The impact of the world economic crisis on the Serbian economy

1. The impact of the world economic crisis on the Serbian economy Ana S. Trbovich USAID Serbia Competitiveness Project

2. Macroeconomic Effects • Stock exchange indices decrease sharply BELEXline4916 index points in April 2007 and only 848index points in March 2009; BELEX 15 highest 3283 index points in March 2007 and only 354 index points in March 2009 – but now rising (1256/642) • Exchange rate: nominal depreciation of Dinar; from 75.75Dinars for 1 EUR in August 2007 to 94 Dinars for 1 EUR in February 2009 (~ -24%) as a result of foreign capital withdrawal, etc. • Collapse in external demand Export decrease from 2.36 billion EUR in March 2008 to 1.86 billion EUR in March 2009 (- 21.3%) ; Serbia exports mostly to EU markets that are strongly affected by the WEC • Fall in domestic consumption by 4.2% y-o-y in Dec 2008, increased cost of imports as dinar continues to depreciate • In Feb 2009 y-o-y trade deficit increased by 32.8%!

3. Macroeconomic Effects, cont’d • 13%decrease in foreign reserves in Jan 2009 cf. Dec 2008 as a result of several factors: frequent interventions of the National Bank of Serbia, trade deficit etc. • Private sector borrowing increased in accordance with high economic growth • Reduced capital inflows-fall in FDI will lead to production cut, lower demand and slower economic growth. Serbia 2008 FDI 1.8 billion EUR, almost 50% less than in 2006 (3.5 billion EUR); Privatization of major state owned companies stalled; Delay of important investments (Fiat) • Unemployment rate Oct 08 - Apr 09 – 14 -15.6% (official data) - highest job cut in processing industry, transport and logistics, health, social work, tourism industry

4. Policy measures of the Serbian Government • Dialogue with banking and private sector • Restrictive fiscal and less restrictive monetary policy • Increase of insured bank retail deposits from 3,000 to 50,000 EUR • Temporary suspension of tax on foreign exchange savings income as of January 2009 (the tax used to be 20% of the savings income) to stimulate savings • Temporary suspension of capital gain tax (used to be 20%) and tax on stocks rights transfer (used to be 0.35%) until 2012 • Subsiding the balance between the market interest rate and a more favorable interest rate on private sector loans – totals 122 billion Dinars (~ 1.2 billion EUR)

5. Policy measures of the Serbian Government • Budget rebalance in April 2009 to generate budget savings of 100 Billion Dinars (~1 billion EUR): • 85%of savings to be generated by expenditure cut (decreased expenditure by line ministries, public companies and local authorities including salaries in public administration) and • 15% by budget revenue increase – (increase of excise duty on fuels, introduced excise duty on mobile operators, increased tax on yachts, aircraft and luxury vehicles, increase of VAT in worst case scenario) • Standby agreement with IMF (3 billion EUR) until end April 2011 and macroeconomic assistance of 100 million EUR from EU for 2009

6. Policy measures of the Serbian Government • Other measures: streamlining administration, economic growth stimuli e.g. investment in infrastructure projects, encouraging demand for locally made products through offering commercial bank loans with subsidized interest rate for businesses and consumer loans for households, etc. • Considering cutting the working week from 40 to 32 hours • Considering “multilateral” debt compensation among companies and debt-for-equity swaps to settle pre-privatization tax and other debts for illiquid businesses

7. HR management response to the crisis in Serbia • PriceWaterhouseCoopers (PWC) conducted research on HR reaction to the WEC in Serbia (March 2009; sample = 22 companies) • All companies decided to make changes in HR management to respond to the effects of the WEC • The assessed companies will decrease: salary costs (42% of companies), costs of corporate events (58% of companies), travelling costs (59% of companies), training and development (55% of companies), employment costs (35% of companies)

8. HR management response to the crisisin Serbia… cont’d • Optimization in number of employees: No hiring (50% of companies), reduction of current number of employees (35% of companies – 14.6% cut on average) • Measures taken concerning salaries: Salary decrease (13% of companies), salary freeze (43% of companies) • Total budget changes for bonuses: Decrease (60% of companies), freezing (30% of companies), increase (10% of companies, 9.5% rise on average) • Recommendations of HR experts: • Employment reduction to be carefully planed and conducted • Best employees to be better compensated

9. Impact of WEC in Agriculture Fall in demand for Serbian products (export falls 15% y-o-y in the first quarter of 2009) Less loans available to producers ( -7.5% cf. Aug 2008) Employment cut (2100 workers dismissed) and salary decrease (6-13%) Recommendations: • Stay informed on the possible impact of the WEC and build a strategic approach • Stimulatecredit activity • Provide support to the most vulnerable producers

10. Impact of WEC in Auto parts Sector • Limited access to finance, and high costs if available, both for the manufacturers, their suppliers and for potential car buyers • Passenger car sales in Europe fell by 7.8% in 2008, and by 19.3% alone in the 4th quarter. European car sales continued to drop in 2009 - 17.7 % in February, 2009  • Structural problems must be addressed – overcapacity and a need to move towards the new drivers of consumer demand (small fuel efficient and affordable cars) • Serbian automotive suppliers are reporting decrease in production due to lower demand from foreign buyers

11. Impact of WEC in Construction • Slower investment growth, liquidity problems of banking systems, drop in price of oil, gas and steel, and the decline of the stock markets led to a rapid global decline of construction sector by 10-30% • Some European construction markets (Ukrainian, Romanian) have been severely affected due to investment withrawals and liquidity problems of the banking systems. • Serbian exports fell, capital is being withdrawn from emerging markets and short-term credit is drying up.  This triggered a fall in production and investment. • Serbian construction sector is especially dependent on FDI and loans from foreign banks, which have been strongly affected by the crisis • Home buyers more risk-averse • Economics Institute predicts 3% growth of Serbian construction services in 2009, mainly based on planned Government investments in local infrastructure of ~$3 billion (in part funded by foreign credits).

12. Impact of WEC in Film and Production • According to Motion Picture Association of America, US production plummeted by 21% from 656 feature films in 2007 to 520 in 2008. due to - Strike by the Writers’ Guilds of America in late 2007 and early 2008 - Difficult economic environment for securing bond and insurance in the second half of 2008 • It is expected that by the end of 2009, majority of these projects will be continued but the overproduction and lack of capacities by big studios for all the projects will lead to outsourcing – this is a chance for Serbia • Analysts claim that impact of the economic crisis will be more in the direction of technology not in sales, as people will reach out for cheaper sorts of entertainment instead of travel, favorising 3D technologies, online video stores etc. (similar to previous crisis when VHS and DVDs were born). • It is also expected (Variety) that box office will see great numbers this year as, usually, during crisis people need more entertainment and have more time for movies (as was the experience during previous recessions).

13. Impact of WEC in Furniture Sector • Global trends: - USA experienced fall in furniture sales as a result of real estate sector crisis - Europe remains stable in furniture consumption and sales • The furniture industry in Europe even has the chance to emerge from the crisis as one of the winners. Whenever people feel extremely insecure, their own home and the sense of security and safety connected with their own four walls assume a higher status. • However, the furniture sector in Serbia is experiencing a decline: Jan – Apr 2009 – fall both in furniture import and export by 25-30% y-o-y

14. Impact of WEC in IT Sector • Worldwide IT spending forecast to total $3.2 trillion in 2009, a 3.8 % declinefrom 2008 revenue of nearly $3.4 trillion (Gartner, Inc.) • The focus on cost reduction is driving outsourcing and global delivery demand increase in Europe, indicating the need for more efficient, better, faster and less expensive IT solutions • Almost 60 % of organizations in Western Europe will outsource more IT and business process functions in 2009, while renegotiation of existing contracts will rise to more than 60 %, according to a recent survey from Gartner (May 2009) • Partnerships will also become extremely important as the need to be more geographically dispersed and more vertically integrated increases. Aligning with partners that can provide local knowledge or industry insight will be a considerable differentiator. • In 2008 Serbian IT sector experienced growth of 18,5% or 545 million EUR, but in the first 3 months of 2009 IT sector decreased 24%

15. Impact of WEC on Tourism • Growth has been negative for all sub regions with the exception of North Africa, Sub-Saharan Africa, Central and Southern America which recorded increases in the range of 3-5%. Among the most affected regions are Northern, Southern and Mediterranean Europe, South Asia and the Middle East. UNWTO projects international tourism to stagnate (0%) or decline as much as -2% during the current year. • In Serbia, in March 09 the number of tourist arrivals was 7% lower y-o-y but it is expected that tourism income at the end of 2009 will be the same as in 2008 ($944 million) as a result of University Olympics • Meetings and Events industry - overall recent business levels are down 5% in April 2009, after a 6% decline in Feb 2009 and a 5% decline in Dec 2008. Projected business levels in the coming months are 4% lower than a year ago • International Congress & Convention Association (ICCA) has ranked Serbia between 55 and 56 top convention and meeting destinations, making a 14 ranks leap from 69-72 place in 2008

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