Serbia as investment destination, presentation of the Forum in Berlin (30.06.2014)

Republic of Serbia Investor Presentation June 2014

Republic of Serbia delegation in Berlin – 30th June

Mr. Aleksandar Vucic Prime Minister

Ms. Kori Udovicki Deputy Prime Minister and Minister of Public Administration and Local Self-Government

Mr. Lazar Krstic Minister of Finance

Mr. Dusan Vujovic Minister of Economy

Mr. Zeljko Sertic President of Chamber of Commerce and Industry of Serbia

1

Serbia at a Glance

Key Facts

Form of Government: Parliamentary Republic

Territory: 88,361 sq. km

Capital: Belgrade

Population: 7.1 million(1,2)

GDP per capita: EUR 4,453(1,2)

Nominal GDP: EUR 31.98 billion(1,2)

Currency: Serbian Dinar (RSD)

Credit ratings: S&P: BB-/Negative

Fitch: B+/Stable

Moody’s: B1/Stable

Vilnius

EU Non-EU

SERBIA

Nis

Kragujevac

Novi Sad

Belgrade

1 National Statistics Office (Stat office), 2 Excluding Kosovo and Metohija

EU membership application

Stabilisation and Association Agreement with the EU

Response to the European Commission’s Questionnaire

2008 2006 2009 2011 2008

2009

2011

Mar 2012

EU candidate status awarded

July 2012

Formation of the Government after general elections held in May

Jan 2014

Serbia officially started EU accession process

Mar 2014

Early parliamentary elections held

Apr 2014

The new Government led by PM Vucic in place

Recent Milestones and Progress to EU accession

2

For internal use only

Agenda of the New Government

Business Environment and Foreign Direct Investments

Macroeconomic Background

New Government agenda – reforms, growth, FDIs

New legislation being introduced: Labor,

Bankruptcy, Privatization, Construction

Comprehensive fight

against corruption &

grey economy

On-going EU accession

negotiations, full membership expected

in 2020

Improvement of the business climate as one of key pillars

Economic development, fiscal

consolidation

Generous incentives, focus on additional

jobs

3

Work in progress agenda “Serbian Government officials aim to provide bureaucracy free and corruption free first class service to foreign investors”

• New Labor Law draft ready for approval in summer ‘14 • Hiring & firing made easy Employer friendly Labor Law

• 65-75% employers tax/contribution reliefs for all newly employed workers in the next two years Reduced salary load for

employers for new jobs

• High on the Government’s agenda • Telekom Srbija, National Lottery, Mining and Smelting

Complex Bor, Electric Power Industry, Belgrade Airport

Completion of the privatization process

• Rightsizing , 10% salary reduction, pension system reform • Fast-track procedures and timely subsidies’ payments to

investors, led and overseen by Prime Minister directly

Public sector reform and cutting of red tape

• Strategic investment sectors are automotive, agricultural, IT, pharmaceutical, textile, heavy industrials, energy & mining

• Incentives that you require to start doing business in Serbia

Investor input is mission critical to our joint success

4

A roadmap to fundamental success “Serbia aspires to drive the Balkans forward as a champion in reforms and a reliable investment partner, boosting global confidence towards the region.”

• Optimization of resources and efficient spending • Growth across the board • Sector-focused industrial development approach

• Corruption free and bureaucracy free environment • Transparency and service excellence

What does Serbia have to do

• Payments to investors as priority vs. general public spending • Cut wage bill in the public sector and review pension spending • Create framework to clear the backlog in privatization

• Update bankruptcy procedure to enable divestitures • Optimize local government financing

• Simplify tax system and rebuild tax administration • Cut time for construction permits issuance

Immediate deliverables by the

Government

• European Union member by 2020 • Seamless infrastructure and unlocked potential in strategic sectors • Partner of choice for foreign investors and leader in CEE

Long-term aspiration

5


Agenda of the New Government



Recovery of FDI inflows is expected According to the European Investment Monitor 2013, in 2012 Serbia was ranked 6th in Europe by jobs created and 11th by number of projects

1,332

4,291

3,015

2,530

1,869

1,172

2,289 2,020

1,087

-

1,000

2,000

3,000

4,000

5,000

2005 2006 2007 2008 2009 2010 2011 2012 2013

FDIs (EUR m)

FDI stock since 2001 is nearly EUR 21bn Top 20 investors in Serbia

Source: Serbia Investment and Export Promotion Agency (SIEPA)

Source: SIEPA

860

1,827

232

761

1,000

3.1% 5.8%

0.8%

2.4% 3.1%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

-

400

800

1,200

1,600

2,000

2010 2011 2012 2013 2014*

Net FDIs (EUR m) Net FDIs as % of GDP

Source: NBS * NBS’ forecast

Net Foreign Direct Investments – EUR 761m in 2013

Company Country of

origin Activity

Investment (EUR m)

Telenor Norway Telecommunications 1,602 Banca Intesa Italy Finance 1,355 Gazprom Neft Russia Oil and Gas 947 Fiat Automobili Serbia Italy Automotive 940 Delhaize Belgium Retail trade 933 Philip Morris USA Tobacco 733 Stada Germany Pharmacy 650 Moblkom - VIP Austria Telecommunications 633

Agrokor Croatia Food, Drink and Agriculture

614

Raiffeisen Bank Austria Finance 500 Merkator Slovenia Retail trade 500

Salford Investment Fund UK Food, Drink and Agriculture

500

Eurobank EFG Greece Finance 500

StarBev USA Food, Drink and Agriculture

487

CEE/shopping centers Israel Real estate 470 National Bank of Greece Greece Finance 425 Credit Agricole France Finance 264

Fondiaria SAI Italy Insurance and pensions

220

Lukoil Russia Oil and Gas 210 British American Tobacco

UK Tobacco 200

6

EU countries dominate the FDI environment, with USA and Russia in top 10

5.0%

5.1%

5.6%

7.0%

7.7%

8.2%

9.3%

12.6%

15.1%

France

Slovenia

Russia

Germany

Norway

USA

Greece

Austria

Italy

FDI Ranking by Value FDI Ranking by No of Projects

2.5%

4.5%

4.7%

5.0%

5.6%

10.0%

12.0%

13.0%

17.0%

Croatia

Israel

Greece

USA

France

Slovenia

Austria

Germany

Italy

FDI Ranking of Sectors by Value FDI Ranking of Sectors by No of Projects

3.6%

3.9%

4.5%

5.0%

5.8%

6.1%

7.2%

7.8%

10.6%

15.6%

Metallurgy

Retail

Financial

Real estate

Electrical & electronics

Machinery & equipment

Construction

Textile & clothing

Food, beverage & agriculture

Automotive industry

3.7%

4.0%

5.0%

5.7%

7.4%

8.3%

9.4%

10.8%

13.2%

19.7%

Pharmaceutical

Construction

Tobacco

Real estate

Oil & Gas

Automotive industry

Retail

Telecommunications

Food, beverage & agriculture

Financial

Source: SIEPA Source: SIEPA


Serbian cities always show up on Financial Times’ list of the Most Cost Effective Cities of the Future

7

Low operating costs

Value Added Tax Average Gross Monthly Salary (EUR)

Corporate Profit Tax Salary Tax Rate

23%

20%

19%

19%

19%

16%

15%

10%

Slovakia

Croatia

Hungary

Poland

Czech Republic

Romania

Serbia

Bulgaria

12-40%

18-32%

19-25%

16%

16%

15%

10%

10%

Croatia

Poland

Slovakia

Hungary

Romania

Czech Republic

Serbia

Bulgaria

27%

25%

24%

23%

21%

20%

20%

20%

Hungary

Croatia

Romania

Poland

Czech Republic

Slovakia

Bulgaria

Serbia

1043

972

870

824

780

537

490

389

Croatia

Czech Republic

Poland

Slovakia

Hungary

Serbia

Romania

Bulgaria



Among 37 European countries, Serbia has the lowest cost of electricity, gas, other fuels, postal services, landline telephony, fax service, and maintenance of motor vehicles costs

8

Free Trade Agreements – 0% imports duties, 0% exports duties

European Union

EFTA

CEFTA Turkey Belarus

Russia Kazakhstan

Source: SIEPA

Serbia success story: Easy access to new markets, Skilled and highly educated labor force

9

Cost effectiveness across the board One of the first decisions of the new Government was the introduction of employer tax relief for all newly employed workers

• Around 47,000 university and college graduates, and 75,000 high school graduates every year.

• Top quality technical education at both high school and university level.

• Over 100,000 registered unemployed hold either university or college degree.

• Strong command of the English language. Serbia was ranked 4th out of 76 countries in Business English proficiency by BEI*.

• Young graduates speak other languages, primarily French, Italian, German, and Russian.

TIPYCAL MONTHLY SALARIES NET Minimal salary € 171

Average blue collar salary € 300 Average white collar € 550

Working week 40h Overtime 8h/week, 4h/day

No. of shifts max 3 UTILITIES

Electricity costs € 0.06/kwh Gas cost € 0.42/m3

Water cost € 0.2/m3 BUILDING

Average industrial facility cost € 3-5/sqm Average building cost € 400/sqm

Commitment to education

Reduced salary load

• New employment entitles employers to a sizable relief of taxes and contributions paid on net salary from the moment of employment until June 30, 2016. • This reduces the total salary load to very competitive 20%.

• 65% reduction 1-9 new jobs

• 70% reduction

10-99 new jobs

• 75 % reduction 100+ new jobs

Corporate Profit Tax

10-year tax holiday for investments over €9 million and 100 new jobs

Tax credit 33% of the tax debt, total credit value 20% of the investment

*Business English Index, Source: Global English Corporation, 2012

10

Financial Incentives for Investors Production vs. service oriented sectors as a pillar of growth. Investment friendly municipalities and sound investment opportunities are available

€1m

€50m

€100m

Invested amount Incentives

Additional 17% of the invested amount exceeding €100m

Additional 25% of the invested amount exceeding €50m

Up to 50%* of the invested amount/sum of gross salaries over 2-year period

Conditions - For manufacturing: 100**+ new jobs - For services: 20+ jobs

*For SMEs, the approved incentives may be increased up to 70% or up to 60% of the total investment amount. **Minimum investment for devastated regions and for the 4th group of local administration is EUR 0.5 million and 50 new full-time jobs created.

Financial incentives until 2013 Standard scale projects

Cash grants;

Projects evaluated to a set of criteria;

3 year deadline for investment project completion. Followed by 3 year deadline for contractual number of employees;

Payments follow project life cycle;

Each payment backed by a bank guarantee.

Total number of subsidized projects 238

Total value of the projects €1,432.9

Total amount of funding approved €285.6

New jobs created 47,161

Average incentive per job created €4,620

Ratio of domestic companies to foreign

129/109

Source: SIEPA

11

Free Trade Zones – success stories

There are currently eleven Free Trade Zones operating all over Serbia

Free Zone Benefits

Manufactures in some of the Serbian Free Zones

Exemption from payment of customs duties for goods intended for carrying out activities and construction of facilities in the free zone Free movement of capital, profits and dividends Efficient administration - one stop shop Users of free zones who perform production activities in the zone are exempted from paying VAT on energy consumption Exemption from some taxes for foreign direct investments, exemption from certain local fees and taxes Exemption from payment of VAT on trade of goods and services within the free zone VAT exemption on entry of goods into the free zone, as well as on transport and other services which are directly associated with that entry of goods

• Free zone “Pirot”: - Michelin – Tigar Tyres, production of car tyres - Novadis, production of sport fishing accessories

• Free zone “Subotica”: - Loher Elektro (SIEMENS), wind power generators - Dunkermotoren GmbH, production of motors for blinds - Norma Group, production for industrial applications and distribution

• Free zone “Novi Sad”: - NIS Gazprom Neft - part of Oil Refinery Novi Sad - Belarus-Agropanonka, assembly and storage of tractors

• Free zone “ Kragujevac”: - FIAT Automobiles Serbia, automobile industry - Subcontractors of FIAT Automobiles: Magneti Marelli, Sigit, H.T. & L.Fitting Serbia, Johnson Controls Automotive etc.

12





Back on the path of recovery

28.0

31.5 29.6

32.0 32.5

1.0%

1.6%

-1.5%

2.5%

1.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

20

24

28

32

36

40

2010 2011 2012 2013 2014p

GDP nominal (EUR bn) Real GDP growth rate

After losing pace in 2012 Serbian economy picked up 2.5% in 2013. Fiscal consolidation measures will slow down growth in 2014 but set ground for sustainable progress

Real GDP growth Structure of the 2013 GDP

21%

10%

3% 67%

Industry

Agriculture

Construction

Services

Source: Stat Office, MoF Source: Stat Office

Source: Stat Office, National Bank of Serbia (NBS)

Inflation – End of Period

10.3%

7.0%

12.2%

2.2% 2.1%

2010 2011 2012 2013 Apr-14

Source: NBS

33%

43%

49% 48% 45%

52%

59% 59% 60%

71%

20%

30%

40%

50%

60%

70%

80%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Exports Coverage of Imports (last 10 years)

13

External imbalances significantly reduced

Current Account Deficit narrowed 50% in 2013 due to boosting exports

External trade deficit decreased by 25% in 2013

7.4 8.4

8.8 11.0

12.6 14.3 14.8 15.5

-5.2 -5.8 -5.9 -4.5

-6

-2

2

6

10

14

2010 2011 2012 2013

Exports (EUR bn) Imports (EUR bn) Trade balance (EUR bn)

-50%

Source: Stat Office

Source: MoF

3.4% 2.8%

9.4%

2.0%

3.1% 5.8%

0.8%

2.4%

-6.7% -9.1% -10.7%

-5.0%

2010 2011 2012 2013

Financial Account excl. FDIs Net FDIs Current Account

Balance of Payment (% of GDP)

100.0

120.0

140.0

160.0

180.0

200.0

2010 2011 2012 2013

Exports Imports External trade

External trade Indices (2009=100)

7.2 8.8

10.5 12.2 12.2 4.9

6.0 7.2

7.9 8.4 12.1 14.8

17.7 20.1 20.6 44.5%

48.2%

60.0% 62.8% 62.9%

0%

10%

20%

30%

40%

50%

60%

0

5

10

15

20

25

30

2010 2011 2012 2013 Apr-14

External Debt Domestic Debt

Public Debt Stock (EUR bn) Public debt (% of GDP)

Source: Stat Office

Public Debt has been increasing since 2008

14

EU as the major foreign trade partner Total exports of goods in 2013 jumped 26% reaching EUR 11 billion, while imports recorded modest growth of 5% totalling EUR 15.5bn

Major exports markets in 2013 – EU 62.8% Major exports divisions in 2013

16.3%

11.9%

8.1%

7.3% 5.7%

5.4% 3.9%

3.4%

3.3%

2.8%

32.0%

Italy

Germany

Bosnia and Herzegovina

Russian Federation

Montenegro

Romania

Macedonia

USA

Slovenia

Croatia

Other

Major imports divisions in 2013 Major imports markets in 2013 – EU 61.8%

17.8%

11.4%

7.4%

6.9%

6.8% 6.0%

5.8%

37.9%

Motor vehicles, trailers and semi-trailers

Food products

Basic metals

Rubber and plastic products

Electrical equipment

Chemicals and chemical products

Crop and animal production

Other

Source: Stat Office Source: Stat Office

Source: Stat Office

11.5%

10.9%

9.2% 7.3%

4.9%

4.7%

4.3%

3.1%

2.9%

2.8%

38.2% Italy

Germany

Russian Federation

China

Hungary

Poland

Kazakhstan

Austria

France

Romania

Other

12.8%

10.9%

10.0%

6.1%

5.8%

4.6%

4.5%

45.4%

Motor vehicles, trailers and semi-trailers

Chemicals and chemical products

Crude petroleum and natural gases

Basic metals

Machinery and equipment

Computer, electronic and optical products

Electrical equipment

Other

Source: Stat Office

15

Stable and well capitalised banking sector

Key Policy Rate has been cautiously decreased since Apr 2013

Level of Non-Performing Loans remain high but still fully covered by regulatory provisions

Exchange rate EUR/RSD and USD/RSD

9.00%

7.00%

8.00%

9.00%

10.00%

11.00%

12.00%

13.00%

Jan-

10

Apr

-10

Jul-

10

Oct

-10

Jan-

11

Apr

-11

Jul-

11

Oct

-11

Jan-

12

Apr

-12

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

115.81

110

112

114

116

118

EUR/RSD USD/RSD

84.13

80 82 84 86 88 90

Source: NBS

Source: NBS

16.9% 19.0% 18.6%

21.4%

19.9% 19.1% 19.9% 20.9%

134% 121% 121% 114%

0%

50%

100%

8.0%

12.0%

16.0%

20.0%

24.0%

28.0%

32.0%

2010 2011 2012 2013

NPLs CAR

Regulatory requirements for CAR Loan loss provisions/NPL

Source: NBS

Capital Adequacy Ratio (CAR) remains high above the regulatory minimum

18.5%

6.8%

23.5%

15.5%

14.9%

10.2%

10.7% State

Private

Italy

Austria

Greece

France

Other

Well diversified ownership structure of the banking sector

16