#1ஆ National Bank of Serbia Macroeconomic Developments in Serbia April 2024#2• • • • • • Sustained Macroeconomic Stability Despite the multidimensional crisis that lasts more than 3 years, Serbia has managed to preserve the stability of its economy and the consumers and investors' confidence, as evidenced by cumulative real GDP growth in the period 2020-2023 of around 12%, record inflows of FDI, continued growth of employment and wages in the private sector, as well as a record level of FX reserves. Inflation has been on a declining path since April 2023, while in March it slowed further to 5.0% y/y. Inflation will downward path through 2024, while the return to the target tolerance band is expected most likely in May 2024 and approaching to central point of target is expected by the end of 2024. Projected GDP growth for 2024 is in the range of 3-4%, and in 2025 and 2026 we expect an additional acceleration to the range of 4-5%, in line with the new investment cycle associated with the project EXPO 2027. In 2023 the CAD amounting to EUR 1.8 bn (2.6% of GDP), which represents a record low value of the share of the CAD in GDP. For 2024, we project the CAD of EUR 3.0 bn (4.0% of GDP), due to expected acceleration of investment cycle. Due to product and geographic diversification and export-oriented investments, Serbia's exports showed resilience in 2023 despite the decrease in demand from the EU and the region, upon which it relies heavily and managed to achieve a growth of approximately 8% y/y in goods and services exports. Export growth continued in two months of 2024, supported by strong exports of the manufacturing (+11.0% y/y) and the recovery of exports of agricultural products. During Jan-Feb 2024, the net inflow of FDI amounted to EUR 854 mn and was doubled compared to the same period of the previous year. According to LFS, the unemployment rate in Q4 2023 was 9.1%, which is 0.3 pp lower than in Q4 2022. This rate for the whole year 2023 is 9.5% on average and is around last year's level. Formal employment stood at 0.5% in the period January-February 2024. Fiscal developments in 2023 were also better than expected, with a realized deficit of the consolidated budget of RSD 181.1 bn (2.2% of GDP). At the end of February 2024, general government public debt stood at the level of 48.2% of GDP. The Standard & Poor's agency has increased Serbia's outlook for obtaining an investment grade credit rating from stable to positive. In April 2024, the key policy rate was kept unchanged at 6.5% for the ninth consecutive month, motivated by the declining, though still elevated global inflationary pressures, the current medium-term inflation projection, and global uncertainty over energy and primary commodity prices. 2 • Banking sector stability has been preserved - the share of NPLs in February was at 3.2%.#3National Bank of Serbia Inflation in March Slowed Down to 5.0% y/y In accordance with NBS expectations, inflation followed a declining path since Q2 2023... 18 16 Chart 1 CPI developments (y/y rates, %) and contributions (pp) ...with an equal level of core and the headline inflation in March 18 86 Chart 2 Contributions to y/y core inflation (pp) Services Other Energy 62 16 Core Inflation* Food 14 Goods 14 CPI Inflation .Tolerance Band 12 12 Inflation Target Core Inflation 10 10 8 6 4 2 2 0 -2 806 5.0 4- 2- 0 -2 5.0 14 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 In the period of seven years prior to the outbreak of the current crisis, inflation averaged around 2%. se • Average annual inflation in 2023 was 12.1% which is close to the average inflation in 2022 (11.9%). • Inflation has been decreasing since April 2023. Slowdown was especially intensified in H2 2023. . Since the beginning of the year, inflation has slowed by an additional 2.6 p.p. (5.0% y/y in March). As in recent months, the key contribution to inflation slowdown came from the slackening growth in the prices of food and products and services within core inflation. • • 147101471014710147101 47101 47101 4 7101 4 7101 4 7101 47101 4 7101 4 7101 4 7101 47101 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 In the period before the outbreak of the current crisis, core inflation also averaged around 2%. In March, core inflation slowed down to 5.0% y/y, which was contributed to by the effects of the tightening of monetary policy, weakening of cost pressures and lower inflation expectations. According to the latest results of Ipsos survey, one-year ahead expectations of the financial sector were within NBS tolerance band and stood at 4.0%. Medium term expectations of the financial sector were also within NBS tolerance band. 3#4Na Inflation Will Follow Downward Path in the Coming Period Inflation should return to the target tolerance band most likely in May 2024... Chart 3 Inflation projection (February 2024 IR) (average y/y rates in % per quarter and contributions in pp) approaching the target midpoint at the end of the year. Chart 4 Inflation projection (February 2024 IR) (y/y rates, in %) 18 16 14 12 10 086420 17 16 15 8765 14 13 12 11 10 109 8 7 6 Non-food Regulated prices Oil derivatives -2 Q4 Food Q2 2022 Q4 Q2 2023 Consumer prices Q4 Q2 2024* 1 5432TO 0 Q4* Q2 2025* Q4* -1 12 3 *NBS Forecast 2022 6 9 12 3 6 9 12 3 6 9 2023 2024 12 3 6 9 2025 12 Inflation slowdown is the result of the effects of past monetary tightening, the slower pace of imported inflation, the decrease in inflation expectations, as well as the easing of cost-push pressures. •Cost-push pressures are weakening due to the fall in prices of primary agricultural commodities and certain industrial raw materials. • • Disinflationary effect also comes from subdued aggregate demand due to slackened global growth. • • The key risks to the projection are mostly related to external environment and refer to geopolitical conditions and the outlook for global economic growth, and their impact on global energy and commodity prices. As for the factors from the domestic environment, the projection risks are mainly associated with the pace of the recovery of domestic demand and the outcome of this year's agricultural season. • Overall, the risks of the inflation projection are assessed as symmetric. 4#5Projected GDP Growth in 2024 in the Range of 3-4%, in a Medium Term in the Range of 4-5% National Bank of Serbia Growth in the 2024 led by private consumption and fixed investments Chart 5 GDP developments (y/y growth rates in % and contributions in pp) In the coming years Serbia will maintain a strong, sustainable and broad-based growth Chart 6 GDP growth projection (from February IR) (y/y growth rates in %) 14 12 10 8 6 3.3 4 1.8 2 0 -2 -1.6 -4 NX 4.5 4.3 -0.9 12 CII - GDP 7.7 10 8 4.5 4.5 CO 6 2.5 4 2 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026* *NBS forecast Thanks to the preserved macroeconomic and financial stability and the timely and comprehensive package of economic measures adopted by the National Bank of Serbia and the RS Government, Serbia recorded a cumulative growth of real GDP of 9.5% in three years of crisis (2020-2022). • According to our new projection, we expect the acceleration of the growth of the real GDP of Serbia this year to the range of 3.0-4.0%, with the central value of the projection of 3.5%. • Bearing in mind the excellent data of real sector indicators for the two months of 2024 (primarily industry and retail trade), in Q1 we expect real GDP growth in the range of 4.0% to 4.5% y/y. • -2 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2022 2023 2024 2025 In 2024, growth will be driven by domestic demand, where higher private consumption will be contributed to by continued growth in employment and wages, and to investment growth by the implementation of projects in transport, energy and communal infrastructure. Due to the expected acceleration of investments and personal consumption, we project that imports will grow faster than exports, which will result in a negative contribution to net exports. We have revised the projection of growth in 2025 and 2026 upwards, to a range of 4%-5%, taking into account the realization of the investments planned for organizing the specialized exhibition EXPO 2027. 5#6National Bank of Serbia Investments Remain at a High Level Preceded by achieved macroeconomic stability, investment cycle began in 2015... Chart 7 Fixed investment share in GDP (nominal terms, in % of GDP) ...supported by diversified financing sources Chart 8 Key sources of investment financing (in EUR mln) 14.000 24.2 25 23.3 22.5 22.7 22.8 23.4 24.1 21.4 12.000 20.0 20 20 15.9 17.0 17.1 17.7 10.000 8.000 15 6.000 10 4.000 2.000 5 0 0 -2.000 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024* 2025* 2026* Private investment -4.000 Government investment *NBS estimate Gross fixed investment According to SORS data, the share of fixed investments in nominal GDP in 2023 has reached the level of close to 23%. Government investments reached level of about 7% in 2023 and should remain around that level in the medium term. • Starting from the analysis of the planned capital projects in the infrastructure in the next 3 years and the EXPO 2027 project, in the medium term we expect that the share of investments in GDP will increase further. . • • 2014 2015 2016 2017 Government CAPEX ■Domestic companies profitability (estimate) 2018 2019 ■Domestic investment loans (growth) FDI 2020 2021 2022 In earlier years, investments have largely relied on FDI. Owing to maintained macroeconomic and financial stability, relative stability of exchange rate, as well as fiscal consolidation, in recent years three more strong pillars for financing investments have been established: multiplied profitability of the economy, investment loans and doubled government investments. On top of that, FDI inflow reached record levels of around EUR 4.4 bn and 4.5 bn in 2022-2023. 6#7National Bank of Serbia Macroeconomic and Macroeconomic and Financial Stability financial stability combined with structural reforms has created a favourable climate for FDIs... Chart 9 FDI composition by sector (EUR bn) Supported High FDI Inflow ...which are diversified by sector and origin and contributing to the employment growth and country's export potential Chart 10 FDI composition by geographic origin (EUR bn) 5,00 Total inflow: 5,00 Total inflow: 4.4 4.5 4.4 4.5 3.9 3.8 4,00 3.8 3.9 4,00 3.5 3.5 3.0 3.0 2.5 3,00 2.9 3,00 2.2 2.2 2.1 2.8 2.0 2.5 3.2 1.6 2,00 2,00 2.3 1,00 1,00 1.7 1.5 0.9 0.9 0.4 0.6 0,00 0,00 2018 2019 2020 2021 Other Trade 2022 2023 Construction & real estate Manufacturing 2018 2019 2020 2021 ■Europe Asia 2022 2023 ■Rest of world Tradable sector* *industry, agriculture, transport & storage, accomodation and food svc. • Out of an inflow of EUR 23.1 bn in the period 2018-2023, over EUR 12.0 bn has been directed into tradable sectors, most notably manufacturing (almost EUR 7.0 bn). • Manufacturing sectors with the highest FDI inflows (metals, autos, food, rubber and plastic) recorded a high growth in employment, output and exports. • In 2022, FDI inflow amounted to EUR 4.4 bn (net inflow EUR 4.3 bn), and in 2023, a new record level of FDI inflow of EUR 4.5 bn (net EUR 4.2 bn) was recorded. In the first two months of 2024, FDI inflow amounted to almost one billion (EUR 970 mln), while the net FDI inflow amounted to EUR 854 mln. O Serbia has attracted more than half of total FDI to the Western •FDI inflows are diversified by region of origin as well, with a Balkans region in the 2018-2022. greater share of countries from the Asia, alongside Serbia's major trading partner - the European Union. 7#8A Record-Low Current Account Deficit was Recorded in 2023, Favourable Developments at the Beginning of 2024 The current account deficit in 2023 amounts to 2.6% of GDP due to strong export growth and lower import Chart 11 Current account balance by component (EUR bn ) 10 Speed-up of investment cycle will be followed by stabilization in share of gross national savings Chart 12 Savings and investment balance (% of GDP) 30% 25% 5 20% 15% 0 10% -3.5% 2.9% -5.2% 4.8% -4.1% -4.2% 2.6% -5 -6.9% -4.0% 5% -6.9% -4.8% -5.0% 0% -10 -5% -2.9% -4.8% -5.2% -15 -10% -4.1% -4.2% -2.6% -4.0% -4.8% -5.0% • 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024* 2025* 2026* Goods ■Secondary income Primary income ■Services ▲ CAD In 2015-2022 Serbia's current account deficit has been fully financed by FDI, which is mostly expected in the following years as well (projected net FDI inflow of around 5% of GDP). • The current account deficit was significantly reduced in 2023, from EUR 4.2 bn (6.9% of GDP) in 2022 to EUR 1.8 bn (2.6% of GDP). In January and February 2024, the CAD amounted to EUR 50 mln. • CAD projection for 2024 amounts to 4.0% GDP, and in the medium term, it should approach the level of 5% of GDP, which is within the bounds of external sustainability. -6.9% -6.9% 2016 2017 2018 2019 2020 2021 2022 2023 2024* 2025* 2026* ■Gross national savings ■Gross domestic investment ■Savings investment balance The S-I gap narrowed in 2023 as a result of increase of gross national savings. • Over the intermediate period, expected stabilization of the gross national savings share will be accompanied by a gradual speed-up of investments in transport, energy and communal infrastructure, as well as in projects related to the international world exhibition EXPO 2027. 8#9Revealed Exports Resilience During the Crisis; Lower Imports Led by a Better Situation in the Energy Market New investments and continued expansion of the export capacities will ensure high growth of exports in the medium term Chart 13 Exports of goods and services 60 (EUR bn) The projection reflects that the new investment cycle will result in the increased imports of equipment and intermediate good 60 Chart 14 Imports of goods and services (EUR bn) 50 40 40 30 20 20 10 50 40 40 30 20 20 10 0 ■Manufacturing 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024* 2025* 2026* Other ■Sevices exports Agriculture *NBS Forecast .Goods exports continued to grow in 2023 and recorded increase of 3.7%, while exports of services were higher by 18.1%. • In January and February 2024, goods exports were increased by 2.7% y/y. • This growth was driven by the increased agricultural exports (44.2% y/y), as well as increased manufacturing exports (11.0% y/y), within which 16 out of 23 branches recorded an increase in exports. Services exports in this period increased by 16.1% y/y. 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024* 2025* 2026* ■Capital goods Interm. Goods Consumer goods Unallocated goods Services imports *NBS Forecastt • Imports of goods decreased by 4.8% in 2023, with the largest contribution to the decrease coming from reduced intermediates imports, which includes energy (a decrease in energy imports by EUR 1.7 bn compared to 2022). • On the other hand, the imports of services increased by 15%. . Imports of goods were also lower in January and February 2024 by 2.3% y/y, primarily driven by lower imports of energy and intermediate goods, while an increase in imports of capital goods was recorded. Services imports recorded year-on-year growth of 33.6%. 6#10Geographic Diversification Helped Export Resilience National Bank of Serbia During the Period of Multidimensional Crisis Significant increase in exports to Germany of 14% was recorded in 2023... ...which was followed by the growth of imports. from Germany Chart 15 Goods exports by country in 2023/2022 (EUR mn and % of total ) Chart 16 Goods imports by country in 2023 2022 (EUR mn and % of total ) 5000 6000 4500 15.1% of total exports in 2023 ■2022 ■ 2023 5000 13.1% of total imports in 2023 12.2% 4000 EU: 65.7% 64.6% EU: ■2022 55.7% ■2023 57.8% 3500 4000 3000 2500 6.9% 6.2% CIS: CEFTA: 15.9% 5.2% 15.4% 3000 5.0% 7.3% CEFTA: 5.2% CIS: 8.3% 4.6% 5.9% 2000 5.5% 5.0% 4.7% 4.3% 1500 4.0% 3.9% 3.8% 3.6% 3.4% 3.3% 2000 4.3% 4.2% 3.2% 3.0% 2.9% 2.8% 2.7% 2.6% 1000 1000 500 0 0 DEU BIH ITA HUN ROU MNE CHN RUS CZE CRO BGR MKD DEU CHN ITA TUR RUS HUN PL ROM FRA BH AUT CZE • • Serbia's exports showed resistance in 2023, despite the decrease in demand from the EU and the region, on which it relies the most. In this period, most of Serbian exports went to the EU, followed by CEFTA and CIS. • By country, the largest share of exports went to Germany (15.1%), followed by Bosnia and Herzegovina (6.9%), Italy (6.2%), Hungary (5.5%) Romania (5.0%) and Montenegro (4.3%). • Majority of imports in 2023 come from the EU (around 58%), followed by CIS and CEFTA. Compared to the 2022, the volume of imports from Germany in 2023 overtook the volume of imports from China, making Germany the largest importing country again (with a share of 13.1%). 10 10#11Favourable Developments in the Labour Market National Bank of Serbia Single-digit unemployment rate in the whole 2023 (9.5%) Chart 17 Labour market indicators according to the LFS*, (in %) and Productivity Growth Significant contribution of total factor productivity and capital to GDP growth Chart 18 Contribution of factors of production to GDP* (in pp, period average) 60,0 51.8 52.4 52.9 52.9 53.9 54.7 55.6 7.7 8.0 52.2 50.3 7.0 50,0 6.0 49.5 50.3 4.4 47.0 47.1 47.9 5.0 40,0 44.8 45.6 43.3 4.0 40.7 2.4 4.0 2.5 3.0 30,0 2.0 18.9 20,0 16.4 1.0 14.5 13.7 11.2 11.1 0.0 9.7 9.5 9.5 -1.0 10,0 -2.0 -0.9 0,0 -3.0 2015 2016 2017 2018 2019 2020 2021** 2022 2023 2015-2017 2018-2019 2020 2021 2022-2023 2024-2025 Source: Statistical Office Republic of Serbia. * LFS data revised according to the new methodology from 2021. ** From 2021 data aligned with the Census 2022. Employment rate Unemployment rate Activity rate ■TFP Capital ■Labour ◆ GDP Sources: SORS, NBS calculation. * NBS estimate. • According to data from the Labour Force Survey, the unemployment rate was on a single-digit level in 2023 and amounted to 9.5% (same as the level in 2022), while the employment rate amounted to 50.3%, which is an increase of 0.8 p.p. compared to 2022. In 2023, the rate of informal employment was 12.5% (-0.5 p.p. compared to 2022). The activity rate (persons 15+) in 2023 amounted to 55.6%, which is 0.9 p.p. higher compared to 2022. • . Acceleration of economic growth in the period 2018-2019 was driven mainly by faster productivity growth. In 2020, similar to other countries, there was a temporary drop in productivity and a negative labour contribution due to reduction in the participation rate due to the pandemic. From 2021 productivity was the main driver of growth, along with investment. In the medium term, we also expect from productivity and investment to be the main drivers of GDP growth, while the contribution of labour will be lower. 11#12Growth in Wages in January 2024 and Employment in National Bank of Serbia Real wage growth in the private sector in January 2024 (8.5% y/y) Chart 19 Nominal net wages by economic sector (y/y growth, in %) ■Transportation and storage ■Tourism and cattering ■Construction ■Trade Agriculture Period January-February 2024 High level of formal employment in the private sector in February 2024 Chart 20 Contribution to y-o-y growth in total formal employment by economic sector (period average, in pp) 4,0 Education ■Manufacturing Administrative activities 3,0 Health Care ■Information and communications 2,0 1.0 3.3 2.6 2.6 2.0 1.9 2.2 1.6 26,0 22,0 18,0 14,0 10,0 6,0 2,0 -2,0 Sources: SORS. January 2024 10 1,0 0,0 -1,0 -2,0 0,5 2016 2017 2018 2019 2020 2021 2022 2023 Sources: SORS and NBS calculation. Professional act.; Admin. act. Industry&water supply Trade, F&A, Transport, ICT Total formal employment (in %) Agriculture&farm. Construction Other activities January- February 2024 • In the January 2024, the nominal average net wage was 95,836 dinars (818 euros) and is higher by 15.8%. The growth was driven by a faster growth of wages in the public sector (16.2% y/y) than in the private sector (15.6% y/y). In January 2024, a double-digit growth of average wages was achieved in all activities, and it is most pronounced in electricity, gas and steam supply sector and transportation and storage. • In January 2024, nominal net wages grew slightly faster than inflation, but still there is no significant inflationary pressures induced from the labour market. • Total formal employment in the period January-February 2024 amounted to 2.36 million persons and is higher by 0.5% y/y (13 thousand persons). This growth was led by private sector growth of 0.6% y/y (about 11 thousand persons), with a high level of employment in the private sector of about 1.75 million persons. • Employment growth is present in most activities. Growth stands out in professional and scientific activities, in health care, as well as in ICT sector. 12#13Fiscal Developments in 2023 were Better Than Expected National Bank of Serbia In 2023, the consolidated deficit was RSD 181.1 bn (-2,2% of GDP) Chart 21 General government revenues, expenditures and outcome (% share in GDP) Public debt remains on a downward trajectory and within the Maastricht criteria Chart 22 Public debt (central government) (% share in GDP) 50.0 6.0 80.0 70.0 67.8 4.0 70.0 45.0 57.9 57.0 56.5 1.1 0.6 2.0 60.0 53.7 55.1 51.9 52.0 47.8 40.0 .0 50.0 -0.2 40.0 35.0 -1.2 -2.0 -2.2 30.0 -3.2 -4.0 30.0 -3.5 -4.1 Примарни резултат, д.с. 20.0 -5.1 25.0 -6.4 -6.2 укупни биланс: 20.0 -6.0 Фискални резултат, д.с. 10.0 Приходи, л.с. -8.0 Расходи, л.с. -8.0 .0 -10.0 2015 2016 2017 2018 2019 2020 2021 2012. 2013. 2014. 2015. 2016. 2017. 2018. 2019. 2020. 2021. 2022. 2023. Other SDR CHF EUR USD RSD 2022 2023 February 2024 Public debt • . • Although Serbia eliminated fiscal deficit in the years before pandemic, higher deficit in 2020-2022. arose as a result of higher expenditures due to the pandemic and a package of measures to support the economy and the population, and in 2022, support to companies from the energy sector. In 2023, the general government budget deficit amounted to RSD 181.1 bn (-2.2% of GDP) and was thus lower compared to the plan from the revised Fiscal Strategy (- 2.8% of GDP) as a result of lower current expenses. Share of capital expenditures was kept at around 7% of GDP. • In the period January-February 2024, a consolidated surplus of 10.5 billion dinars was achieved. In medium term, we expect its return to the level of around 1.5% of GDP. As of 2021, the share of public debt in GDP is on a downward trajectory, despite the impact of the international energy crisis on the growth of budget expenditures and energy procurement. At the end of 2023, the share of central government public debt in GDP amounted to 52.0% (general government public debt 52.3%) and decreased by 3.1 pp relative to 2022. At the end of February 2024, the share of the public debt of the central government amounted to 47.8% (general government public debt 48.2%) and thus further decreased compared to the end of 2023, mostly due to the higher projected nominal GDP for 2024. • We expect that as a result of the lower deficit, the public debt will continue its downward trajectory in the coming, years. 13#14Monetary Conditions were tightened in the Previous Months Through the Key Policy Rate and Required Reserve Ratio National Bank of Serbia In April 2024, the key policy rate remained unchanged at 6.5% Chart 23 Interest rates (in %) 22 Key Policy Rate The required reserve ratio was increased in September 2023 Chart 24 Reserve requirement ratios (in %) 50 20→ 18 16 14 12 10 8 6 4 2 0 Deposit Facility Lending Facility BELIBOR 1W Average interest rate on repo auction 40 40 30 30 ----FX <2r RSD <2г FX >2r RSD >2r 29.0 26.0 23.0 22.0 20.0 20 20 19.0 г- 16.0 13.0 10 7.0 5.0 2.0 0.0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 In making such decision, the Executive Board primarily took into account the following factors: . ⚫ global inflation continues to slow, with the risks as to its further movement being increasingly balanced, but global inflationary pressures even though receding, remained still elevated; • that caution in domestic monetary policy conduct is needed also due to rising global oil prices after the OPEC+ countries extended supply curbs to Q2, in an environment of elevated geopolitical tensions, longer transport routes and higher logistical costs. 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 NBS increased required reserves (RR) in September: • FX RR rates by 3 pp (to 23%/16% for liabilities with the contracted maturity of below and over 2Y, respectively), while increasing dinar allocations of FX RR by 8 pp (to 46%/38%, depending on maturity of liabilities). the RSD RR rate by 2 pp each (to 7% and 2%, depending on maturity of liabilities). Major effects: • . withdrawal of excess dinar liquidity by RSD 114 bn (around 20%). the turnover on O/N Interbank market has increased. FX RR currently stands at EUR 2,905.4 mn, while RSD RR is RSD 419.6 bn. 14#15Monetary Conditions Determine Financing Conditions National Bank of Serbia Interest rates on dinar government securities are on a decline over the last few months Chart 25 Interest rates in the primary market of government securities (p.a. in %) 15 of the Private Sector Interest rates on private sector loans declined mildly in Q4 2023 and some declined further at the start of this year Chart 26 Interest rates on loans - new business (p.a. in %) 13 11 9 7 5 3 24 20 16 12 8 4 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Dinar current assets loans to enterprises 0+ 1 2013 2014 2015 2016 2017 2018 2019 2020 3 months 6 months 5 years 7 years 53 weeks 8 years 2021 2022 2 years* 10 years 2023 3 years 2024 12 years Source: Ministry of Finance. * Excluding coupon securities with the rate linked to the NBS key policy rate. The share of long-term dinar securities (5+ year maturity) increased from 2% in 2012 to almost 90% in 2024, with the extension of the dinar yield curve to 12 years in February 2020. Yield rates continued to decline as a result of lower government financing needs, declining global yield rates, as well as lower country's risk premium. The January and February auctions in this year, for the sale of 8y dinar government securities, saw record-high performances of a dinar securities auctions, with a significant participation of non-residents. Serbia's dinar-denominated bonds were included in renowned J.P. Morgan GBI-EM family of indices as of 30 June 2021. Dinar cash loans to households Eur-indexed investment loans to enterprises Eur-indexed housing loans to households * From September 2010 to December 2014, "Other loans" of the household sector included cash loans and other loans. From January 2015, "Cash loans" are shown separately. · In line with monetary tightening cycle that had a moderate pace last year, interest rates on new dinar loans to the corporates and households stabilized in recent months and slightly declined starting from Q4 2023, up to February 2024. In February interest rates: some - for current assets loans to corporates declined to 8.0% - for cash loans to households equalled to 13.1%. In accordance with the NBS decision to cap housing loan rates, that will remain in force until end-2024, the average rate on housing loans was kept at an unchanged level of 5.0% in February. 15#16öσ o σ NNW 5 20 15 25 30 In Line With the Higher Borrowing Costs, Credit Activity National Bank of Slowed Down in 2023 and in the Beginning of 2024 Credit activity lost pace in the beginning of 2024.... ... due to lower corporate lending in January Chart 27 Bank lending to enterprises and households (y/y rates, constant exchange rate 31 October 2022, in %) -10 -15 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Households ― Enterprises -Total 20 15 10 сл 5 Chart 28 Contributions to y-o-y corporate lending growth (in pp, constant exchange rate 31 October 2022) 0 -5 -10 -15 2013 2014 2015 2016 2017 2018 2019 Investment Export Other Y-o-y lending growth rate, in % 2020 2021 2022 2023 Liquidity and current assets Import Transaction accounts 2024 . In February total domestic loans slightly slowed down to 0.5% y-o-y (from 0.6% y-o-y in January). Lending activity dynamics reflected tightening of the monetary policy of the NBS and the ECB, the maturing of guarantee scheme loans, the and tightened bank lending standards. In February loans to households accelerated y-o-y growth to 2.1% (from 1.5% in January), while corporate loans declined by 1.0% y-o-y (after declining by 0.3% y-o-y in January). Investment loans which rose by 4.4% in 2023, slowed growth to 2.4% y-o-y and made 41.9% of total corporate loans in February. Liquidity and current assets loans declined by 3.3% y-o-y and made 46.2% of total corporate loans in February. •Micro, small and medium-size enterprises loans share in total corporate loans amounted to 59.1% in February. 16#17Relative Stability of Exchange Rate and Credit Rating are Preserved Even in the Period of Crises National Bank of Serbia Downword trend of the risk premium of Serbia Chart 29 Risk premium indicator for euro-denominated debt - EURO EMBIG (basis points, daily values) EURO EMBIG Comp. 800 Hungary Romania 700 North Macedonia Turkey Montenegro Croatia Serbia 600 500 400 300 200 100 0 The stability of the exchange rate is maintained, while FX reserves are at record level Chart 30 Exchange rate developments and NBS transactions in the FX market (EUR/RSD)** NBS transactions in the FX market, monthly (RHS)* EUR/RSD, monthly average (LHS)** (in EUR mn) 140 1.000 135 800 130 125 600 120 400 115 200 110 105 0 100 -200 95 -400 90 85 -600 80 -800 75 -1.000 70 65 -1.200 2009 2011 2013 *net purchase; - net sale. ** EUR 1 in RSD. 2015 2017 2019 2021 2023 8 10 13 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 2019 2020 2021 2022 2023 2024 Due to the reduction in global uncertainty and favorable domestic macroeconomic prospects, Serbia's risk premium decreased in 2023, and its decline continued in 2024 - for debt in euro decreased by 23 bp in the first three months of 2024, while for debt in dollars it decrased by 20 bp. Fitch (in February 2024) confirmed Serbia credit rating at BB+, with a stable outlook. Moody's has affirmed Serbia's Ba2 ratings with stable outlook (September 2023). S&P rating agency (in April 2024) confirmed Serbia's credit rating at BB+ level but increased the outlook from stable to positive. • As factors that determine the positive outlook, the agencies point out: sound medium-term growth prospects, FDI inflow, credible monetary policy, economic resilience to a challenging external environment, stable public finance, and structural reform progress. •The dinar gained 0.1% against the euro in 2023, while in 2024 dinar remained unchanged against the euro. Appreciation pressures reflect favourable BoP developments, high purchases of foreign cash and inflows from payment card operations. • • The net FX purchases in the IFEM amounted to EUR 3.94 bn in 2023, while in three months of 2024 the NBS net bought EUR 320 mn. FX reserves amounted to EUR 24.9 bn in end-March, which is close to their record high, and are well above the standards for determining their adequacy. 17#18Since the Adoption of the Strategy, Significant Progress Has Been Made in the Field of Dinarization Households are predominantly indebted in dinars and dinar savings records maximum level National Bank of Serbia Macroeconomic stability dinarisation process contributing Chart 31 Dinarisation of the corporate and household sector receivables and deposits, and dinar share of public debt to Chart 32 Dinarisation of corporate and household sector (in %) 50 NNW w A A 20 30 25 40 35 45 42.3 (outstanding amounts, in %) Corporate sector deposits 60 Corporate and household 40 sector receivables 20 35.0 22.3 Household sector receivables 15 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Corporate and household sector receivables, outstanding amounts Corporate and household sector deposits, outstanding amounts Dinar share of public debt 2023 2024 2012 Corporate sector receivables Household sector deposits Corporate and household sector deposits February 2024 NBS stimulates the dinarisation process by delivering low and stable inflation in medium-term, preserving relative exchange rate stability and using other measures to stimulate dinar source of finance. •The Government contributes to dinarisation through tax policy, by developing the dinar securities market - dinar debt share rose from 2.5% in 2008 to 22.3% in February 2024. • Dinarisation of corporate and household sector deposits rose by 23.0 pp compared to end-2012 to 42.3% in February 2024. Dinarisation of corporate and household sector claims amounted to 35.0% in February 2024 (up by 7.0 pp compared to end-2012). . Over the past years, dinarisation of household receivables had a firm upward trend as a result of NBS measures aimed to support dinarisation an upsurge from 35.1% (2012) to 54.3% (February 2024). - Dinar savings of households (residents) recorded double- digit annual growth in period 2018-2021, while its temporary reduction in the beginning of 2022 was the consequence of growing uncertainty caused by the escalation of geopolitical tensions at the international level. During 2023 it has increased by 43.2%, while in first three months of 2024, dinar savings grew by RSD 13.7 bn, to RSD 151.6 bn end-March. 18#19National Bank of Serbia Traditional Banking Mostly Financed by Domestic Deposits Adequate structure of banking sector assets Chart 33 Structure of banking sector assets (RSD bn) Improving the quality of the banking sector assets Chart 34 Asset quality - Non-performing loans (NPL) (RSD bn) 7,000 Cash and assets with central bank Securities 6,000 Loans Other 5,000 Total 4,000 3,000 2,000 1,000 500 400 300 200 100 Finance and insurance sector Public non financial sector Corporate sector Entrepreneurial sector General government sector Household sector Foreign persons sector Registered agricultural producers Other legal entities sector Total . • 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 2015 2016 2017 Source: NBS 2018 2019 2020 2021 2022 2023 Risk aversion during the crisis led to intensified banks' investments in securities (predominantly low-risk government securities), the share of which stabilized since 2015 and amounts 12.4% of the total net banking sector assets at the end of February 2024. Stability of retail and corporate deposits in funding mix is present, with share in total liabilities of 45% and 32%, respectively at the end of February 2024. Despite high loan portfolio euroization, currency matching of assets and liabilities is present, with net open position of 1.7% of regulatory capital at end of February 2024. 0 2017 2018 2019 2020 2022 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 2015 2016 2021 2023 Source: NBS • • Successful implementation of NPLs resolution activities, led to a record low level of NPLs. The amounts of NPL continue to stand still and are well below its pre-crisis level. The main channels for the NPLs reduction were repayments, write-offs, and transfer (sale) to third parties. At the end of February 2024, the largest portion of total NPLs related to the household sector (54.0%) and corporate sector (32.0%). 19#2025 25 National Bank of Serbia Conservative Framework Contributed to the Banking Sector Resilience to Shocks High banking sector capitalisation as a result of strong prudential measures Chart 35 Capitalization of the Serbian banking sector (%) Serbian banking sector is highly liquid Chart 36 Liquidity indicators of the Serbian banking sector 21.38 3.00 19.67 2.75 20 20 19.62 2.50 2.25 1551 2.00 1.75 1.50 10 1.25 1.00 0.75 5 0.50 0.25 0 0.00 2015 2016 2017 2018 2019 2020 2021 2022 2023 2020 ■Total capital ratio Source: NBS Tier 1 to RWA ■CET1 ratio 2021 2022 Liqudity indicator (reg. min 1.0) Source: NBS Narrow liquidity indicator (reg. min 0.7) LCR (reg. min 100%) 2023 2024 (Feb) 2.70 202% 1.82 • . Banks possess significant capital reserves, which enable them to successfully deal with credit risk even in the case of worst-case stress scenario. In addition to the high level, the capitalization of the banking sector is characterized by a good structure, with CET1 around 92% of total capital. • The high solvency of the banking sector is also indicated by the leverage ratio, introduced in regulatory framework of the Republic of Serbia with Basel III implementation, which at the end of December 2023 amounted to 10.3%. • Liquidity ratios are constantly at levels significantly higher than the regulatory minimum. . • Liquid assets account for around 45.4% of the total assets of the banking sector in February 2024. • The loan to deposit ratio that at the end of February 2024 amounted 74.7%, indicates stability of funding and in general the liquidity of the banking sector. 20#21National Bank of Serbia Structural slides 21 21#22Improved Structural Competitiveness Provided Additional National Bank of Serbia Boost to Overall Macroeconomic Performance Chart 37 Indicators on business regulation, Doing Business (rank, lower value means rank improvement) Chart 38 Global competitiveness indicators, WEF (rank, lower value means rank improvement) Institutions 200 Overall ranking Infrastructure 150 Macroeconomic Inovations 100 enviornment 50 Health Overall rank 200 Resolving insolvency Starting a business 150 100 Enforcing contracts 50 Dealing with construction permits Business dynamics Trading across borders Getting electricity Paying taxes Registering property Protecting minority/ Getting credit investors Source: World bank, Doing Business Report. Market size Technological competencial market development Skills Commodity market efficiency Labour market efficiency -2012 2019 2012 2020 Source: World Economic Forum. Key reform areas in the previous period: Construction sector; Labor market; Tax administration; Financial sector; Contract enforcement and resolving insolvency. 22 22#23National Bank of Serbia Regulatory Assumptions were Created for Numerous Repayment Reliefs 1. Decision on temporary measures for banks related to housing loans to natural persons (until the end of 2024) For housing loans approved until the Decision came into force: for the first housing loan, with variable rate, up to EUR 200,000 gross amount, nominal part of interest rate is capped at 4.08%, that is, nominal part of interest rate from original repayment plan if the loan is approved after 31 July 2022. ✓ For housing loans approved since the measure came into force: for loans with variable interest rate, bank margin is capped at 1.1%, and loans with fixed interest rate are capped via limit to nominal part of interest rate at 5.03%. ✓ For all housing loans: early repayment enabled without penalties 2. Reliefs for first time home buyers (permanent measure) ✓ The bank may approve loan in amount of up to 90% value of mortgaged real estate, with lower weighted risk of such exposures, which encourages banks to approve loans with lower client participation 3. Relief for clients of cash, consumer and other non-purpose loans ✓ Facilitated simplified approval of consumer loans up to 90.000 RSD (measure is extended until the end of 2024) ✓ Enabled one restructuring of cash, consumer and other non-purpose loans for natural person without affecting bank capital (adopted in December 2022 as permanent measure) 4. Decision on a temporary measure related to the calculation of the bank's capital ✓ From March 2024, the banks may opt not to deduct 50% (25% from 30 September 2024) of unrealized losses on government securities issued by the Republic of Serbia, valued at fair value through other comprehensive income, from CET-1 capital (this measure is to be phased-out by 31 December 2024 with gradually decreasing the percentage of deduction) 23#24• -5% -15% -25% 2014 15% 5% National Bank of Serbia Successful Implementation of Measures and Sustainability of Achieved Results - NPL Indicator Chart 39 NPL Ratio (%) 25% 25% 2015 NPL strategy 2016 2017 accounting write-off 2018 program for NPL 2019 I monthly change of NPL ratio (%, l.h.s.) NPL ratio (r.h.s.) 2020 repayment moratorium I repayment moratorium II 2021 relief in repayment 2022 agriculture reprogram 2023 20% 15% TY. 10% 5% 0% • • Source: NBS The decrease in NPL ratio by 20.18 p. p., from inherited-post-crisis period record levels (23.18%; May 2015) to as low as 3.00% (March 2023), is the result of a systematic approach to problem solving, timely implementation of adequate measures and sustainability of achieved results. The most prominent implemented regulations in terms of results are: housing loans relief 2024 Decision on accounting write-off of the bank's balance sheet assets (Official Gazette of RS 77/2017; in force since September 2017; abb. accounting write-off) • Strategy for resolving problem loans (for the period 2015-2018; Government session on August 13, 2015; abb. NPL strategy) and its successor Program for resolving problem loans (for the period 2018-2020; Government session on December 27, 2018; abb. program for NPL) 24#25National Bank of Serbia - Capital Buffers – Implementation of Macroprudential Policy Measures • . • Capital buffers increase the resilience of banks to losses, reduce excessive or underestimated exposures and restrict the distribution of capital. These macroprudential instruments should limit systemic risks in the financial system, which can be cyclical (capital conservation buffer and countercyclical capital buffer) or structural (capital buffer for a systemically important bank and systemic risk buffer). The following capital buffers are used in the Republic of Serbia: - - - - Capital conservation buffer; Countercyclical capital buffer, in order to mitigate and prevent excessive credit growth; Capital buffer for a systemically important bank, with the objective to limit the systemic impact of misaligned incentives in terms of favoring certain financial institutions; Systemic risk buffer, introduced to limit the risk of euroisation, one of the key structural non-cyclical systemic risks to the stability of the financial system of the Republic of Serbia. The capital conservation buffers may consist only of Common Equity Tier 1 capital equal to 2.5% risk- weighted assets for capital conservation buffer, 1% or 2% risk-weighted assets for capital buffer for systemically important banks, depending on the systemic importance level and 3% of total foreign currency and foreign currency-indexed placements of a bank approved to corporates and households in the Republic of Serbia for systemic risk buffer. Countercyclical buffer rate is set at 0%. Capital buffers apply as of 30 June 2017. 25#26National Bank of Serbia Serbia's Economic Outlook *NBS projection Serbia Real GDP, y-o-y % 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024* 2025* -0,7 2,9 -1,6 1,8 3,3 2,1 4,5 4,3 -0,9 7,7 2,5 2,5 3,5 4,5 Private consumption, in % -1,7 -1,7 -0,1 -0,6 1,9 2,2 3,1 3,7 -1,9 7,8 4,0 0,8 3,0 3,3 Private investment, 1 in % 14,9 -8,4 -5,2 5,2 2,1 9,5 12,3 13,9 -5,5 10,2 4,0 3,3 5,6 6,1 Government consumption, in % 0,4 -2,1 0,9 -3,7 0,0 2,9 3,8 2,0 2,9 4,3 0,4 0,3 1,5 2,0 Government investment, in % 7,6 -35,8 13,6 14,0 21,2 -6,3 45,3 30,7 11,0 32,4 -3,4 5,4 7,0 7,5 Exports, in % 2,9 18,0 4,3 9,3 12,0 8,2 7,5 7,7 -4,2 20,5 16,6 2,4 4,2 4,8 Imports, in % -0,6 6,5 5,1 4,0 7,0 11,1 10,8 10,7 -3,6 18,3 16,1 -1,1 7,1 4,9 Unemployment Rate, in %4 25,9 24,0 20,6 18,9 16,4 14,5 13,7 11,2 9,7 11,1 9,5 9,5 Nominal Wages, in %5 9,0 6,2 1,4 -0,2 3,7 3,9 6,5 10,6 9,4 9,6 13,8 14,8 15,8 Money Supply (M3), in % 9,4 4,6 7,6 6,6 11,6 3,6 14,5 8,4 18,1 13,3 6,9 12,4 CPI,² in % 7,3 7,9 2,1 1,4 1,1 3,2 2,0 1,9 1,6 4,0 11,9 12,1 4,5 3,0 National Bank of Serbia Key Policy Rate,³ in % 11,25 9.5 8,00 4,50 4,00 3,50 3,00 2,25 1,00 1,00 5,00 6,50 6,50 Current Account Deficit BPM-6 (% of GDP) -10,9 -5,8 -5,6 -3,5 -2,9 -5,2 -4,8 -6,9 -4,1 -4,2 -6,9 -2,6 -4,0 -4,8 1 Excluding the effect of change in inventories 2 Average inflation in corresponding year. 3 Latest data 4 Labour Force Survey. Data are revised according to the LFS methodology from 2021. From 2021 data are aligned with the Census 2022. Data for 2023 is average of four quarters 2023 data. Since 2018, nominal wages published according to the new methodology. Data for 2024 is data for the January 2024. 5 26 26#27National Bank of Serbia Banking Sector Overview February Serbia 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Number of banks' 29 30 31 29 27 26 26 23 21 20 20 Employees 25,106 24,257 23,847 23,055 22,830 23,087 22,823 22,550 21,995 21,899 21,938 Branches 1,787 1,730 1,719 1,627 1,598 1,598 1,576 1,515 1,371 1,341 1,344 HHI Assets 794 796 813 813 779 800 786 867 936 986 980 Share of foreign banks, % 74.5 76.1 76.7 76.9 75.4 75.7 86.0 87.0 83.6 76.9 76.5 Assets (net), EUR m 24,545 25,059 26,253 28,440 31,931 34,731 39,177 42,943 46,525 50,705 50,817 Capital, EUR m 5,074 5,090 5,122 5,631 5,725 6,002 6,098 6,121 6,138 6,981 7,226 Loans (gross), EUR m 16,170 16,175 16,442 17,565 19,406 21,111 23,439 25,939 28,142 28,534 28,874 Of which gross NPL, EUR m 3,483 3,491 2,800 1,730 1,105 862 871 927 848 916 924 Gross NPL ratio, % 21.5 21.6 17.0 9.8 5.7 4.1 3.7 3.6 3.0 3.2 3.2 IFRS impairment of NPLs 54.9 62.3 67.8 58.1 60.2 61.5 59.0 56.3 58.1 60.5 60.9 Deposits, EUR m 15,637 16,523 18,242 19,926 23,115 25,197 28,984 32,483 35,506 38,389 38,337 Pretax Income, EUR m 29.0 80.0 172.0 579.8 595.8 543.5 357.5 419.7 748.1 1,179.1 248.5 CAR², % 20.0 20.9 21.8 22.6 22.3 23.4 22.4 20.8 20.2 21.4 21.4 CET1 ratio % 2,3 21.5 21.1 22.3 21.6 19.7 18.8 19.6 19.6 2,3 Leverage % 11.1 12.6 13.6 12.4 11.1 10.3 10.3 10.3 Liquidity ratio 2.2 2.1 2.1 2.0 2.0 2.2 2.2 2.1 2.2 2.5 2.7 Liquidity coverage ratio³, % 239.5 213.3 199.3 211.8 199.8 177.5 193.7 202.0 FX ratio, % 3.9 4.4 2.7 2.9 4.5 1.5 1.0 1.0 1.8 1.2 1.7 ROA, % 0.1 0.3 0.7 2.1 2.1 1.7 1.1 1.1 1.9 2.4 2.9 ROE, % 0.6 1.6 3.4 10.6 11.3 9.8 6.5 7.5 13.8 18.0 21.0 Net interest margin*, % 4.3 4.3 3.9 3.7 3.6 3.3 3.0 2.7 2.9 4.0 4.2 1 The NBS revoked operating licence from Univerzal banka Beograd on 31 January 2014 and from Jugobank Jugbank Kosovska Mitrovica on 2 April 2018. The NBS issued operating licence to Mirabank on 16 December 2014 and the bank started its operations in April 2015. The NBS issued operating licence to Bank of China Srbija on 20 December 2016. The Findomestic bank was merged to Direktna bank on 1 July, 2017. Jubanka ad Beograd was merged to AIK bank on 23 Decembar, 2017. Pireaus bank was merged to Direktna bank on 26 October, 2018. Vojvođanska bank was merged to OTP bank 25. April, 2019 (consolidated under Vojvođanska brand). OTP bank was merged into Vojvođanska banka 29. April, 2021 (consolidated under OTP brand). mts bank was merged to Banka Poštanska Štedionica on 30 Jun 2021. Direktna bank was merged into Eurobank Direktna on 10 December 2021. NLB bank was merged into Komercijalna bank on 29 April 2022 under the NLB - Komercijalna banka name. Naša AIK bank was merged into AIK bank on 01 December 2022. RBA bank was merged into Raiffeisen bank on 29 April 2023. 2 The last available data of 31.12.2023 3 Introduced by the implementation of Basel 3 and monitored from 30 June 2017 4 Net interest margin to average total asset 27 27