national bank of serbia governor ’ s opening remarks at the presentation of the inflation report – february 2017 dr jorgovanka tabakovic, governor belgrade, 22 february 2017 ladies and gentlemen, welcome to the presentation of the february inflation report. i would like to begin just as i will conclude – by summing up last year. namely, 2016 ended with yearon - year inflation of 1. 6 %, the fiscal deficit of 1. 4 %, the current account deficit of 4 %, the npl level of 17 %, foreign direct investment of eur 1. 9 bln and the customary inflow of remittances of 2. 6 bln. why am i starting off like this? it is because the fiscal deficit of 1. 4 % was lowered by 2. 3 percentage points relative to the year before, the current account deficit fell from 4. 7 % to 4 %, and the level of npls fell by 4. 6 percentage points to 17 % compared to the end of the last year – these being preliminary results. all these are reasons which underpin our decision to start this year with the new target of 3. 0±1. 5 %. the results from 2016 justify our decision to lower that target. i expect this will be the best confirmation that serbia ranks among the countries running low and stable inflation. inflation is expected to move within the target tolerance band as of early this year, on account of the effects of past monetary policy easing, the recovery of domestic demand and global oil prices, and a gradual rise in inflation abroad. the key risks to the projected inflation path are related primarily to the international environment, notably the diverging policies of the leading central banks – the federal reserve and the european central bank, as well as uncertainties associated with movements in oil prices. the federal reserve raised its rate in december and it became probable that the pace of rate hikes would be faster than expected. on the other hand, the european central bank ’ s decision to extend its quantitative easing programme until at least end - 2017 signals the continuation of the bank ’ s monetary accommodation, expected to moderate adverse effects of the fed ’ s policy. what i wish to highlight is that today serbia is more resilient to all external shocks thanks to the improved macroeconomic fundamentals, such as the narrowing of internal and external imbalances set in place by fiscal and structural adjustments. in particular, the fiscal deficit was slashed from 6. 6 % in 2014 to 1

credit quality impairment were already observed in 2020. specifically, stage 2 loans6 increased substantially in 2020 ( 24. 3 % ), and their growth has quickened in 2021 to date ( 37. 5 % in march ). meanwhile, although forborne loans continued to fall year - on - year, these declines have been far more moderate since the onset of the pandemic ( - 2. 3 % in march 2021, compared with - 19. 6 % in march 2020 ). lastly, npls increased in the consumer portfolio in 2020, growing by 23 % ( but slowing to 15. 9 % in march 2021 ). deeper analysis of the growth of npls and stage 2 loans in the business lending segment reveals that the sharpest increases occurred in sectors severely affected by the pandemic. thus, while total npls extended to business activities presented a year - on - year decline of - 1. 8 % in december 2020 ( - 1. 5 % in march 2021 ), the hospitality and transportation sectors posted increases of 5. 8 % and 19. 2 % ( rising to 14 % and 44 % in march 2021 ), respectively. in december 2020, these two sectors represented around 15 % of spanish banks'loans to pursuant to circular 4 / 2017, a loan is classified as a stage 2 exposure when credit risk has increased significantly since initial recognition, even though no event of default has occurred. non - financial business activity, while the group of severely affected sectors accounted for 20 % and the moderately affected sectors a further 30 %. specific credit risk analysis of the firms and households that have benefited from ico guarantees or from moratoria can help predict potential future impairments when the measures are progressively withdrawn. for instance, analysis of the relative position of firms that obtained ico - backed loans reveals that these presented an, ex ante, higher risk profile. 7 as regards the classification of loans whose moratoria were no longer in force at end - 2020 ( either through expiry or cancellation ), around 20 % were in stage 2 and 8 % were classified as non - performing. 8 we should bear in mind that at end - 2020 ico loans represented around 19 % of total lending to businesses, and loans with moratoria accounted for 5. 3 % of loans to households. approximately 80 % of the outstanding moratoria as at december 2020 expired in june 2021, and virtually all of the rest are expected to do so before end - 2021. likewise, as