200

-150

-100

-50

0

50

100

150

200

250

300

350

400

450

I II III IV V VI VII

мил

. EU

R

Source: NBS

FDI Portfolio Others


External debt at the end of July 2011

amounted to EUR 23.1bn and on 2010

it decreased by 2.8%

53

In the structure of long-term liabilities the public sector in July 2011 accounted for 42.6%, to the amount of EUR 9.5bn. In the period of reference the private sector accounted for 57.4% of long-term liabilities, i.e. EUR 12.68bn. The share of the debt of the banking sector in the private sector was 27.1%, i.e. EUR 3.4bn, and of companies 72.9%, i.e. EUR 9.3bn.

In the structure of total external debt the short-term debt in July 2011 accounted for 3.6%. The short-term debt was characterized by a dominant share of the debt of banks of 90.6%, while the share of the sector of companies was 9.4%.

Long-term debt to the World Bank group at the end of July 2011 equaled EUR 1.9bn, a drop in comparison with the end of 2010 of 1.0%, i.e. of EUR 18.9m. Liabilities stemming from IDA arrangements in the same period decreased by 1.8%, i.e. by EUR 9.0m.

The debt to the EBRD at the end of July 2011 was EUR 985.3m and compared to 2010 it was up by 14.6%, i.e. by EUR 125.9m.

Liabilities to the EIB in the same period also increased, by 29.9%, i.e. by EUR 308.8m.

The consolidated debt to the Paris Club of Creditors in July 2011 amounted to EUR 1.6bn and in relation to December 2010 it fell by 3.4%, i.e. by EUR 55.0m.

Liabilities to the London Club of Creditors in July 2011 amounted to EUR 675.4m and in relation to 2010 they were down by 10.5%, i.e. by EUR 79.0m.

The debt to creditors at the end of July 2011 was EUR 11.9bn, in comparison with 2010 a decrease of liabilities of 0.6%, i.e. of EUR 67.8m.

The IMF at the end of September 2011 approved a new precautionary arrangement with Serbia to the amount of 1.1bn euros for the period of 18 months that preserves macroeconomic and financial stability of the country in case of a major economic crisis.

Chart 32 Long-term external debt

0

5000

10000

15000

20000

25000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 VII 2011

Long-term debt Banks Companiesmill. EUR

Source: NBS

Long-term liabilities account for 96.4% and short-term liabilities 3.6%

New precautionary arrangement brokered with the IMF at the end of September


54

8. Public Finance

Consolidated balance of the state sector. Fiscal developments in the period January-July 2011 show that public revenues of the state sector (712.7 bn dinars) nominally were up by 6.7% and in real terms down by 5.6% on the same period 2010. Current revenues saw a real drop of 5.7% on the same period 2010, tax revenues went down in real terms by 4.9%, and non-tax revenues by 11.2%. Capital expenditure rose by 71.7% on the same period 2010 but their share in total revenues was low (0.1%) and does not impact significantly on developments of total public revenues. The largest portion of total revenues of the consolidated state sector over the first seven months of 2011 was accounted for by revenues from value added tax and contributions (they account for 27.0% each in total revenues). Within tax revenues only the income tax and excise duties were higher than in the same period 2010 (7.0% and 4.8%, respectively), while all other categories of tax revenues registered a drop in real terms.

Consolidated budget expenditure in the first seven months of 2011 (801.7bn dinars) rose nominally by 9.4% and fell in real terms by 3.2% on the same period 2010. Current expenditure account for 91.9% of total public expenditure and they fell in real terms by 4.0% All the categories of current expenditure, except for the interest repayment and other current expenditure (a rise of 26.3% and 33.4%, respectively), fell in real terms on the same period 2010. As for the structure of total public revenues, what dominates is social assistance and transfers (43.0%) that went down in real terms by 7.6% on the same period 2010, and within this category the most significant item is pensions (69.7%). Expenditure on employees is the second significant category of expenditure within public consumption (23.6%) and in the first seven months of 2011 they saw a real drop of 3.8%. A substantial share in the structure of total expenditure is that of expenditure on purchase of goods and services (14.5%) that on the same period 2010 fell in real terms by 1.7%. Capital expenditure saw an increase in the share in the structure of total public expenditure on the same period last year from 5.3% to 5.8% (they increased in real terms by 6.2%). Net budget loans rose in real terms by 9.1% (within this category there are also some forms of fiscal incentives for the economy and households).

Deficit of the consolidated state sector rose from 64.9bn dinars in Jan-Jul 2010 to 89.0bn dinars in the period January-July 2011 (4.5% of GDP).

Chart 33

Budget of the RS

-40

-20

0

20

40

60

80

100

120

VIII IX X 2010

XI XII I II III IV V 2011

VI VII VIII

RSD bn

Budget revenues Budget expenditures Budget surplus/deficit

Source: MF


Over the first seven months of

2011 deficit of the consolidated

state sector was 89.0bn dinars

(4.5% of GDP)

55

Budget of the Republic of Serbia. Budget revenues in January-August 2011 amounted to 475.3bn dinars, and budget expenditure 569.4bn dinars. In comparison with the same period 2010 budget revenues went down in real terms by 5.9% and budget expenditure by 0.4%. Budget deficit increased from 59.3bn dinars in the first eight months of 2010 to 94.1bn dinars in the first eight months of 2011. All categories of budget revenues registered a real drop except for the income tax and excise duties (they went up in real terms by 5.2% and 3.1%, respectively).

Developments of budget expenditure in the first eight months of 2011 was favourable in terms of the structure of budget expenditure. In the category of expenditure in the first eight months of 2011 current expenditure went down in real terms by 1.5% while capital expenditure rose in real terms by 34.1% and net budget loans by 11.5%. When it comes to current expenditure, expenditure on employees went down in real terms by 0.6%. The largest portion of budget expenditure is accounted for by current and capital transfers (39.7%) and they fell in real terms by 7.1%, and their largest portion is accounted for by the transfer to the Republic PDI Fund earmarked for the disbursement of pensions. Within current expenditure the largest real rise was registered with expenditure on the repayment of interests and other current expenditure (a rise of 34.2% and 80.6%, respectively).

Revenues and expenditure of the budget of the RS

Structure Real indexes

I-VIII 2010

I-VIII 2011

I-VIII 2011 I-VIII 2010

BUDGET REVENUES 100.0 100.0 94.1

1. Tax revenues 87.3 88.1 94.9 Personal Income Tax 10.7 10.9 96.0 Corporate Income Tax 4.6 5.1 105.2 Value Added Tax 45.8 45.6 93.7 Excises 18.2 20.0 103.1 Customs 6.2 5.2 79.1 Other tax revenues 1.8 1.3 66.6 2. Non-tax revenues 12.5 11.8 88.5 3. Grants 0.1 0.1 82.1 BUDGET EXPENDITURES 100.0 100.0 99.6

1. Current expenditures 95.0 94.0 98.5 Expenditure on employees 24.7 24.7 99.4 Purchase of goods and services 6.4 6.8 106.0 Interest payment 3.3 4.4 134.2 Subsidies 6.3 6.6 103.9 Current and capital transfers 42.5 39.7 92.9 Social assistance from the budget 10.6 9.7 90.9 Other current expenditures 1.1 2.1 180.6 2. Capital expenditures 2.0 2.7 134.1 3. Net Budget Loans 3.0 3.4 111.5 BUDGET SURPLUS/DEFICIT, RSD bn 59.3 94.1

Source: MF

Comparative analysis. The share of public expenditure in Serbia of 45.5% in 2010 was lower than the EU-27 average that equals 50.3%. In comparison with adjacent countries Serbia has a higher level of expenditure than Bulgaria, Romania, and Croatia, and a lower level than Hungary and Slovenia. Fiscal policy will be pursued in the following period in keeping with the rules of fiscal accountability.

In the first eight months of 2011 budget revenues down in real terms by 5.9%, and expenditure by 0.4%


56

Of all the countries in the region a better fiscal position than Serbia (4.6%) was that of Bulgaria (deficit of 3.2% of GDP) and Hungary (a deficit of 4.2% of GDP), while larger fiscal deficits are those of Romania (6.4%), Slovenia (5.6%), and Croatia (4.9%).

Consolidated general government (% of GDP) in 2010

Government revenue (% of GDP) EU 27 44.0 Bulgaria 34.5 Czech Republic 40.5 Hungary 44.6 Poland 37.8 Romania 34.3 Slovenia 43.4 Slovakia 33.1 Croatia 37.0 Serbia 41.0

Government expenditure (% of GDP)EU 27 50.3 Bulgaria 37.7 Czech Republic 45.2 Hungary 48.9 Poland 45.7 Romania 40.8 Slovenia 49.0 Slovakia 41.0 Croatia 41.9

Serbia 45.5 Government deficit / surplus (% of GDP) EU 27 -6.4 Bulgaria -3.2 Czech Republic -4.7 Hungary -4.2 Poland -7.9 Romania -6.4 Slovenia -5.6 Slovakia -7.9 Croatia -4.9 Serbia -4.6 Source: Eurostat, European Commission, Croatia MF, Serbia MF

The share of deficit in GDP

in most European countries increased


57

9. Privatization Results

During the period 2002-2011 in the Republic of Serbia 3,017 companies were privatized by the method of tender and auction privatization and the sale of minority share packages in the capital market; privatization revenues of EUR 3.7bn were generated and EUR 1.4bn of investment was provided. However, due to non-compliance with contracted commitments on the part of purchasers of the total number of signed contracts 636 were broken (21%) so the net effect of privatization is 2,381 sold enterprises, EUR 2.6bn of privatization revenues (by 2% exceeded the book-keeping value of assets offered for sale), and EUR 1.1bn of investment.

Through tender and auction privatization 1,645 companies were sold (2,281 companies before contract termination), generating EUR 2.0bn of revenues and providing EUR 1.1m for investment, whereas on the capital market through the sale of minority share packages revenues of EUR 686m were generated.

In the period January-September 2011:

12 companies were privatized and privatization revenues of EUR 13.1m were generated;

through tender privatization the social enterprises (Porecje Vucje and Ravnaja Mali Zvornik) were sold, and through auction privatization one company (Enikon from Loznica) was sold - revenues of EUR 1.1m and investment of EUR 4.3m;

on the capital market privatization revenues of EUR 11.9m were generated through the sale of minority share packages – over 90% of this year’s privatization revenues;

due to the failure to meet contracted obligations, 4 tenders and 27 auctions were annulled;

Privatization of enterprises 2002-2011

There are 426 enterprises that are under the competence of the Privatization Centre for which a decision on the privatization and restructuring method has been taken (212 enterprises with a majority social capital and 214 with state capital).

Portfolio of Center for Privatization 31/ 08/2011

Social capital State capital Total

Published public invitation 2 4 6

Planned to be published 5 34 39

In restructuring 53 105 158

Privatization process interrupted 153 50 220

Proposal for bankruptcy 12 24 36

Required position of MERD 6 - 6

Source: Privatization Agency Work Report for August

Cumulative 2002-2011

Number of enterprises

Revenues EUR m

Investments EUR m

Tender (Т) 90 1,075 930

Auction (А) 1,555 876 202

Tender + Auction (Т + А) 1,645 1,951 1,132 Capital market (Cm) 564 532 6 Capital market - contract previously terminated (Cmt) 172 101 Capital market – previously privatized (Cmp) 902 53

Total Net effect (Т+А+ Cm + Cmt + Cmp) 2,381 2,637 1,138 Terminated privatizations 636 1,060 306 Total 3,017 3,697 1,444 Source: Privatization Agency – Mega table on 30/09/2011


Privatization method determined for 426 companies

Of the total number of signed contracts (3,017), 636 or 21% were broken

Net effect: 2,381 companies were privatized -revenues of EUR 2.6bn

58

Restructuring of large systems. In the process of restructuring are 158 large industrial companies in which it is necessary to continue activities aimed at the realization of defined concepts (amending the Programme, the sale of property, selection of a councilor, initiation of the bankruptcy procedure, etc.). Public call for tender privatization of 86.6% of assets of the company Autotransport Kraljevo was announced in June. The sale of property and organization units is being realized in: Generalexport Belgrade, International Company CG Belgrade, Fund Inex Interexport Belgrade, 21. oktobar Kragujevac, Petar Drapsin Mladenovac, and Ikarbus Belgrade. The design and amendment to the restructuring programme is needed to complete privatization of: IMP Majdanpek, ILR Belgrade, Holding Electronic Industry JSC Nis, Cable Industry Jagodina, Raska Holding Novi Pazar, IHP Prva Petoljetka Trstenik, JSC Dnevnik Novi Sad, Romulijana Zajecar, Gosa Holding Corporation Smederevska Palanka, Vrsacki vinogradi Vrsac, Severtrans Sombor, Rudnik Gornji Milanovac, Vulkan Nis, BIP Belgrade, Javor Ivanjica. Candidate companies for liquidation or bankruptcy are Kluz Srem, 21st May Holding Belgrade, and Svetlost Bujanovac. The privatization process is interrupted in companies for professional education and employment of the disabled: Svetlost Belgrade, DEC Novi Sad, Sloga Belgrade, and Metalac Nis. Investors take an interest in cooperating and taking part in the privatization of SE Glass Industry Pancevo, IMT Belgrade, IMP Belgrade, Jumko Holding Vranje, Betonjerka Aleksinac, Koncern Fabrika vagona Kraljevo, Vulkan Nis, Fontana Vrnjacka Banja, FAP Priboj, Zorka Holding Sabac. Privatization of public enterprises is yet to come. When it comes to the restructuring of large public infrastructural companies, a major prerequisite for their privatization is a change of their legal form. So far a change of the legal from from a PE to a shareholding company has been made with ЈАТ Airways (2008), Airport Nikola Tesla (2010), and Serbian Railways (the Decision taken in May 2011), and in the following period one could expect that public companies Elektroprivreda Srebije, Elektromreza Srbije, Transnafta, Srbijagas, PTT Communications ‘Srbija’, Srbijasume and Srbijavode, followed by deeper organizational and structural changes in these companies. Ownership, organizational, and business transformation of local utility companies requires adoption of the Strategy for restructuring and privatization of public communal companies and the Law on communal activities, as well as amendments to the law on Concessions.

Privatization of PE is yet to come

158 large industrial companies under

restructuring


59

10. Stimulating Policy of the Fund for Development of the Republic of Serbia

By September 2010 the Fund for Development for 381 long-term investment programmes approved loans to the total amount of 8.4bn dinars for 110 municipalities (of which 9 are in the territory of Kosovo and Metohija). Through realization of these programmes the opening of 3,215 new jobs is planned.

Chart 34 Chart 35 Credit distribution by territory Approved credits by function of investment

As for the territorial breakdown of funds, the largest share was that of Belgrade (24.3% of total funds for 24 programmes).

If the structure of approved credits is analyzed by purpose, it can be concluded that the greatest interest was taken by businessmen in investment in durable working assets - DWA (4bn dinars for 83 projects), while for loans for new programmes and projects of modernization an equal sum was earmarked (2.1bn dinars each). The realized structure of credit assets of the Fund mirrors an adverse situatin in overall economy and the need of a large number of economci entities to make use of state aid to a greater extent. Of the total value of approved credit funds, most (31.7%) was invested in production of food products, beverages and tobacco (2.6bn dinars for 117 programmes), production of machines, metals and metal products (1.3bn dinars for 35 programmes or 16.2%), and manufacture of wood and wood products (11.3% for 41 programmes).

For a faster development of extremely underdeveloped municipalities2, 1.7bn dinars were allocated for 63 programmes (20.6% of approved loans). The realization of these programmes is planned to create 955 new jobs. The greatest sum of loans was approved3 to municipalities Blace, Golubac, and Kursumlija (52.2% of funds), while other municipalities accounted for less than 10%. In the undeveloped area a high share (52.7%) was that of programmes designed for modernization (in 22 programmes 913.5m dinars was invested) and DWA (459.3m dinars for 16 projects).

2 Pursuant to Regulation on compiling a single list of development of regions and local self-government units for 2010 the status of extremely underdeveloped is assigned to 46 municipalities whose development degree is below 60% of the republic average while the devastated area comprises 27 municipalities whose degree of development is 50% below the republic average; Official Gazette No. 69/2011. 3 The analysis refers to the total funds for the extremely undeveloped area.


By September 2011 381 loans approved

For extremely underdeveloped 20.6% of the Fund’s allocations

Most funds invested in Belgrade

20.6%

11.8%

67.6%

0,0

20,0

40,0

60,0

80,0

100,0

Undeveloped m. Devastated m. Other

Source : Fund for Development of the Republic of Serbia

48.1%

25.9%26.0%

0,0

20,0

40,0

60,0

80,0

New programs

Moderniz. and revit.

Permanent assets


60

Of 46 extremely undeveloped municipalities, only 28 attracted Fund’s allocations and so the financial sum and the number of loan applications were lower in comparison with the same period last year (by 49%, i.e. 4 times) in relation to the same period last year. Except that the number of companies increased (by 642), stimulating effects compared to last year are missing as extremely underdeveloped areas register long-term development problems that are mirrored in: undermined demographic stability (the population decreased on 2002 by 8.2%), low economic capacities (5.1% companies account for only 4% of employees,

1.5% of net income and 3.6% of net loss of the non-financial sector in 2010), a low employment rate (13.5%) and extremely high unemployment (50.4%), negative financial trends (net loss rose more than 2 times, accumulated loss by

25%, and total liabilities by 18%).

Chart 36 Structure of the credit approved by types of programs

For economic entities in devastated municipalities 995.4m dinars was approved for 25 programmes, which accounts for 11.8% of total funds. Realization of these projects, of which 59.2% is accounted for by investment in modernization, is planned to create 562 new jobs. Of 27 devastated municipalities for Fund’s loans companies from 15 municipalities applied.

Through realization of approved programmes of the Fund planned employment at the level of municipalities is the highest in Belgrade (434 employees) and Kikinda (205 employees), while the structure of planned employment by sectors of industry suggests that 1,511 new jobs will be created in industry (47%), 1,079 in the sector of agriculture (33.6%), and in the sector of services 625 people will find employment (19.4%).

The area that accounted for most of the total approved funds of the Fund was the Belgrade region (2bn dinars), while the lowest share was that of North Backa (0.1%) and Podunavlje (0.2%) area.

26.5%

52.7%

20.8%

31.8%

59.2%

9.0%

0,0

20,0

40,0

60,0

80,0

100,0

Undeveloped m. = 100 Devastated m. =100

New programs

Modrniz. and revitaliz.

Permanent assets


Devastated municipalities

accounted for 11.8% of Fund’s

allocations


61

and

THE FUND'S FINACIAL RESOURCES APPROVED IN Jan – Sep 2011

Total funds = 100

< 2% 2-4% 4-6% 6-9% > 10%



2. Business Climate and Forecast of Trends in Manufacturing Industry

3. Business Analysis of the SMEE Sector for 2010

4. Fiscal Capacity

SPECIAL ANALYSES

64


The analysis of developments of the leading indicator of economic activity of Serbia has as its goal to track business cycles of economic activity and is a key element of the GDP forecast.

According to the September 2011 OECD report (data refer to July 2011) containing the analysis of economic cycles4 only in OECD member countries, the slowing down of economic activity is widely present. The report states that the global economy over the last few months (about 4 months) has increasingly been losing in intensity of the expansion cycle and is entering the contraction stage. In comparison with the previous report, signals of leading indicators for Canada, France, Germany, Italy, Great Britain, Brazil, China, and India have suggested a more marked slowing down of economic activity. Signals of leading indicators for the USA and Russia have suggested a somewhat more moderate intensity of the slowing down of economic activity while signals of indicators for Japan have indicated the peak of the expansion cycle is being reached. A general conclusion is that the global economy is slowly entering the stage of the economic cycle contraction.

Composite leading indicators

Month-on-month growth rate (%) Year on-year

growth rate (%) Growth cycle

outlook

March 2011 April 2011 May 2011June 2011

July 2011Lates

t month

OECD Area 0.0 -0,2 -0.3 -0.4 -0.5 -0.1 Slowdown

Еuro area -0.3 -0,4 -0.6 -0.7 -0.7 -2.2 Slowdown

Major Five Asia -0.3 -0,4 0.3 -0.3 -0.3 -1.0 Slowdown

G 7 0.1 -0,2 -0.3 -0.4 -0.5 0.5 Slowdown

Canada -0.2 -0.4 -0,6 -0.7 -0.7 -2.1 Slowdown

France -0.4 -0.6 -0,6 -0.6 -0.6 -2.2 Slowdown

Japan 0.3 -0.1 -0,1 0.0 0.0 3.4 Potential peak

Germany -0.2 -0.4 -0,6 -0.8 -1.0 -2.5 Slowdown

Italy -0.4 -0.6 -0,7 -0.7 -0.8 -3.7 Slowdown

United Kingdom -0.1 -0.2 -0,3 -0.4 -0.5 -2.0 Slowdown

USA 0.2 0.0 -0,2 -0.4 -0.6 1.8 Slowdown

Brazil -0.7 -0.9 -1.2 -1.5 -1.7 -6.4 Slowdown

China -0.3 -0.4 -0.3 -0.2 -0.2 -0.8 Slowdown

India -0.9 -1.0 -1.0 -0.9 -0.8 -6.2 Slowdown

Russia -0.1 -0.2 -0.3 -0.3 -0.3 1.9 Slowdown

Serbia -0.1 -0.06 -0.04 -0.03 -0.02 -0.7 Slowdown

Note: Asia 5: China, India, Indonesia, Japan and Korea. G 7: Canada, France, Germany, Italy, Japan, Great Britain, and USA, Euro area: Austria, Belgium, Finland, France, Germany, Greece, Italy, Ireland, Luxembourg, The Netherlands, Portugal, Slovakia, and Spain. Overall OECD zone: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, The Netherlands, New Zealand, Norway, Poland, Portugal ,Slovakia, Spain, Sweden, Switzerland, Turkey, Great Britain, and USA. The source of OECD countries is OECD, for Serbia it is the Republic Development Bureau.

4 Notation of the economic cycle (long-term trend=100) based on leading indicators differs the following phases: expansion (economy above the long-term average and still rising), contraction (above the long-term average but falling), recession (below the long-term average, in decline), and recovery (economy is below the long-term average but is on the rise).


Global economy still in the stage of slow growth

65

Chart 37 Chart 38 Leading indicators of economic activity of Leading indicators of economic activity of 5 largest countries, July 2011 OECD-Eastern Europe, July 2011

Source: OECD

The composite leading indicator published by OECD is indicative of changes that will occur in about 6 months on average as of the month in which the change is detected (according to the latest report of July 2011). This means that recession trough was not established in early 2009 as can be concluded from the chart of economic activity of 5 largest countries but only after about 6 months on average, i.e. in the third quarter of 2009. In the third quarter of 2009 dynamics of global economic activity reached the recession trough in all major economies, the fourth quarter saw the stage of general recovery, and in early 2010 the stage of overall expansion began. After a several month long period of stagnation, in 2011 a large number of economies entered the stage of contraction i.e. slowing down of economic activity. Results obtained through the analysis of the economic activity of Serbia point to a cyclical discrepancy between the reference (KIPAS) and the Leading Indicator of Economic Activity of Serbia (VIPAS) by about 5 months on average. Development of the reference indicator (KIPAS) confirms the indication of early signals of the leading indicator (VIPAS) on establishment of the recession trough in the 3rd quarter of 2009 as well as the incidence of recovery signals in the first quarter of 2010. In addition, the leading indicator VIPAS indicates that the peak of the expansion cycle was reached at the end of 2010 and that there was a move from the expansion stage to the stage of moderate contraction of the economic cycle of Serbia at the start of the first quarter of 2011. It should be noted that the Leading Indicator of Economic Activity of Serbia also envisaged contraction tendencies until the 4th quarter. In the next 5 months, i.e. by the second quarter of 2012 one can expect for the economic activity to stagnate by a period for which the leading indicator advances unless there are marked changes to the economic environment in global terms.

Chart 39 Reference and Adjusted Leading Indicator of Economic Activity Serbia,

(Long run trend=100), business perspective by March 2012

Source: MF

By 2nd quarter Serbian economy in the stagnation stage


66

2. Business Climate and Forecast of Trends in Manufacturing Industry - Analysis of the monthly Business Tendency Survey (BTS) results for August, 2011 -

Greater business expectations of businessmen in comparison with the previous month are registered while trend extrapolation suggests a stable growth of production activity in the next three months.

The assessment of the current business situation increased compared to July 2011 and August 2010 - 31% of enterprises think their current business situation is bad. A rise of business expectations compared to July 2011 and a drop compared to August 2010 is registered - 46% of the total number of surveyed enterprises believes their operating in the next 6 months will improve.

Assessments of businessmen on developments of business activities are indicative of increased output, stocks of finished products, demand, prices, and liquidity, as well as a fall in liabilities and order books (total, export, and outstanding). In the period to come surveyed businessmen expect to see a rise in output, exports, and liquidity as well as a drop in prices and employment.

A lower value of BCI in relation to July 2011 and August 2010 is registered. A drop in the value of BCI resulted from a substantial drop in the assessment of total and export order books despite improved assessments of current output, stocks of finished products, and higher expectations of businessmen as regards future output.

The BCI for the euro-zone fell in August 2011. The current level of the indicator remains positive but a constant drodeclineps observed over the last six months suggests that industry of the euro area has entered a growth moderation phase. The drop in the BCI reflects weakening production assessments of businessmen regarding developments of output, total and export order books, while expectations of businessmen regarding developments of future output also decreased. The assessment of developments of the stock of finished products continues to go up compared to its historical minimum. Industrial Confidence Indicator - ICI 5, saw a drop in its value of four percentage points in comparison with the previous month (of 1 percentage point in comparison with August 2010). A drop in the value of ICI resulted from a considerable decline in businessmen’s assessments of order books (a drop of 13 percentage points), and a rise in stocks of finished products (a rise of four percentage points), despite higher expectations of businessmen as regards future output (a rise of 6 percentage points).

Chart 40 Business climate indicator (BCI) and Index of Industrial Production (IPI)

5 Industrial Confidence Indicator is an arithmetic average of balances on total order books, expected output and stocks of finished products (with an inverted sign).

BCI Serbia

BCI Euro area

IPI (right hand scale)

-25

-20

-15

-10

-5

0

5

10

15

20

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

dec 04 jun 05 dec 05 jun 06 dec 06 jun 07 dec 07 jun 08 dec 08 jun 09 dec 09 jun 10 dec 10 jun 11

yoystd-dev

seasonally adjusted dataSource: BCI – MF, Eurostat; IPI – MF


A rise in business expectations ...

Lower value of BCI

BCI for the euro area fell

... production, exports, and

liquidity, and a drop in prices and

employment

ICI dropped in value

67

According to surveyed producers of manufacturing industry, in August 2011 the production assessment went up by 10 percentage points compared to July 2011 (by 6 percentage points compared to August 2010) while 41% of surveyed enterprises reported a higher output. Production trend extrapolation suggests a stable level of production activity.

Chart 41 Production in Manufacturing (Survey results)

Business Mirror

(seasonally adjusted data)*

Manufacturing since 10-2004 2011

min date average mаx date June July August

1. Current business situation -48.1 02-09 -14.7 22.2 09-05 -15.7 -12.9 -11.1

2. Inventories -28.1 10-10 -8.9 11.8 05-07 -22.9 -15.9 -11.6

3. Current order book -69.8 09-09 -39.3 -23.0 09-07 -32.6 -34.8 -48.3

4. Output -28.6 02-09 8.7 36.5 05-05 1.7 9.5 19.5

5. Demand -32.9 03-09 9.3 33.4 09-05 4.5 2.8 5.1

6. Outstanding orders -34.6 02-09 -17.5 0.1 10-10 -16.7 -8.4 -17.6

7. Selling prices -14.6 03-09 7.5 27.9 01-06 0.1 -3.0 3.4

8. Liquidity -62.6 03-09 -12.1 11.5 03-08 -15.9 -23.2 -19.1

9. Total liabilities -6.9 01-06 19.7 41.1 04-09 20.2 19.1 18.2

10. Degree of capacity utilization 51.6 01-10 57.8 73.9 12-10 56.0 54.0 55.9

11. Expected output 13.7 03-09 43.9 67.7 10-06 44.0 35.8 41.9

12. Expected prices -0.7 10-06 16.1 37.9 09-05 9.9 8.9 1.1

13. Expected exports 3.4 03-09 34.2 55.9 01-05 31.4 26.8 29.7

14. Expected employment -26.0 06-09 -6.0 14.5 07-10 0.5 7.3 -4.8

15. Expected liquidity -11.7 11-08 32.3 57.1 06-07 24.8 27.1 29.0

16. Business expectations -1.0 11-08 42.3 64.2 03-05 36.7 28.3 31.4

Business Climate Indicator BCI -2.7 03-09 0.0 1.6 09-07 0.0 0.2 -0.2

Industrial Confidence Indicator ICI -9.3 03-09 4.5 13.1 07-10 11.4 5.6 1.7 * Balances, obtained through response from the monthly survey (seasonally adjusted and smoothed by the software Demetra 2.0) have a percentage value between -100 and 100.

-55

-45

-35

-25

-15

-5

5

15

25

35

45

sep 04 mar 05 sep 05 mar 06 sep 06 mar 07 sep 07 mar 08 sep 08 mar 09 sep 09 mar 10 sep 10 mar 11 sep 11

bal

ance

raw data trend seasonally adjusted data

trend extrapolation long-term average

Source: MF

Assessment of output went up


68

3. Business Analysis of the SMEE Sector for 2010

One of the important results of transition economy of Serbia is a faster development of the sector of small and medium-sized enterprises and entrepreneurs and its becoming a vital segment of the economy. However, recession effects (a decline in external and domestic demand, investment, the rise in risks and investment costs, as well as a fear of failure) negatively impacted on operations of economic entities.

The climate for development of entrepreneurship in Serbia deteriorated and several years long healthy entrepreneurial dynamics is undermined (a slower process of opening, growth and development, and rapid closing), and so the number of shops fell while the number of enterprises is stagnating. Consumer demand decreased, the loss of business confidence made a negative effect on the access to financial support, and this heavily limited the opening of new and development of existing enterprises and shops. The rate of setting up new companies slowed down a lot. In 2010 every month about 3,700 individuals set up new business entities (5,000 people in 2007). In addition, in 2007 per each 6 newly established companies one closed down and per three newly opened shops two were closed. In 2010 the number of newly set up and closed enterprises was almost equal and the number of newly opened shops was by about 10% lower than the number of closed ones. Prospects of newly set up companies to survive on the market also diminished and so the share of companies that survive the first two years of operations fell from 92.0% (in 2007) to 90.6% (in 2010), while the rate of survival of shops fell from 66.2% to 54.1%, respectively. At the same time unemployment rose substantially, which resulted in new forced migrations, particularly of young and educated people. The global economic crisis has already had a negative effect both on economic entities in an early stage of operating and on full-fledged companies – there are fewer business opportunities and it is more difficult to start a business.

According to latest data, in 2010 of the total of 319,044 enterprises, the entrepreneurial sector accounted for 99.8% (318,540 enterprises). The sector of SMEE accounted for 66.4% of employees (814,585), 65.3% of turnover (4,678bn dinars), 55.9% of GVA (817.4bn dinars), and 52.6% of investments of the non-financial sector in 2010.

Viewed by size, the structure of the SMEE sector is dominated by micro enterprises (306,669) while small and medium-sized enterprises (11,871) dominate by all indicators of reference (account for 52.7% of employment, 59.9% of turnover, 60.6% of GVA, 73.7% of exports, and 74.9% of imports of SMEE). However, in 2010 the number of medium-sized enterprises, which are to take the role of a development driver for the entire sector, fell by 8.6%. In addition, a drop in the number of employees was most marked with medium-sized enterprises (9.6%).

Development indicators of the SMEE sector

SMEs Large Non-financial sector SMEs‟ share

2009 2010 2009 2010 2009 2010 2009 2010Number of enterprises 314,827 318,540 529 504 315,356 319,044 99.8 99.8Number of employees 872,540 814,585 435,751 412,966 1,308,291 1,227,551 66.7 66.4Turnover (RSD m) 4,380,545 4,677,933 2,078,312 2,482,401 6,458,857 7,160,334 67.8 65.3GVA (RSD m) 778,108 817,417 584,771 645,309 1,362,879 1,462,726 57.1 55.9Export (RSD m) 275,378 339,845 270,437 393,232 545,814 733,077 50.5 46.4Import (RSD m) 627,147 680,549 402,030 573,291 1,029,177 1,253,840 60.9 54.3Trade balance (RSD m) -351,769 -340,704 -131,593 -180,059 -483,363 -520,764 72.8 65.4Investments (RSD m) 259,796 ,,, 234,170 ,,, 493,966 ,,, 52.6 ...

Source: Ministry of Finance


The climate for development of

entrepreneurship in Serbia

deteriorated

69

Effects of the economic crisis were not eliminated in 2010 but to a great extent were alleviated through numerous economic incentives. As different from small companies that in 2010 managed to recover and redirect their operations to other, less risky areas, medium-sized companies only in 2010 felt the first strike of the crisis (because they are slower to adapt to new circumstances) and this was of key importance for the intensity of recovery of the SMEE sector.

Main positive business developments in the SMEE sector compared to 2009: The trend of an increasing number of economic entities continues – the number

of SMEE rose by 3,713; Moderate boost of business activity – turnover up in real terms by 0.3%; Productivity increased by 5.7% - in the SMEE of manufacturing industry by

4.3% (low-tech 2.9%, medium low-tech 6.3%, medium high-tech 5.6%, and high-tech 11.1%);

The negative trend of declining profit and profitability was stopped – profit rose in real terms by 8.6% and profit rates by 10.1%;

The value of external trade (1,020.4bn dinars) increased by 6.2%, exports (339.8bn dinars) by 15.9%, imports (680.5bn dinars) by 1.9%, and deficit decreased (340.7bn dinars) by 9.1%

Global recession had a major effect here in the sense that it slowed down economic development of Serbia and led to deterioration of the entrepreneurial climate.

Most obvious negative effects are: A slower process of setting up and faster closing down of business entities

worsened the ratio of opened and closed enterprises and shops – per 10 closed 10 new ones were opened (28 in 2009) and per 10 shops that were closed 9 new were opened (11 in 2008). Moreover, the rate of survival of newly set up SMEE also fell, from 71.9% in 2007 to 61.7% in 2010;

Significance of the SMEE for the lowering of overall unemployment in the country diminished – a decrease in the number of the employed of 57,955 workers (or 6.6%) accounts for 71.8% of the decrease in employment of the non-financial sector;

Below average business rates: turnover at 0.3% (4.1% in the non-financial sector), a 1.4% drop in GVA (a rise in the non-financial sector of 3.6%), a lower rise in productivity (5.7% vs. 7.4%) and profitability (36.1% vs. 39.2% in the non-financial sector);

The adverse tendency of the sector concentration of SMEE lingers – Manufacturing industry, Wholesale and retail trade, Construction and Expert, scientific, innovation, and technical activities;

Regional disparities are still present. The level of development of the SMEE sector by areas in Serbia, as measured by GVA per employee, indicates that the ratio of areas with the most developed SMEE sector (City of Belgrade) and areas with the least developed SMEE sector (Pcinja) was 2.4: 1 (2.3:1 in 2009), and when it comes to profitability it was 2.1:1 in 2010 vs. 2.9:1 in 2009;

Recession led to a diminished intention of SMEE to invest (a drop of 7.6%), as well as a lower share of equipment and construction works in the technical structure of investments. Almost 40% of investment of SMEE is channeled to development of small enterprises with the growth rate of 29.8%, where investment per employee and the share of investment in GVA (47%) are the highest. Recession economic developments hit medium-sized enterprises most as their allocations for investment in 2009 went down in real terms by 1/3 in relation to the year before, while their share in GVA was only 27%.

Effects of the economic crisis in 2010 alleviated through numerous economic incentives


70

A low level of competitiveness of the SMEE sector is still the main limiting factor for raising the degree of internationalization. Higher productivity of SMEE results rather from a more dynamic fall in employment (-6.6%) than from a generated GVA (-1.4%). In branches of high and medium-high technological intensity, the sector of SMEE had an above average performance and realized real growth rates of labour productivity, the highest having been in Manufacture of motor vehicles and trailers 49.4% (small 42.6%) and Manufacture of basic pharmaceutical products and mixtures 16.7% (medium-sized 15.4%). On the other hand, in these sections the only negative rate was registered in the area of Manufacture of other transport equipment -28.3% that at the same time has the highest rate of fall of the SMEE sector (productivity of small enterprises in this area was up in real terms by 70.4%). Through in decline, unit labour costs are still high.

Chart 42

That export competitiveness of the sector is low is suggested by data that in the total number of enterprises exporters account for only 3.9%, importers 6.2%, the share of export in turnover is 7.3%, realized export and import per employee were down by close to 1/3 and 1/5 respectively compared to the non-financial sector’s average, while the coverage of export by import was below 50% (58.5% the non-financial sector, 68.6% large enterprises). The value of RCA also indicates that the level of competitiveness of manufacturing industry in SMEE is low – deficit in 2010 accounted for 7.3% of trade (manufacturing industry of the non-financial sector saw surplus). In the structure of rising exports and imports in 2010 products of low-tech intensity registered the fastest rise in the volume of external trade. Micro enterprises traded less with medium-high-tech products which is why the total real rate of growth was negative (-15.5%). Small enterprises still trade externally with products of low-tech intensity and the volume of trade of high-tech products was down in real terms by 7.6% on 2009. On the other hand, medium enterprises managed to raise the real rate of growth of high-tech products (23.3%) but they had a negative real rate of the volume of trade of medium-high-tech products (-19.2%), which made an impact on the entire sector of SMEE.

114,7182,4

226,2274,5 275,4

339,8391,0

503,2

651,1751,8

627,1680,5

-276,3-320,7

-424,9 -477,3

-351,8-340,7

-500

-300

-100

100

300

500

700

2005 2006 2007 2008 2009 2010

RSD

bn

Source: Ministry of Finance

Foreign trade activity of SMEE 2005-2010

Export

Import

SALDO

By the share in the number of

enterprises and employment, as

well as generated turnover and GVA, the SMEE sector is

at the level of EU average


71

The comparative analysis of development of the SMEE sector in Serbia and EU countries shows that by the share in the number of enterprises and employment as well as generated turnover and GVA, the SMEE sector of Serbia was at the level of the EU average. Still, the SMEE sector of Serbia lags behind the EU average a lot if we analyze turnover per employee, GVA per employee, and profit per employee. The comparative analysis of investments per employee and investments per enterprise in adjacent countries and EU-27 indicates a much lower level of these indicators in Serbia, both for the SMEE sector and for entire economy. Investments per employee in the SMEE sector amount to EUR 3,400 (EU average at EUR 7,400), and investments per enterprise amount to EUR 8,700 (EUR 33,400 in the EU). Chart 43

Comparative business indicators relating to SMEE in the EU and Serbia in 2010

Source: Ministry of Finance on the basis of data released by ЕUROSTAT, DG Enterprise and Industry, and Republic Statistical Office.

0

20

40

60

80

100

Number of SMEE per 1,000 inhabitans

Profitability

Number of SMEE

Number of employees

Turnover

GVA

Profit

EU Serbia


72

4. Fiscal Capacity

Fiscal capacity of a city/municipality is its ability to generate a certain level of local self-government budget revenues by means of various instruments of tax policy. The fiscal capacity hinges on the realized level of fortune of a municipality or a city concerned, i.e. on the tax basis used to set a tax liability and collect public revenues.

Adoption and enforcement of the Law on Funding Local Self-government is a major step toward fiscal and financial decentralization. This legal framework defines main drivers in the process of realization of local management and economic development as it introduces a new system of financing activities under their competence. The system of local self-government funding (a mixed model) is designed to make sources of income of municipalities and cities more certain and predictable year by year and to increase income of local self-government units overall.

Budget revenues before and after implementation of the Law on Funding Local Self-government

Budget

revenues

Local government

(164)

Cities

(23)

Municipality

(122)

Belgrade and Novi

Sad

Other cities (21)

Extremely underdeveloped

municipalities (46)

2006 Total, in mill. € 1,747.7 1,320.0 427.9 889.8 430.2 93.9

Per capita, € 235.8 305.4 138.7 464.0 178.9 108.8

2007 Total, in mill. € 2,025.1 1,513.8 511.3 1,008.3 504.7 110.7

Per capita, € 274.3 349.8 167.5 522.0 211.1 129.8

2008 Total, in mill. € 2,080.0 1,550.7 529.3 1,023.7 527.0 113.8

Per capita, € 283.0 357.9 177.1 526.6 220.5 135.1

2009 Total, in mill. € 1,754.2 1,284.0 470.2 852.5 431.5 105.5

Per capita, € 239.6 296.2 157.5 435.5 181.4 126.7

2010 Total, in mill. € 1,856.7 1,369.1 487.6 927.5 441.6 113.8

Per capita, € 254.6 315.6 165.2 470.8 186.4 138.3

Source: Statistical Office of the Republic of Serbia

Law on Amendments to the Law on Funding Local Self-Government, which will take effect on October 1 2011, envisages twice as much revenues from the salary tax for cities and municipalities, i.e. instead of 40% they will get 80%. The City of Belgrade as the most developed city will have 70% from the salary tax and it will not receive transfers from the republic budget as these funds will go to the newly formed solidarity transfer. The level of solidarity transfer to some cities and municipalities will be made according to a specific development list, whereby 50% of the transferred funds will be allocated to local self-governments of the IV development group (least developed), 30% will be transferred to municipalities and cities in the III development group, while cities and municipalities in the II and I development group will each get 10% of funds from the solidarity transfer. Undeveloped cities and municipalities will receive an unchanged sum of the transfer from the republic budget while developed cities will get twice as less transfers but will have twice as much funds from the salary tax as well as funds from the solidarity transfer. Cities and municipalities will fund projects of local importance from local budgets while least developed cities and municipalities in the IV development group could apply for local projects with republic bodies, public companies, agencies, and other types of organization whose founder is the Republic of Serbia. As early as in the first year of implementation of the Law on Funding Local Self-government (2007) the total budget revenues of the Republic rose by 15.9% in comparison with the year before. The entire increase resulted from an increase in transfer funds allocated to units of local self-government. Revenues were increasing


Revenues up owing to

implementation of the new Law on

Funding LS

73

all the way until 2009 when they dropped sharply as a result of the Government’s decision to terminate enforcement of the Law that regulates the area of transfers under the pressure of the global economic crisis. Instead of the planned 40.7bn dinars, transfer funds were reduced by 15 billion dinars. This measure remained in force in 2010 as well and so cities and municipalities could count on 26.7bn dinars. Budget Law of the Republic of Serbia for 2011 envisages transfers to the amount of 31.8bn dinars, an increase of 23.8% in comparison with 2010. For cities 16.7bn dinars has been planned (Belgrade and Novi Sad 7.6bn dinars) and for municipalities 15.1bn dinars (of which for 46 extremely underdeveloped 5.6bn dinars is allocated). Due to suspension of the Law, the system of local self-government funding has been returned to the level that was in place before the adoption and so revenues in 2009 were lower in comparison with 2006. Revenues in cities in 2009 fell by 17.2% and in municipalities by 11.2%, whereby the greatest decrease in revenues was registered by Apatin (-48.6%), Sremski Karlovci (-32.5%), Kovin (-32.1%), Batocina (-31.6%), Kragujevac (-31.5%), and Sokobanja (-30%). In 2009 only 22 municipalities and two cities (Leskovac and Vranje) registered a moderate increase in budget revenues, whereby Backi Petrovac saw the greatest increase in revenues (33.3%), followed by Raska (24.9%), and Sjenica (13.5%). In the course of 2010 there was a moderate rise in revenues and so revenues in cities went up by 6.6% and in municipalities by 3.7% in comparison with 2009. In 46 extremely underdeveloped municipalities revenues increased by 7.9%. The greatest decrease in revenues in 2010 was registered in Indjija (-29.6%), Vrnjacka Banja (-28.9%), Cajetina (-22.2%), and Kragujevac (-20%).

Chart 44 Revenues per capita in 2006-2010

If we try to analyze a relative fiscal capacity, i.e. revenues per capita, we will see that in most cities and municipalities they are below the national average, which clearly indicates that their total fiscal capacity is weak. The capital has at its disposal 50,888 dinars of budget revenues per capita, i.e. almost five times higher revenues than Bogatic and Zitoradja that are at the bottom of the list. Cities (without Belgrade and Novi Sad) have at their disposal 19,186 dinars per capita, which is 73.2% of the republic average (26,211 dinars). Revenues per capita in extremely underdeveloped municipalities equal only 14,235 dinars, i.e. 54.3% of the republic average.

0

100

200

300

400

500

600

2006 2007 2008 2009 2010

Belgrade and Novi Sad Other citiesMunicipality Republic of Serbia

€

Revenues were rising by 2009 when due to suspension of the Law they fell by 17.2%


74

That the situation is serious is indicated by the fact that as much as 62 units of local self-government generate revenues per capita lower than 60% of the country’s average; of this number 26 municipalities and cities have revenues lower than 50% of the republic average. Among local self-governments with extremely low revenues per capita there are some formerly strong industrial cities and now devastated areas (Novi Pazar, Loznica, Krusevac, Leskovac, and Vranje) that have at their disposal 3-4 times lower revenues per capita than the most developed Belgrade. Insufficient budget funds cannot provide for capital investment in road, communal infrastructure etc. nor promote a general environment for economic development.

The City of Belgrade accounts for 43.7% of generated budget revenues of the Republic, i.e. in the territory of the capital in 2010 revenues amounted to 810.6m euros. Other 22 cities account for 30.1% in generated revenues (558.5m euros), while 142 municipalities account for 26.3% (487.7m euros).

Chart 45 Spatial distribution of revenues in 2010

Belgrade43.7%

Other cities 30.1%

Municipality 26.3%

Fiscal capacity of most

municipalities and cities is weak


the autumn report september, 2011 no 9, year xi autumn … · the government of the republic of...

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