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National Bank of Serbia

Introductory speech at the presentation of the
Inflation Report - August 2024

Dr Jorgovanka Tabakovié, Governor

Belgrade, 14 August 2024

Ladies and gentlemen, esteemed members of the press, dear colleagues,

Welcome to the presentation of the August Inflation Report. As usual, at today's
conference we will present current economic developments, our new macroeconomic

projections and monetary policy decisions adopted since the last Report.

At the very beginning, I wish to emphasise that since the previous Report, first and
foremost, inflation returned within the target bounds and inflation expectations fell
further, enabling us to embark on monetary policy easing. This means that we have
won our battle against inflation and that, going ahead, it will move at levels consistent
with our target. In addition, as GDP growth in the first half of the year turned out to be
faster than expected, we increased the economic growth projection for this year to
3.8%, anticipating further growth acceleration to 4-5% in the next two years. The
recorded economic growth and preserved financial stability, coupled with the decline
in the share of NPLs in total loans to below 3%, confirm that we managed to provide
both medium-term price stability and a soft landing with our appropriate monetary
policy which was tightened in the previous period continuously, but at a gradual and

moderate pace.

I will give more details on all these points further on.

KKK

Let me start with inflation, which is our main goal and a measure of success. As
announced at the last conference, but also almost a year and a half back, inflation
returned within the target tolerance band of 341.5% this May and continued to move
within the band for another two months. Following its decline to 3.8% y-o-y in June,
inflation rose to 4.3% in July owing to a series of one-off price hikes (bread, package
delivery, tolls) and the increase in the global prices of some primary agricultural
commodities which pushed up the prices of some of the products in Serbia too (here I
have to point out coffee and cocoa). As the said hikes remain in the calculation of the
y-o-y inflation rate for a year and as the growth in domestic demand since the
beginning of the year turned out to be stronger than expected, we now project that
inflation will decline at a somewhat slower pace in the coming period. Under the new
central projection, inflation will continue to move within the target band in the next two

years, which is our projection horizon. It will first slow down to around 4% at the end

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of this year and gradually approach the 3% midpoint in the course of 2025. As in
most other countries, core inflation has been higher than headline inflation since May
and has stabilised at around 5% y-o-y in recent months. Nevertheless, according to
our projection, core inflation too will slow down until the end of the year and approach

headline inflation next year.

Chart 1 August 2023 inflation projection and its outcome Chart 2 Headline, core and trimmed mean inflation
(y-o-y rates, in %) (y-0-y rates, in %)
18 18 -- Consumer prices
Core inflation
Trimmed mean (15%)
16 Targeted inflation

===> Target tolerance band

6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6

2021 2022 2023 2024 2025 2010 2012 2014 2016 2018 2020 2022 2024

Source: NBS. Sources: SORS and NBS calculation.

Considering inflation's downward trajectory and its expected profile over the
monetary policy horizon, in June we began and in July continued trimming the key
policy rate by 25 bp each, to 6%. At the August meeting, we kept the key policy rate
on hold, having in mind that the effects of past measures are yet to play out fully.
Here I wish to stress that in the previous months we made monetary policy decisions
with great caution, acknowledging the risks, and that despite the relaxation, the
monetary policy stance is still restrictive which will contribute to keeping inflationary
pressures low in the coming period as well.

Chart 3 cPl movements in selected CESEE countries in the previous year (until July 2024)

y-o-y rates, in %

20
18
16

Hungary Czech Poland Serbia

Romania

78 91011121234567I/7891011212345677 8910112123456 7)7 891011121234567789101121234567
'23 '24 '23 '24 123 '24 23 '24 (23 '24

Sources: Central banks of selected countries. Inflation target == =* Tolerance band === Headline inflation === Core inflation

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Chart 5 Contributions to y-o-y inflation by component
(average y-o-y rates, in pp)

Chart 4 Inflation projection

(y-0-y rates, in %)

18 18
Petroleum products
16 16 =m Administered prices
mums Fruit and vegetables
14 44 mmm Non-food products and services
Food (excl. fruit and vegetables)
12 12 -- Average y-o-y inflation in quarter (in %)
10 10
8 8
6 6
4 4
2 2
0 0 ------
2 2
6 9 12 o3 6 9 12 on 6 9 12 os 6 9 12 oe 6 iv ot ot mW vot ot it wot ot i weotow
2022 2023 2024 2025
Source: NBS. Source: NBS.

Inflation expectations are an important factor of the restrictiveness of our monetary
policy and, at the same time, a proof of its high credibility. Short-term expectations of
the financial and corporate sectors have gone considerably down in the last year,
and one-year ahead expectations of the financial sector were lowered to 3.15%,
according to the July survey, almost equalling medium-term expectations which have
been at the target midpoint for quite some time now. The decrease in short-term and

anchored medium-term expectations directly contribute to lower inflation.

Chart 6 Key policy rate and average repo rate Chart 7 Inflation expectations

(y-0-y rates, in %) (y-0-y rates, in %)

8 14

Key policy rate
Lending facilities rate

7 --Average repo rate

= Financial sector, 12 months ahead
-- Corporate sector, 12 months ahead
12 -- Financial sector- Bloomberg, 12 months ahead

--Financial sector, 2 years ahead
-- Corporate sector, 2 years ahead

Deposit facilities rate
6

4/20 7/20 1/21 7/21 1/22 7/22 1/23 7/23 1/24 7/24 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Source: NBS. Sources: Gallup/Ipsos/Ninamedia, Bloomberg and NBS.

The downward path of domestic inflation was also underpinned by the fall in imported
inflation from its end-2022 peak. According to the projections of the relevant
international institutions, euro area inflation will continue to decline, but its pace will
be more gradual than expected, mostly due to a somewhat higher core inflation than

anticipated.

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Chart 8 Revision of the euro area inflation projections for Chart 9 Projection of primary commodity prices
2024 and 2025 (index, 100 = 2015-19 average)
(in %)

New projection for 2024 230

3.0 I = New projection for 2025
Previous projection for 2024 210
os Previous projection for 2025 e
e 190
20 170
150 V4
re ns yy a at
190 I Of errr rete,
1.0 110
90 = Total primary commodities
Energy
05 70 -- Agricultural commodities
Metals and minerals
0.0 50
Headline inflation Core inflation 2019 2020 2021 2022 2023 2024 2025
Source: ECB (June and March 2024). Source: World Bank, Global Economic Prospects. June 2024.

Assuming unfavourable geopolitical developments do not reflect significantly on
global energy and primary commodity prices in the coming period either, the said
factors should ensure medium-term inflation levels which are consistent with our

target.

Due to market expectations of the start of monetary policy accommodation by the
National Bank of Serbia and the European Central Bank, the interest rates on dinar
and euro loans to corporates and households have been on a moderate decline ever
since the end of last year, and the same can be expected going forward in view of
the implemented easing of monetary conditions in both Serbia and the euro area.
Consistent with the easing of credit conditions and standards for dinar loans, the loan
demand of both corporates and households increased, resulting in the acceleration of
total lending activity growth, to 4.7% y-o-y in June, with corporate loans rising by
4.2% and household by 4.9%. Increased dinar lending pushed up the dinarisation of
corporate and household receivables to 36.1% in June. Stepped-up lending also
contributed to the lowering of the NPL share in total loans to the new low of 2.9%,
which was maintained at close to 3% owing to the solid regulatory framework for
banks and carefully combined and synchronised measures of monetary and
macroprudential policy for the entire duration of the multiple crisis.

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Chart 10 Interest rate on new dinar loans Chart 11 Interest rates on neweuro and euro-indexed loans

(monthly average, in %) (weighted average values, p.a., in %)
== Key policy rate
26 Interest rates on new dinar household loans 10 EURIBOR 3M
24 --- Interest rates on new dinar corporate loans .
--=BELIBOR 3M 9 Household loans'
22 --BELIBOR 6M 8 -- Corporate loans*
20 7
18 6
16 5
14 4
12 3
10
2
8
1
6
0
' 1
2 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Sources: European Banking Federation and NBS.
Source: NBS. * Excluding revolving loans, current account overdrafts and credit card debt.

Owing to inflation slowdown, a rise in the real disposable income of households and
corporates and the intensification of the investment cycle, the acceleration of Serbia's
real GDP growth from the second half of last year continued into the first half of this

Chart 12 Corporate and household lending Chart 13 NPL level and share in total loans, gross principle
(y-0-y growth rates, in %, at constant exchange rate, 31 October 2022) (in RSD bn) (in %)
20 500 mmm Household sector 25
= Corporate '=m Corporate sector
45 -- Household Other sectors
= Total 400 == NPL share in total loans (RHS) 20
10
5 300 15
° 200 10
5
100 5
-10
15 t) 0
2010 2011 2013 2014 2016 2017 2019 2020 2022 2023 20122014 2016» 2018 = 2020. 2022_-S June
2024
Source: NBS. Source: NBS.

year, with the real GDP growth amounting to around 4.5% y-o-y. More specifically,
according to the flash estimate of the Statistical Office, GDP growth measured 4.2%
in Q2, driven by services, construction and manufacturing on the production side, and
by higher private consumption and fixed investments on the consumption side. In
quarterly terms and excluding the seasonal effect, GDP is estimated to have grown
0.7% in Q2, the growth being recorded for the seventh quarter in a row. Though
external demand from the euro area is still subdued, it is recovering, as indicated by
the 0.3% GDP growth in each of the first two quarters of the year, which should exert
a positive effect on our exports and manufacturing output.

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Chart 16 GDP growth projection Chart 17 Contributions to real GDP growth
(y-0-y rates, in%) (in pp)

10 12 mmm Change in inventories

Net exports

Government consumption
10 mmm Gross fixed capital formation
mmm Household consumption
--GDP (in %)

8

6

4
omvet tw vet oem vw to wom wero 2017 2018 2019 2020 2021 2022 2023 2024* 2025* 2026"
2022 2023 2024 2025 ;
Sources: SORS and NBS calculation.

Source: NBS. * NBS estimate.

Since GDP growth in the first half of the year exceeded our expectations, we raised
our projection of economic growth for this year to 3.8%, from the 3.5%
projected in May. Similar expectations for economic growth for this year are shared
by other relevant institutions, the International Monetary Fund and Consensus
Economics, which place Serbia's growth among the highest in the CESEE region. In
the next two years we expect to see further economic growth acceleration, to the
range of 4-5%. This will be underpinned by the rollout of investments under the
"Leap into the Future - Serbia EXPO 2027" programme, reduced global inflationary
pressures and more favourable financing conditions reflecting the National Bank of
Serbia's and the European Central Bank's start of monetary policy accommodation.
Growth will be led by domestic demand, with positive contributions coming from all its
components. Private consumption will expand on the back of a continued rise in
employment and wages, primarily in the private sector, but without any major
inflationary effects, because wage growth will also reflect increased productivity. An
important factor of economic growth are fixed investments, which boost the potential
output of our economy and should come close to 25% of GDP in the medium term.
Private investment growth should be propelled by high FDI inflow, higher corporate
profitability from the past years and preserved investment confidence, as well as
reduced global inflationary pressures and more favourable financing conditions.
Investment growth will also be impacted by the implementation of public investments

in transport, energy and utility infrastructure.

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Chart 14 Contributions to y-o-y GDP growth rate, production Chart 15 Contributions to y-o-y GDP growth rate,

side expenditure side

(in pp) (in pp)

5 12 Net exports mms Change in inventories
sms Net taxes =m Government spending '=m Government investment
semen Services 10 I mmm Private investment mmm Household consumption
=== Construction -G0P (in %)

4 I mmm Industry 8

Agriculture
-GDP (in %) 6
3
4
2 2
0
1 2
4
zz
6
8

I I IV I I Ml lV I *
2023 2024

Sources: SORS and NBS calculation.

* NBS estimate.

I
2023
Sources: SORS and NBS.
* NBS estimate.

Trends in the current account of the balance of payments in the year to date were
consistent with our expectations. We thus kept the projection of the current account
deficit share in GDP for this year at around 4%. Having in mind the accelerated
implementation of the investment cycle, this share is anticipated at around 5% of
GDP over the next two years, which in our estimate, as well as that of the
International Monetary Fund, is within the boundaries of external sustainability. As we
expected, in the first six months of the year, goods and services exports were some
4% higher than in the same period of 2023, driven primarily by the growing exports of
manufacturing and mining, as a result of past investment, and of agricultural products
following a good agricultural season last year. Goods and services imports grew
faster in the same period, at around 5% y-o-y, mostly due to higher imports of
equipment and intermediate goods for the investment cycle. Given the outturns in H1
-acurrent account deficit of EUR 1.2 bn or 3.4% of GDP and an FDI inflow of over
EUR 2.3 bn (or EUR 2.8 bn if preliminary July data are included) - we can say that
for a whole decade now, the current account deficit has been fully covered by the
most desirable category of foreign capital inflows, and this trend is projected to

continue going forward.

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Chart 18 Fixed investment Chart 19 Real export and import growth
(y-0-y growth, in pp)

(y-0-y rates, in %) (in pp)
25 'sms Government investment 24 , "=== Contribution of net exports to real GDP growth (RHS)
mmm Private investment -- Imports (LHS)
20 --Fixed investment (in %) Exports (LHS) 25
16
15 I 1.8
10
8 14
5 /
/ 04
0 0
5 -0.3
10 8 1.0
-15 1.7
-16
20 2.4
-25 "24 31

2009 «2011 2013 2015 2017 2019 2021 2023 2025* 2015 2017 2019 2021 2023 2025*

Sources: SORS and NBS. Sources: SORS and NBS.
* NBS projection. * NBS estimate.
Chart 20 Current account and FDI Chart 21 Current account and FDI projection
(in EUR bn) (in % of GDP)
5 25 mmm Secondary income mm Primary income
Services === Goods
4 16 20 -- Current account -FDI
. 1.5
3 15
2 10
4 23 5
0 ty) : : + : - -
zl 5
: ' Leo
38 ===" Primary income, net 15 a
4 mmm Secondary income, net
=== FDI, inflow -20
5 "==" Goods
Services -25
4 --Current account deficit 2019 2020 2021 2022 2023 2024* 2025* 2026"
H1 2023 H1 2024 'Sources: SORS and NBS.
Source: NBS. * NBS projection.

A capital inflow was also generated by the issue of 10Y eurobonds in the
international market, worth USD 1.5 bn, which boosted the country's FX reserves to
EUR 28.1 bn at end-July. The rise in FX reserves also resulted from the National
Bank of Serbia's interventions in the FX market - in order to maintain relative stability
of the EUR/RSD exchange rate amid prevailing appreciation pressures, during seven
months of 2024 the NBS acted as the net buyer of foreign currency, in the amount of
EUR 1.56 bn. At the same time, I want to stress that the Republic of Serbia did not
issue eurobonds because of any financing difficulties, but in order to raise funds for
the implementation of the Green Agenda and socially responsible projects. In view of
the persisting uncertainty in the international markets, the issue of Serbia's 10Y ESG
bonds may be characterised as highly successful. This is confirmed by the high
investor demand for these bonds and reduced costs of borrowing during the auction,

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as well as by the fact that after the hedging transaction, the terms of borrowing in
euros, at 4.75%, turned out more favourable even when compared to some countries

in the region with an investment-grade rating.

KKK

In the year to date, fiscal trends have outperformed the expectations. Contributing
factors were higher than expected revenues, partly owing to greater corporate
profitability in the previous year, which came at RSD 972 bn in 2023, recording a
12% increase on the year before. On a consolidated basis, the first half of 2024 saw
a surplus of RSD 33 bn (0.8% of GDP), while a deficit of 2.2% of GDP is planned at
the annual level. General government public debt as a share of GDP came at 50.3%
in June, down by 2 pp compared to end-2023. In the National Bank of Serbia's
estimate, the fiscal impulse in this period will be almost neutral, meaning that fiscal
policy measures should not exert inflationary pressure, while investment in the

modernisation of public infrastructure will also boost the country's potential output.

Recent macroeconomic movements at home and abating external inflationary
pressures, along with a more favourable global growth outlook and Serbia's proven
resilience to adverse geopolitical developments, indicate that the most turbulent
period of economic challenges is behind us and that we managed to weather through
it, while preserving macroeconomic stability and strengthening resilience to external
shocks. However, though currently less pronounced, the risks to our macroeconomic
projections still mandate caution in the conduct of monetary policy. Uncertainty
surrounding the inflation and GDP projections still largely stems from geopolitical
relations and the global growth outlook, as well as their impact on global prices of
energy and other primary commodities. To a certain extent the risks also relate to the
persistence of core inflation on a global level and the duration of tight monetary
policies of leading central banks. The risks to the projection also stem from the pace
of growth of domestic demand and the outcome of the domestic and global
agricultural season. Overall, the risks to inflation and GDP growth projections for this

and the next year are judged to be symmetric.

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Chart 22 Geopolitical Risk Index

(in pp) Chart 23 Contribution to global economic growth
in pp)

(in pp)

550 40 Other EMDEs
500 ° tm Other AEs
= China
450 3.5 = Euro area
= United States
400 3.0 Sa * World economy - growth in % (RHS)
350 34 R +

27 27

So
26
250 2.0
200
15
150
100 10
50
05
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 00

2010-2019 2024 2025 2026

Source: World Bank (June 2024).
Note: Data for 2024, 2025 and 2026 are projections.

Source: Caldara and lacoviello (2022); data downloaded from
https://mm. matteoiacoviello.com/gpr.htm.

In this context, I would like to underscore that in making our future monetary policy
decisions we will follow a meeting-by-meeting approach, taking into account the
speed of inflation slowdown and the movement of its key factors, while also taking
care about the effects on financial stability and economic growth. We tightened
monetary conditions carefully and cautiously and we will apply the same principle of

caution in easing them.
Dear ladies and gentlemen, dear colleagues,

Considering that the last week marked twelve years since I took the helm of the
National Bank of Serbia, I will conclude my introductory speech with a brief overview
of that period, probably the most turbulent and challenging one in recent history, for
economic policymakers not only in Serbia, but worldwide. Let me remind you that in
the past four years alone we faced the coronavirus pandemic, unprecedented
economic lockdowns, energy crisis, war in Ukraine and the Middle East. The period
before that was not bereft of challenges either. Brexit occurred, as well as the Greek
bank crisis... It fills me with special pride that I served as governor in this period and
that even in such circumstances medium-term price and financial stability and the
relative exchange rate stability were preserved. As a result of the responsible
conduct of economic policy, primarily synchronised actions of monetary and fiscal
authorities, as two hands of the same body, fiscal and external imbalances were
reduced, a favourable growth outlook of our economy and Serbia's status as a
desirable investment destination were preserved, and the country's resilience to

external challenges was strengthened. Owing to that, last week Fitch, and in April

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Standard & Poor's, improved Serbia's outlook for credit rating, which is currently at
BB+, from stable to positive, placing us a mere half a step away from investment

grade.

I use this opportunity to thank President Aleksandar Vu¢ié for entrusting me with the
leadership of the National Bank of Serbia for the next six years. I hope that in the
coming period as well the National Bank of Serbia will continue to be a synonym for
stability, continuity and consistency in achieving goals to the benefit of the state, the

economy and our citizens.

In the remainder of the conference, the colleagues from the Economic Research and
Statistics Department will give a more detailed overview of our projections, after

which we remain open for your questions.

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