Public Debt Management Strategy

Transcription

1 Public Debt Management Strategy Pursuant t the Public Debt Law ( Official Gazette f the Republic f Serbia Ns. 61/05, 107/09 and 78/11), which cnstitutes the legal basis fr Serbia s brrwing, public debt includes 1 : Debt f the Republic arising frm agreements entered int by the Republic; Debt f the Republic arising frm securities; Debt f the Republic arising frm treaties and/r agreements n rescheduling f liabilities assumed by the Republic under earlier treaties and securities issued under special laws; Debt f the Republic arising frm guarantees issued by the Republic r frm direct accessin t debt in the capacity f a debtr fr debt arising frm guarantees and/r cunter guarantees issued by the Republic; Debt f lcal gvernments and legal entities funded by the Republic whse debt is guaranteed by the Republic. The Law allws brrwing in the cuntry and abrad, i.e. in dmestic and freign markets. The Republic may brrw in lcal and freign currency t cver budget deficit, liquidity deficit, t refinance public debt, t finance investment prjects and t cver liabilities arising frm guarantees issued. Pursuant t Article 9 f the Law n Depsit Insurance Agency, the Republic may als brrw t cver ptential lss with cmmercial banks (Official Gazette f the Republic f Serbia Ns. 61/05, 116/08 and 91/10). Under Article 13 f the Public Debt Law, public debt is an uncnditinal and irrevcable bligatin f the Republic cncerning the repayment f principal, interest and any and all brrwing csts. Public debt repayment has a permanent apprpriatin in the natinal budget and is priritized ver ther public expenditure prvided fr by the law gverning the natinal budget. The Budget System Law (Official Gazette f the Republic f Serbia Ns. 54/09, 73/10, 101/10, 101/11, 93/12 and 62/13-crrectin) lays dwn general fiscal rules, accrding t which general gvernment debt, exclusive f liabilities fr restitutin, may nt exceed 45% f grss dmestic prduct (GDP). This prvisin f the Law was welcmed by internatinal financial institutins, because it limited Serbia s public debt t a relatively lw share f GDP. It shuld be nted that, accrding t the Maastricht criteria, general gvernment debt includes lcal gvernment debt, but des nt include ttal guarantees issued by the gvernment. If this methdlgy were applied, the balance f Serbia s public debt wuld be even lwer than accrding t the currently applied methdlgy. Accrding t the same Law, if public debt exceeds 45% f GDP, the Gvernment is required t adpt and put in place measures t restre public debt t the level defined by the law. The Public Debt Law establishes the Public Debt Agency as an authrity within the Ministry f Finance and defines its pwers and rganizatin fr the purpse f recrding and managing Serbia s public debt. 1 Fr the purpses f this Strategy, the balance f central gvernment debt (a methdlgy defined by the Public Debt Law) includes als nn-guaranteed liabilities f lcal gvernment units.

2 1. Public Debt Balance and Structure in the Perid August 2013 Accrding t the recrds kept by the Ministry f Finance f the Republic f Serbia, the Public Debt Administratin, mre specifically, Serbia s public debt includes all direct liabilities f the Republic arising frm brrwing, as well as guarantees issued by the Republic fr brrwing by public enterprises and lcal gvernments. Public debt f the Republic f Serbia is categrized as direct and indirect liabilities, i.e. liabilities fr and n behalf f the Republic and liabilities arising frm guarantees issued by the Republic in favr f ther legal entities. Direct and indirect liabilities are further categrized as internal debt and external debt, depending n whether they arse frm brrwing in the dmestic market r in internatinal markets 2. At year-end 2000, Serbia s ttal public debt as a share f GDP reached 169.3%. As a result f GDP increase, timely public debt servicing, lwer budget deficit, partial Lndn and Paris Club debt write-ff and ther factrs, the public debt-t-gdp rati was cut dwn t 28.4% in Due t adverse effects f the glbal ecnmic crisis n Serbian ecnmy, the Republic f Serbia increased brrwing t finance its budget deficit in the perid Trends f Serbia s public debt as a share f GDP in the perid August 2013 are shwn in fllwing graph: Graph 18. Public debt as a share f GDP, in % 70% 60% 1.6% 1.4% 50% 40% 1.1% 6.3% 1.7% 6.9% 8.7% 8.8% 30% 20% 10% 0% /VIII Direct Liabilities Indirect Liabilities Nn-Guaranteed Lcal Gvernment Debt Increasing budget deficit, lw real GDP grwth and depreciatin f the dinar against freign currencies in which Serbian public debt is denminated have brught abut t an increase in the level f public debt in the past fur years, which thus exceeded the limit set by the Budget System Law. At year-end 2012, Serbia s ttal public debt std at RSD 2, billin up frm RSD 1,600.4 billin at year-end Public debt as a share f GDP at year-end 2012 was 60.9%. Internal public debt increased cnsiderably in 2012 cmpared t 2011, frm RSD billin t RSD billin. External public debt increased frm RSD billin t RSD 1, Fr the purpses f this Strategy, the stck f central gvernment debt (a methdlgy defined by the Public Debt Law) includes als nn-guaranteed liabilities f lcal gvernment units. 3 Including nn-guaranteed lcal gvernment debt. This cmpnent f general gvernment s public debt increased frm RSD 53.4 bil in 2011 t RSD 54.2 bil in 2012.

3 billin in the curse f Direct liabilities f the Republic f Serbia in 2011 amunted t RSD 1,326.3 billin, rising t RSD 1,713.8 billin in the fllwing year. On the ther hand, indirect liabilities als increased frm RSD billin in 2011 t RSD billin in At the end f August 2013, ttal public debt stck std at RSD 2,245.6 billin r 59.7% f GDP. Out f that amunt, direct bligatins accunted fr RSD 1,861.0 billin, indirect liabilities accunted fr RSD billin whereas nn-guaranteed lcal gvernment debt accunted fr RSD 54.4 billin. Internal direct liabilities amunted t RSD billin, while external direct liabilities amunted t RSD 1,113.1 billin. As regards indirect liabilities, internal debt std at RSD 95.5 billin, while external debt reached RSD billin. If brken dwn int internal and external public debt, ttal public debt amunted t RSD billin and RSD 1,362.3 billin, respectively. Table 24 shws internal and external debt balance (abslute and relative) at year-end ver the perid 2010 August It als cntains figures shwing internal and external debt as a share f GDP. Table 25 shws the abslute balance f Serbia s direct and indirect liabilities and their respective balance as a share f GDP: Table 24. Internal and external public debt in the perid August /VIII In RSD billin General Gvernment Debt 1, , , ,245.6 Dmestic Debt External Debt Out f which Central Gvernment 1, , , ,191.2 Dmestic Debt External Debt , ,347.8 As % f GDP General Gvernment Debt Dmestic Debt External Debt Out f which Central Gvernment: Dmestic Debt External Debt Table 25. Internal and external public debt in the perid August /VIII In RSD billin General Gvernment Debt 1, , , ,245.6 Direct Liabilities, ut f which: 1, , , ,861.0 Dmestic Debt External Debt ,113.1 Indirect Liabilities, ut f which: Dmestic Debt External Debt Nn-Guaranteed Lcal Gvernment Debt, ut f which: Dmestic Debt External Debt As % f GDP General Gvernment Debt Direct Liabilities, ut f which: Dmestic Debt External Debt Indirect Liabilities, ut f which: Dmestic Debt External Debt Nn-Guaranteed Lcal Gvernment Debt, ut f which: Dmestic Debt External Debt

4 It shuld be nted that Serbia s public debt des nt include liabilities arising frm restitutin. Thse liabilities will becme due and payable in The Law n Restitutin and Cmpensatin (Official Gazette f the Republic f Serbia N. 72/11) prvides fr relevant time limits, cnditins, methds and prcedures which will apply t the Restitutin Agency in the restitutin f prperty natinalized after WWII. The Law states a preference fr restitutin in kind, but where this is nt pssible, restitutin will be made in treasury bnds and cash. The ttal amunt f cmpensatin must nt be such as t threaten Serbia s macrecnmic stability and ecnmic grwth. The ttal amunt earmarked fr this purpse is maximum EUR 2 billin, increased by the sum f accrued interest payable t all cmpensatin subjects at the rate f 2% per annum fr the perid frm 1 January 2015 t the maturity dates prvided fr by the Law. The maturity f these bnds will be fifteen years, with annual installments payable as frm In specific cases, cmpensatin in cash will be paid in advance, with the maximum amunt f such advance payments limited t EUR 10,000. Internal public debt Pursuant t the Public Debt Law, internal public debt includes direct and indirect liabilities f the Republic f Serbia t dmestic investrs and lenders. As at 31 August 2013, internal public debt included RSD billin in direct liabilities and RSD 95.5 billin in indirect liabilities. Serbia s ttal internal public debt, inclusive f nn-guaranteed lcal gvernment debt (RSD 39.9bn), std at RSD billin. Table 26 shws the structure f Serbia s internal public debt as at 31 December 2010 thrugh 2012 and as at 31 August 2013: Table 26. Internal public debt structure in the perid August /VIII In RSD billin Ttal Dmestic Debt Gvernment Securities, ut f which: Gvernment Bills and Bnds Frzen Frex Savings Bnds Lan fr ecnmic revival Other Nn-Guaranteed Lcal Gvernment Debt The Gvernment issued securities fr the first time in 2003, and their maturities were 3 and 6 mnths. As privatizatin prceeds were high and primary fiscal result was relatively balanced in the perid , the gvernment did nt issue any securities ver that perid and the amunt f gvernment securities was therefre relatively lw at year-end In the past fur years, the gvernment issued securities with different maturities, and a dinar yield curve was created fr maturities ranging frm three mnths t seven years. Table 27 shws the stck f gvernment securities at year-end in 2010, 2011 and 2012, and as f 31 August 2013:

5 Table 27. Debt balance by Gvernment securities ( August 2013) Instrument and Tenr % /VIII In RSD billin % In RSD billin % In RSD billin % In RSD billin Gvernment Bills 3M Gvernment Bills 6M Eur Indexed Gvernment Bills 6M Gvernment Bills 12M Gvernment Bills 53W Eur denminated Gvernment Bills 53W Gvernment Bills 18M Eur denminated Gvernment Bills 18M Gvernment Bills 24M Amrtizing Gvernment Bnds 2Y Gvernment Bnds 2Y Eur denminated Gvernment Bnds 2Y Gvernment Bnds 3Y Inflatin Indexed Gvernment Bnds 3Y Eur denminated Gvernment Bnds 3Y Gvernment Bnds 5Y Eur denminated Gvernment Bnds 5Y Gvernment Bnds 7Y Inflatin Indexed Gvernment Bnds 10Y Eur denminated Gvernment Bnds 15Y Ttal In early 2009, aiming t finance the budget deficit, the Gvernment issued 3-mnth bills, fllwed by issues f 6-mnth and 12-mnth bills. The ttal market value f issued Gvernment bills in that year was RSD billin, while the balance f debt arising frm Gvernment bills at year end 2009 was RSD billin. In the curse f 2010, debt frm gvernment securities increased, peaking at RSD billin at year-end. In an effrt t bst the develpment f the Serbian capital market, the Public Debt Agency f the Serbian Ministry f Finance issued the first 18-mnth and 24-mnth Gvernment bills in March In February 2011, the Public Debt Agency f the Serbian Ministry f Finance issued a 15-year eur-denminated cupn bnd, as well as a 53-week eur-denminated T-bill, fllwed by the issue f the first 3-year dinar-denminated cupn bnd in March June 2011 saw the first issue f a 3-year eur-denminated cupn bnd in the Serbian market and in July 2011 an 18-mnth eur-denminated T-bill was issued. At year-end 2011, the debt based n dinar-denminated gvernment securities amunted t RSD billin, while that based n eur-denminated gvernment securities issued in the dmestic market std at RSD 57.9 billin.

6 Effrts t intrduce new lng-term dinar-denminated instruments cntinued in 2012 in rder t extend the maturity structure f gvernment securities and increase the share f dinar denminated public debt. The first 5-year dinar-denminated bnd with a 10% cupn was issued n 24 January 2012 in an issue wrth RSD 2.7 billin, and was fllwed by the secnd issue n 29 May 2012 wrth RSD 520 millin. In an effrt t diversify the debt, n 1 August 2012, a 2-year amrtizing cupn-bnd tied t the key plicy rate f the Natinal Bank f Serbia was issued. As at 31 August 2013, the debt based n dinar-denminated gvernment securities amunted t RSD billin while the debt based n eur-denminated gvernment securities issued in the dmestic market std at RSD billin. Effrts t intrduce new lng-term dinardenminated instruments cntinued in 2013 in rder t extend the maturity structure f gvernment securities and increase the share f dinar-denminated public debt. In 2013, The Republic f Serbia issued first 7-year dinar-denminated bnd with average realizatin rate f 85%, and value pndered yield rate f 12.44%. Frm the beginning f the year until 31 August 2013, the Republic achieved 64.8% f the financing plan defined by the Law n Amendments and Changes f the Budget Law fr 2013, ut f which the revenues frm dinar-denminated gvernment securities amunt t RSD billin, which represents 74.4% f the planned revenues frm dinardenminated securities at the lcal market. External public debt Pursuant t the Public Debt Law, external public debt includes direct and indirect liabilities t freign investrs and creditrs. The fllwing table shws the structure f Serbia s public debt at year-end 2010, 2011, and 2012 respectively and as at 31 August Table 28. External public debt structure in the perid August /VIII in RSD billin Multilateral creditrs, ut f which: Paris Club IBRD EIB Lndn Club IDA IMF EBRD CEB Others Bilateral creditrs, ut f which: Italy EU Exprt-imprt bank f China Russia France Azerbaijan Libya Others Other brrwing Of which Eurbnds Of which Eurbnds Of which Eurbnds Guaranteed external debt Nn-Guaranteed Lcal Gvernment Debt Ttal External Debt , ,362.3 At year-end 2012, debt t multilateral creditrs amunted t EUR 5.2 billin (RSD billin), r 28.5% f ttal public debt, as ppsed t EUR 5.2 billin (RSD billin), r 33.9% f

7 ttal public debt, in Paris Club debt at year-end 2012 amunted t EUR 1.5 billin (RSD billin), r 8.1% f ttal public debt, cmpared with EUR 1.6 billin (RSD billin), r 10.3% f ttal public debt, in Lndn Club debt at year-end 2012 amunted t EUR millin (RSD 74.2 billin), r 3.6% f ttal public debt. During April 2013 the Ministry f Finance settled debt t the Lndn Club in the amunt f USD 400 millin in rder t reduce csts f debt f previusly arranged lan debts and/r issued bnds, in bth dmestic and internatinal financial market. As at 31 August 2013, Paris Club debt std at EUR 1.43 billin (RSD billin). IBRD lans amunted t EUR 1.45 billin (RSD billin), Lndn Club debt, after premature payment was EUR millin (RSD 36.7 millin), bilateral lans amunted t EUR 1.2 billin (RSD billin). IDA lans amunted t EUR mil (RSD 57.3 billin), IMF lans amunted t EUR mil (RSD 50.9 billin), and EIB lans amunted t EUR mil (RSD 74.6 billin). In September 2011, the Republic f Serbia issued fr the first time a Eurbnd in the internatinal financial market with the nminal value f USD 1 billin. The terms f issue included a 7.25% cupn and a 7.5% rate f yield t maturity. In September 2012 the Ministry f Finance repened the issue f Eurbnd 2021, frm the year 2011 in the amunt f USD 1 billin and achieved the difference frm the required rate f yield t maturity frm primary issue f 87.5 base pints by cutting the rate f yield at the level f 6.625%, whereby the Eurbnd f the Republic f Serbia were sld at a premium. After a successful re-pening f Eurbnd 2012, n 14 Nvember 2012, the Republic f Serbia issued 5-year Eurbnd n the internatinal bnd market in the value f millin US dllars. The transactin was annunced in the initial amunt f 500 millin US dllars with indicative yield f 5.625%. Hwever, great interest f the financial investrs, especially frm United States f America and United Kingdm (ver 160 investrs wrldwide) caused the increase f ttal demand up t 3.7 billin US dllars, which enabled the increase f the issue t 750 millin US dllars with 5.45% yield rate. On 14 February 2012, The Republic f Serbia achieved the mst successful Eurbnd issue. A ttal f 148 financial investrs frm all ver the wrld participated in the sale f Serbian Eurbnd. Demand was three times higher than the amunt n ffer, which indicates high cnfidence f the freign investrs in the ecnmic and public finances refrms carried ut by the Serbian gvernment. The majrity f investrs were frm the United States f America, the United Kingdm and the United Arab Emirates. A seven-year Eurbnd was wrth USD 1.5 billin and carried an interest rate f 4.875%. The achieved yield was 5.15%. This sale f Eurbnd was dne in accrdance with the planned activities f the Gvernment t prvide financial stability in One part f the prceedings was used t refinance lder and mst expensive debts. In September 2011, the gvernment sld fr the first time a seven-year Eurbnd at a higher yield f 7.5%, but cmpared t that ne this was much mre favrable in terms f price, since the yield was 2.35 percent lwer. Spread at the time f issue f seven-year Eurbnd cmpared with the US benchmark bnd was base pints, which is 107 base pints lwer spread than the ne at the issue f Eurbnd 2017 f shrter maturity in Nvember In the middle f May 2013, Serbian Eurbnd reached the highest price with the lwest yield level frm the date f issue. Eurbnd 2021 yield was 4.414%, and fr Eurbnd 2020 it was 4.039% while fr Eurbnd 2017 it was nly 3.577%. Even thugh Standard and Pr s dwngraded the cuntry s credit rating frm BB t BBwith negative utlk in August 2012 and cnfirmed the same rating in March 2013, and Fitch assessed its utlk fr the frthcming perid as negative, in August 2012, Serbia has managed t issue a security with a yield higher than that achieved by sme cuntries in the regin with higher credit rating.

8 IN PERCENTAGE Graph 19. Serbia s 2021 Eurbnd price and yield trends frm the issue date t 31 August $ $ Clsing price YTM $ $ $ $ 105 $ 102 $ 99 $ 96 $ 93 $ 90 $ Graph 20. Serbia s 2017 Eurbnd price and yield trends frm the issue date t 31 August 2013

9 Graph 21. Serbia s 2020 Eurbnd price and yield trends frm the issue date t 31 August 2013 Currency structure f Serbia s public debt in the perid August 2013 At year-end 2010, mre than 60% f Serbia s public debt was denminated in eurs, fllwed by debt denminated in lcal currency 14.8% while the share f debt denminated in US dllars was 14.4%. Fr the purpse f financing the budget deficit, 2011 saw intensified issues f dinardenminated securities, which increased the share f dinar-denminated public debt t apprximately 16.3% at year-end At the end f 2012, dinar-denminated debt accunted fr nearly 19.3% f Serbia s public debt. In rder t reduce the currency risk by extending the maturity and develping new brrwing instruments, mainly n dmestic market, in the first eight mnths f 2013, a share f natinal currency in debt prtfli was maintained at 19 % at the end f August Table 29. Currency structure f public debt in the perid August /VIII In RSD In RSD In RSD In RSD % % % bn bn bn bn % Special Drawing Rights EUR , , USD CHF RSD Other Ttal 1, , , ,

10 In percentage Graph 22. Currency structure f public debt in the perid August , /VIII EUR USD RSD SDR Other Accrding t the figures as at 31 August 2013, the bulk f Serbia s public debt remains denminated in eurs (48.8%) f ttal public debt stck. This is fllwed by public debt denminated in US dllars, with 25.8% and dinars with 19.0%. The remaining debt is denminated in Special Drawing Rights (4.9%) and ther currencies (1.5%). Interest rate structure f Serbia s public debt in the perid August 2013 The structure f public debt, including nn-guaranteed lcal gvernment debt f Serbia, accrding t interest rates is favrable, because the majrity f debt is tied t fixed interest rates. The structure f interest rates n Serbia s public debt is shwed in Graphs 23 and 24: Graph 23. Interest rate structure f public debt in the perid August % 90% 80% 70% 60% 50% 40% 30% 65.2% 68.4% 70.0% 71.7% 20% 10% 0% /VIII Fixed Interest Rate Variable Interest Rate

11 The majrity f Serbia s public debt (71.7%) is subject t fixed interest rates, while debt with variable interest rates accunted fr 28.3% f ttal public debt. As regards variable interest rates, EURIBOR and LIBOR n EUR accunt fr the highest share 74.6% cmbined f ttal public debt subject t variable interest rates. LIBOR n USD accunts fr 10.4%, while LIBOR n CHF accunts fr 1.7% f public debt subject t variable interest. Variable interest rates linked t LIBOR n GBP and JPY and ther variable rates accunt fr 13.3% f public debt subject t variable interest; f that number, interest rates n Special Drawing Rights accunt fr 2.3% f ttal public debt. Graph 24. Structure f variable interest rates in the perid August % 90% 80% 70% 3.5% 2.4% 11.6% 12.9% 13.4% 13.3% 2.1% 1.9% 1.7% 11.5% 10.8% 10.4% 60% 50% 40% 30% 20% 10% 0% /VIII EURIBOR and LIBOR n EUR LIBOR n USD LIBOR n CHF Other 2013 Structure f gvernment securities and their duratin in the perid August The Republic f Serbia began issuing Gvernment bnds in Originally it issued nly shrt-term Gvernment bills frm 2003 t 2006; hwever, after a perid f stagnatin in the market fr dinar-denminated Gvernment bnds, the Gvernment began reissuing the bills in February Within fur years, the balance f this debt exceeded RSD 400 billin. In ther wrds, f the EUR 6 billin f abslute debt grwth cmpared with year-end 2008, nearly ne half was generated in the dmestic market thrugh issues f dinar- and eur-denminated gvernment securities saw the intrductin f new dinar-denminated instruments such as inflatin-indexed bnds and 2-year amrtizing bnd with variable cupn. A 5-year Gvernment bnd was als issued fr the first time, in an effrt t extend the maturity f dinar-denminated securities. The develpment f financial market, instruments and the structure f the maturity f gvernment securities was cntinued in In additin t the high realizatin rate f the financing plan at the dmestic market, brrwing based n the issue f mainly dinar denminated, but als eur denminated securities significantly reduced the cst f brrwing. In the perid frm September 2012 August 2013, the Republic f Serbia reduced the csts f brrwing based n dinar denminated securities, which can be seen n the example f 53-week Gvernment bills, which achieved the reductin f yield rate f 5.45%, as well as in 3-year bnds which achieved the reductin f yield rate f 5.5%. Als, frm the beginning f the year cupn payment is perfrmed n an annual level. As fr instruments and maturity in 2013, the Republic f Serbia issued 2-year dinardenminated bnds t replace the previusly issued 18-mnth and 24-mnth gvernment bills in rder t extend maturity.

12 By issuing seven-year dinar-denminated bnds twice frm the beginning f 2013, n 5 March and 10 April, with average realizatin f 85%, and yield f 12.44%, the Republic f Serbia additinally extended the structure f maturity f dinar-denminated gvernment securities, and prvided the new instrument fr securing lng-term surce f financing. It is imprtant t emphasize that the demand fr dinar-denminated gvernment securities frm the beginning f the year was twice higher than the ffer f issued dinar-denminated securities f any maturity. Structure f dinar denminated Gvernment securities by riginal maturity is presented in Graph 25. Graph 25. Structure f Gvernment securities by riginal maturity at the end f the bserved perid August Inflatin Indexed Gvernment Bnds 10Y Gvernment Bnds 7Y Gvernment Bnds 5Y Inflatin Indexed Gvernment Bnds 3Y Gvernment Bnds 3Y Gvernment Amrtizing Bnds 2Y , /VIII Gvernment Bnds 2Y Gvernment Bills 24M Gvernment Bills 18M Gvernment Bills 53W Gvernment Bills 12M Gvernment Bills 6M Gvernment Bills 3M In 2012, ttal vlume f 53-week and 18-mnth Gvernment bills was EUR mil. Ttal demand was EUR mil with the average value pndered rate f 6.02%. Ttal nminal value f sld eur bills fr 2012 is EUR mil. In the ttal prtfli f gvernment securities at the end f August 2013, dinar denminated gvernment securities amunt t 75.6%. The remaining 24.4% f the prtfli are eur denminated gvernment securities. Structure f the maturity f eur denminated gvernment securities, as well as the review f perfrmance rates f gvernment securities are given in Graphs 26, 27 and 28:

13 Primary market accepted rate Graph 26. Structure f eur denminated gvernment securities by riginal maturity at the end f August % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% , /VIII Eur denminated Gvernment Bnds 15Y Eur denminated Gvernment Bnds 5Y Eur denminated Gvernment Bnds 3Y Eur denminated Gvernment Bnds 2Y Eur denminated Gvernment Bills 18M Eur denminated Gvernment Bills 53W Eur denminated Gvernment Bills 6M Graph 27. Overview f accepted rates f gvernment securities 17.0% 16.0% 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% Gvernment Bills 3M Gvernment Bills 6M Gvernment Bills 53W Gvernment Bnds 2Y Gvernment Bnds 3Y Gvernment Bnds 5Y Gvernment Bnds 7Y

14 Primary market accepted rate 6.5% Graph 28. Overview f accepted rates f gvernment eur securities 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% Gvernment Bills 53W - EUR Gvernment Bills 18M - EUR Gvernment Bnds 2Y - EUR Gvernment Bnds 3Y - EUR Gvernment Bnds 5Y - EUR Cnsidering that securities issued until 2010 were mstly 3-mnth Gvernment bills, the duratin, r average days t maturity, was lw. With the intrductin f new instruments with lnger maturity and the lwer share f shrt-term instruments in the ttal balance f dinardenminated securities, duratin was extended cnsiderably. As at 31 August 2013, the duratin f dinar-denminated Gvernment bnds was 480 days, while the average duratin f ttal securities was 687 days. Trends in the duratin f dinar-denminated gvernment securities in recent years are shwn in Graph 29: Graph 29. Duratin f Gvernment securities issued in the dmestic market in the perid August /VIII Duratin f RSD Securities Duratin f Gvernment Securities issued n Dmestic Market

15 Servicing f Serbia s public debt (central gvernment 4 ) in the perid The figures presented in this sectin relate t past repayments f interest and principal and prjectins fr the frthcming perid. Table 30 shws the histry f public debt servicing frm 2010 t 2012, while Table 31 shws prjected public debt servicing fr the perid : Table 30. Interest and principal repayment in the perid In RSD billin Principal Interest Ttal Table 31. Prjectins f interest and principal repayment by p 2014p 2015p 2016p In RSD billin Principal Interest Ttal Public Debt as at 31 August % 25.6% 26.8% 25.5% Table 32. Prjectins f interest and principal repayment by 2016 (as a % f GDP) 2013p 2014p 2015p 2016p In RSD billin GDP 3, , , ,583.7 Principal 11.5% 11.6% 11.5% 9.7% Interest 2.4% 2.8% 2.5% 2.8% Ttal 13.9% 14.4% 14.0% 12.5% 2. Prjectin f General Gvernment Debt Balance in the Perid Taking int accunt Serbia s prjected primary budget deficit in the perid , including the withdrawal f lans fr prject financing f budget beneficiaries, the effects f exchange rate changes between the dinar n the ne side and the eur and the US dllar n the ther side in the basic macrecnmic scenari, the balance f Serbia s public debt shuld equal abut 68% f GDP, at the end f 2016, assuming that a prtin f state-wned assets will be sld in the frthcming perid. 4 Central gvernment level includes the Budget f the Republic f Serbia, cmpulsry scial insurance funds and the public enterprise Putevi Srbije

16 Table 33. Basic prjectin f general gvernment debt by p 2014p 2015p 2016p In RSD bn GDP 3, , , ,583.7 Primary deficit Interest Public debt 2, , , ,114.4 Central gvernment debt, % f GDP 62.7% 65.7% 68.1% 67.9% Nn-guaranteed lcal gvernment debt, % f GDP 1.5% 1.5% 1.7% 1.8% General gvernment debt, % f GDP 64.2% 67.2% 69.8% 69.7% Accrding t the prjectins, lcal gvernment debt will remain at a relative level f abut 3% as a share f GDP. Debt arising frm guaranteed liabilities, which are nt included in public debt balance accrding t the Maastricht criteria, is expected t be arund 3% f GDP. Public revenues and csts are f stchastic character and they reflect the changes f macrecnmic framewrk and plitics. Since public debt is a cnsequence f imbalance in public finance, debt crisis threat remains in frce until fiscal cnslidatin is implemented, as a prerequisite fr maintaining and imprving the cmpetitiveness f the ecnmy. Having that in mind, EU member states gradually implement the prcess f fiscal cnslidatin, which can lead t slwing dwn f the ecnmic grwth and can have negative effects n Serbian ecnmy, since EU is Serbian main trade partner, and that situatin wuld lead t wrsening f the public debt. Analyses underlying the Public Debt Management Strategy The Public Debt Agency based its Public Debt Management Strategy n the quantitative apprach, identifying ptential limitatins by applying macrecnmic indicatrs, cst and risk analysis and market cnditins that affect public debt management. The cst and risk analysis tk int accunt all viable financing alternatives. The share f each instrument in the verall financing needs fr a given year is determined n the basis f Strategy bjectives. The fllwing instruments available in dmestic and internatinal financial markets were used in the analysis. Surces f financing denminated in freign currency Lans by freign gvernments and internatinal financial institutins are presented as tw instruments denminated in eurs and US dllars, with fixed and variable interest rates;; Dmestic debt denminated in eurs is presented thrugh three instruments: lans by dmestic cmmercial banks with variable interest rates, Gvernment bills and bnds issued in the dmestic financial market; Eurbnd issued in eurs r US dllars at the internatinal financial market. Surces f financing denminated in lcal currency All gvernment securities denminated in dinars are categrized in a number f grups, including shrt-term Gvernment bills (with maturity up t 53 weeks), 2-year, 3-year and lng-term (5-year and 7-year) cupn Gvernment bnds. Future market interest rates and scenari analysis The mid-term public debt management strategy fr the perid was develped using quantitative cst and risk analyses based n varius scenaris and prjectins. The starting pint was the basic scenari, develped using the mst prbable market cnditins. We then prceeded t identify three grups f market variables: freign exchange rate, reference interest rates in the internatinal market and reference interest rate n dinars. Future

17 market rates can be deducted frm an analysis f available purchase pwer parity r interest rate parity frecasts. The analysis assumes an average depreciatin f the dinar against the eur f 3.4%, as well as f the dinar against the US dllar in the same percentage, ver the bserved perid. Anther pssibility is t use the frward exchange rate between EUR and USD, but in this case external influences ( shcks ) are limited and the EUR:USD exchange rate is assumed t be fixed, in rder t gain a clear picture f the effects f the applied shck. Similarly, market frward rates are currently pr predictrs f future interest rates. The analysis als used cnstant rates. The effects f market rate changes were fully tested in shck cnditins. Interest rates n debt denminated in dinars cannt be real, cnstant r frward rates, because the prjected curbing f inflatin has nt yet resulted in the reductin f prjected interest rates. Amng ther issues, there is a lack f research f cnsumer prices and f structure rules that lead t very high interest rates. The apprach used fr interest rates in dinars is based n real rates that reflect the current situatin, taking int accunt als the expected inflatin rate reductin in the fllwing years. Once the basic scenari was defined, fur additinal types f scenaris (shcks) were chsen. Macrecnmic shcks r shcks in the primary budget are examined separately in the debt sustainability analysis. Depreciatin f the dinar against the dllar by 25%. In this type f shck, all ther exchange rates remain unchanged. This glbal scenari is nt particularly related t the Serbian ecnmy, but it can have a significant impact n Serbia s debt because f the prtin f the debt denminated in dllars (which shuld accunt fr mre than 20% f Serbian central gvernment public debt by the end f August 2013). This glbal scenari is nt much related t Serbian ecnmy, but it has a great impact n Serbian debt, due t a share f debt denminated in US dllars (which at the end f August 2013 accunted fr 26.5% f Serbian public debt f the central gvernment.) In this scenari, the EUR/USD exchange rate wuld change frm 1.30 t This scenari is likely t ccur nce the US ecnmy recvers and sees a higher grwth rate, as the Eurpean ecnmy cntinues t suffer frm effects f the current debt crisis. Depreciatin f the dinar against all currencies by 25%. In this scenari, exchange rates in the whle wrld wuld remain stable, while nly the dinar wuld depreciate against them. Macrecnmic circumstances in this scenari wuld include a high balance f payments deficit and lw inflw f freign direct and prtfli investment. Interest rate increase in the internatinal market. At present, interest rates wrldwide are at a histric lw. Central banks keep lw rates anchred, thus enabling gvernments t address the issue f debt and banks t prfit frm psitive yield curves and recapitalizatin, as lng as inflatin is kept at bay. If glbal ecnmy recvers, interest rates will prbably increase by abut 2-3 percentage pints. Interest rate increase in the dmestic market by 5%. This scenari wuld be pssible if inflatin remained high (abve 10%) and the RSD: EUR exchange rate were highly vlatile. Each f the abve stress tests r risk scenaris was used t examine the cst effects f the strategies cnsidered. Alternative Brrwing Strategies fr the Perid In cperatin with Wrld Bank experts, the Public Debt Agency f the Serbian Ministry f Finance applied the WB Medium Term Debt Strategy Mdel (MTDS) as a cst and risk analysis fr the purpse f prtfli ptimizatin and mre efficient public debt management. The ptimum chice f csts and risks defined the basic brrwing strategy fr the fllwing mid-term perid. The fllwing alternative brrwing strategies were analyzed: Basic strategy (S1): a strategy that largely cvers the financing need with existing financial debt instruments, accrding t the principles used in the perid The majrity f new brrwing is based n issuing gvernment securities in lcal and freign currencies in the dmestic market and issuing Eurbnds denminated in US dllars with 5-year and 10-year maturity.

18 Strategy with prvided cncessin lan (S2): unlike S1 Strategy, ne 5-year Eurbnd denminated in eurs is issued (43% f nminal planned Eurbnd issue in S1), favrable lng-term lan is prvided with 25-year return perid and fixed interest rate f 1% in US dllars, while the additinal financing at lcal market is based predminantly n dinar-denminated securities in the scpe similar t S1. Strategy f financing thrugh a Eurbnd issue (S3): this strategy envisages rll-ver f dinar and eur- denminated securities with the maturity at lcal market withut additinal issue f these securities, while the additinal financing is prvided by the issue f 5-year Eurbnds denminated in US dllars and eurs, and 10-year Eurbnds denminated in US dllars. Supplementary dinarizatin strategy (S4): is a strategy relying n increased issuing f dinardenminated gvernment securities. All strategies envisage financing f natinal budget expenditures primarily thrugh gvernment securities issues in internatinal and dmestic capital markets, except fr strategy S2, which relies n mre significant participatin f cncessin lans. The debt cvered by this analysis is central gvernment debt, including debt arising frm indirect liabilities serviced by the Republic, but excluding nn-guaranteed lcal gvernment debt, withut new drawings f prject and prgram lans, and withut new debts and guarantees pursuant t Articles 36 and 37 f the Budget Law f the Republic f Serbia fr The balance f public debt thus calculated is estimated t be 58.1% f GDP at 2013 end. Cst and risk analysis f alternative brrwing strategies Quantitative analysis presents the perfrmance f each f the fur alternative brrwing strategies. The vertical axis shws debt as a share f GDP in the basis macrecnmic framewrk defined by the Fiscal Strategy and it is the basic measure f each individual brrwing strategy, while the hrizntal axis shws the ptential cst f each individual brrwing strategy (stress test result). Tw different cst ratis were used: public debt-t-gdp and nminal interest-t-gdp. The first rati is a balance indicatr, while the secnd is a flw indicatr. Fr the sake f cmparisn, the analyses fcus n the results f examined strategies at year-end Cmparisn f alternative strategies: Graph 30. Debt-t-GDP rati at year-end 2016

19 Graph 31. Interest-t-GDP rati at year-end 2016 The graph clearly shws csts assciated with each f the examined strategy bth the S1 and the S4 Strategy have a relatively higher risk expsure regarding the interest rates and freign exchange rates. As a result f cmbining dinar, eur and dllar securities, the S1 Strategy has, in the current prprtins, a large expsure t pssible scillatins f RSD interest rates n gvernment securities, while the level f expsure f the S4 Strategy increases significantly as the verall additinal financing is prvided thrugh emissins f dinar-denminated securities. On the ther hand, bth the S1 and the S4 Strategy have a mre stable rati f share in GDP, due t the relatively higher share f dinar. In the S2 Strategy, based n the swap f dllar securities fr the five-year eur-denminated securities, and a lng-term lan with a repayment perid f 25 years and a fixed interest rate f 1% in US dllars, there is the lwest risk in terms f interest rates f all the fur bserved strategies, due t the lwer vlatility f the eur exchange rate in relatin t dinar, as well as t the lw and fixed cst f cncessinal lan. The S3 Strategy appears t be relatively the mst risky ne in terms f debt-t-gdp rati, fr the additinal funding is based n the issue f dllar and eur-denminated bnds, while the S4 Strategy seems t be relatively the mst expensive f all strategies, cnsidering the high share f dinar-denminated securities in this strategy. In the analysis f the public debt-t-gdp rati, it is estimated that the S3 Strategy represents the riskiest chice, while the analysis f the interest-t-gdp rati shws that the S4 Strategy is the mst expensive strategy. The basic S1strategy has relatively high interest csts due t the high share f dinar-denminated securities. The S2 Strategy has lw interest csts because much f the needs fr financing are prvided frm a cncessinal lan. Accrding t these analyses, it is evident that, in the cming perid, the basic brrwing peratins will be based n the strategies S1 and S2, but with a clear preference t base the brrwing peratins n the S2 Strategy, if there exists an pprtunity fr brrwing n cncessinal terms t a greater extent. The results, btained by using the Wrld Bank mdel fr the public debt-t-gdp rati at the end f 2016, d nt cver the pssible prceeds frm the sale f state assets, r guaranteed bligatins, which are nt serviced by the Republic f Serbia, and bligatins in respect f restitutin.

20 Table 34. Public Debt-t-GDP rati at year-end 2016 Scenaris S1 S2 S3 S4 Basic scenari Exchange rate shck (25% all currencies) Interest shck (scenari1) Interest shck (scenari2) Cmbined shck (25% USD and interest shck 1) Maximum risk Table 35. Rati f payments based n the interest and GDP at year-end 2016 Scenaris S1 S2 S3 S4 Basic scenari Exchange rate shck (25% all currencies) Interest shck (scenari1) Interest shck (scenari2) Cmbined shck (25% USD and interest shck 1) Maximum risk The fllwing table shws the trends in basic parameters f public debt in each f the fur examined strategies, reflecting the characteristics f each strategy explained abve: Table 36. Risk indicatrs fr alternative strategies Risk indicatrs Year-end 2016 S1 S2 S3 S4 Nminal debt (% f GDP) Net present value (% f GDP) Applied interest rate (%) ATM 51 external prtfli (in years) Refinancing risk ATM dmestic prtfli (in years) ATM ttal prtfli (in years) АТR 16 (in years) Interest rate risk Refixing (% f ttal debt) Debt at fixed rates (% f ttal debt) Freign exchange risk Freign-currency debt (% f ttal debt) АТМ - Average Time t Maturity 16 АТR - Average Time t Refixing

21 The Share f Public Debt in the Grss Dmestic Prduct in the perid Accrding t the fiscal rule laid dwn by the Budget System Law, the general gvernment public debt may nt exceed 45% f GDP. If the debt exceeds that level, the Gvernment shall be bliged t adpt a prgram t reduce public debt in relatin t GDP, i.e. t restre the debt t the level permitted by the law. At year-end 2012, the central gvernment debt reached 59.3% f GDP while the general gvernment debt reached 60.9% f GDP. The public debt-t-gdp rati f central gvernment amunted t 58.3% f GDP at the end f August This upward trend is expected t cntinue until the end f the year, reaching the share f abut 62.7% f GDP at the central gvernment level, that is 64.2% f GDP at the general gvernment level. As a result f the high share f debt denminated in freign currencies (ver 80%), the freign exchange risk will bviusly determine the trends f the public debt-t-gdp rati in the future and significantly influence the success f fiscal plicies measures aimed at cnslidating public finances and reducing the share f public debt in GDP. On the basis f the planned macrecnmic framewrk, prvided that ptential risks (primarily freign exchange risk) d nt materialize, the public debt (excluding liabilities arising frm restitutin and nn-guaranteed lcal gvernment debt) shuld be 67.9% f GDP by The key factrs, affecting the stabilizatin f the public debt-t-gdp rati, include: GDP grwth, primary deficit, dinar exchange rate against freign currencies and interest levels. The prpsed fiscal plicy measures prvide fr a reductin f the primary deficit, reducing thus the basic factr f debt grwth. Interest levels are expected t decrease in the perid , if brrwings n favrable terms thrugh new cncessinal lan and prceeds frm the sale f state assets are realized, while the nminal GDP is expected t increase t 7%. All these factrs shuld affect the public debt, at a central level, t cme at an average level f 67% f GDP in the perid The sale f the state-wned prperty (enterprises) in tendering prcedures, in industries where such enterprises are expsed t cmpetitin and d nt belng t a grup f the s-called state mnplies, as well as the sale f minrity interest packages, held by the gvernment in certain enterprises, r state licenses can significantly decrease the debt-t-gdp rati in the perid One f the surces f prceeds that will cntribute t the public debt-t-gdp rati reductin is als the sale f inactive state-wned resurces. If prceeds are incurred n the abve mentined grunds, in the amunt f 1.6 billin EUR, the public debt will be reduced by arund 4.5% f GDP. All prceeds arising frm the sale f state-wned assets will cntribute t the public debt reductin due t the pssibility f using resurces fr the repayment f the mst expensive part f the public debt and budgetary needs financing withut any new brrwings in the financial market. This will directly reduce the interest burden in the upcming budget years and increase the primary budget deficit. Table 37. Cntributins f the key macrecnmic variables t changes in the central gvernment debt-t-gdp rati p 2014p 2015p 2016p in percentages Central gvernment debt/ GDP Change cmpared t the previus year Impact f the primary deficit Interest Grwth f nminal GDP Other factrs affecting the rati

22 Graph 32. Impact f changes in the RSD exchange rate against the basket f currencies frm the public debt prtfli n the change in public debt-t-gdp rati The Graph 32. shws the mvement f the public debt-t-gdp rati, depending n changes in the RSD exchange rate against the particular currency basket. It presents the basic prjectin with alternative scenaris, depending n the appreciatin r depreciatin f the RSD exchange rate in the range f 10% f appreciatin t 20% f depreciatin f the dinar against the basket f currencies. Applicatin f the afrementined scenaris shws that the rati wuld range frm 62.5% t 78.8% in 2016, while the basic scenari wuld be at the level f 67.9%. The key risks t the Strategy implementatin, that are quantified, in additin t the abve specified nes, are als: stability f the macrecnmic situatin in Serbia (real GDP grwth, tax cllectin, unemplyment rate, current accunt f payment balance, interest rates n the dmestic market, inflatin, exchange rate f the dinar against the eur, etc.); develpment f the wrld ecnmy and Serbia`s principal freign trade partners; needs fr additinal brrwing in rder t regulate the debts at ther levels f gvernment, in public sectr and financial system f Serbia; tax and nn-tax revenues lwer than planned and expenditures larger than planned during the budget year; significant decline in the value f the dinar against the eur; higher degree f brrwing by lcal authrities than planned in the medium-term macrecnmic (fiscal) framewrk; activatin f prvided guarantees. It is imprtant t nte that the adequate cntrl ver the issuance f guarantees and the imprved prcess f priritizatin f investment prjects, eligible fr funding frm the credit lines apprved by multilateral and bilateral creditrs, will als cntribute t the public debt-t-gdp reductin. In rder t supprt effrts made by the Ministry f Finance t increase the efficiency f prject investing, which is funded frm prject lans f multilateral and bilateral institutins, the Gvernment f the Republic f Serbia adpted, in June 2013, the Cnclusin, accepting the Reprt n the implementatin f prject lans apprved by the internatinal financial institutins and ther freign creditrs, which bliges the Minister f Finance t restrict the apprval f new prject lans and issuance f guarantees f the Republic f Serbia t thse beneficiaries whse rate f withdrawal f funds f the apprved prject lans is less than 70%, n the basis f assessing the effects f the use