Private Briefing March 2023

No. 120 | Year X

Private Briefing Spring 23-2

A straight-up Ten!

The third Private Briefing in 2023 is 120th in total and it signifies a full decade of editions with single unique goal – analysing available support for MSMEs and farmers in current business environment. This edition aligns with the decade long matrix and brings the third segment of the macroeconomic framework trilogy analysis, focusing on banking sector, followed by the analysis of the largest ever. The spring greenery is represented through the provincial programme supporting young farmers outside the main centres, and UNDP contest for sustainable solutions for green transition.

Private Briefing Spring 23-2

Provincial Secretariate: Support for Young Farmers

> The Vojvodina Provincial Secretariate for Agriculture, Water Management and Forestry has announced a public call for support to the young people in rural areas in AP Vojvodina in 2023. The support model provides subsidies for investments in agricultural household’s assets, registered to private individuals residing in the territory of the province, no more than 40 years old at the time of submitting the application. Additionally, users are eligible if they were registered as holders of agricultural households for the first time after April 1st 2023 and did not use government incentives before. Also, the prerequisite is that the applicants’ households are outside of the major cities in the territory of the province, including Novi Sad, Subotica, Zrenjanin, Pančevo, Vršac, Sremska Mitrovica, Kikinda or Sombor.

The purpose of the programme is to support new generations of young farmers, by development and improvement of production, incentivising investments in physical assets of agricultural households. Specific purposes include a wide range of improvements, such as the purchase of breeding and milking cattle, sheep and goats, as well as milking, cooling and milk storage equipment on the farm, with all materials and installations. The maximum amount of 1,5f million dinars is also provided for machines and equipment for handling and transporting solid, semi-liquid and liquid manure, for preparing fodder for feeding animals, equipping facilities for raising sows and fattening pigs, equipment for poultry farms for table eggs production, sorting, packaging and storage, as well as equipment and machinery for frost protection. The total budget of the program is 200 million dinars, and users can obtain a grant reaching 90% of the total investment costs without VAT, ranging from 500.000 to 1,5 million dinars per application. Grants are paid in advance in the amount of 75% of the contracted funds, while the remaining 25% is paid after the finalisation of the investment.

> The combination of an extremely high share of grant and a wide range of purposes, makes this call very interesting and potentially useful for individual farmers, since they can significantly improve their performance. Bearing in mind that the call is aiming at young farmers, who likely don’t have a significant amount of own funds to finance improvements, this is an excellent opportunity for them to start a business from a higher initial level, with increased capacity and resources for better productivity and profitability, provided by new, modern equipment or increased livestock. In addition, the program takes into account the aspect of balanced development by supporting farmers facing a challenge entering the market, since they are located outside the main economic and commercial centres. Therefore, this programme with its clear capacity for support to individual farmers, despite its modest geographical reach, is also bearing certain macroeconomic importance.

Macroeconomic Overview: Banking Sector

After the macroeconomic analysis of the trends and projections of key market indicators and expectations for 2023, focusing on global trends and economic framework in Serbia in the previous two editions, we turn to the analysis of the trends and projections for banking sector, as the last element framing the overall business environment. Since the last years’ results are partially available, being published with delay, some of the analyses are based on the data available by Q3 2022, however, even with that limitation, the trends are clear. The expectations for 2022 indicated further consolidation and rebound of business environment, however, a series of negative impacts mutually titled „permacrisis“, lead by the inflation and disturbed supply chains from far East, boosted by the regional crisis in Ukraine, gained global volume in post-COVID environment, and the global financial system reacted radically to those impulses. Given the high level of integration of local financial system, the trends have spilled over and they produce effects locally, in conjunction with the local specifics.

In line with the projections and processes initiated in previous years, consolidation in the banking sector remains a continuous process, both in terms of finalisation of previously arranged M&As, and in terms of new ones. During the year, the acquisition of Credit Agricole by the Raiffeisen Bank, and the acquisition of Sberbank by AIK Bank have been closed. The total number of registered banks at the end of 2022 was 22, one less than in 2021, with modest decrease of number of employees from 23.000 to 22.000, and with approximately 48 billion EUR of assets, which is an increase of 6,5 billion or 15% compared to the 2021. Mutual market share of the first three banks is at approximately 40%, while the top 4 possess nearly 50% of the total assets, and top 5 nearly 60%, indicating significant concentration. Individually, the largest share holds Banca Intesa, with 15%, followed by the OTP with 13,8% and UniCredit with 10.7%, while the NLB, upon the acquisition of Komercijalna Bank, stands at 4th position with 10,2% of share in assets. The share of NPL at the end of 2022 continued to decrease, reaching a new historical minimum of 3,0%, compared to the previous 3,6%. The highest contribution to the NPL comes from the segment of private individuals, with increased share compared to 2022 (from 49% to 58%), with the rate of 4% being significantly above the total NPL rate. On the other hand, the contribution of businesses in NPL has decreased from previous 37% to 34%, and the average rate of 2,1% is significantly better than the total.

In contrast to the repo rate decrease trend during 2020 and almost full stabilisation during 2021, following the global inflation increase effect, which locally, from initial 7,9% reached 15% at the end of 2022, the trend has reversed leading to repo growth from 1% all the way to 5,25% at year end. Repo rate dynamics, similar to EURIBOR, reflected on cost of borrowing, so the interest rates on local currency and indexed loans to businesses reached 5,9% and 4,8% respectively, compared to the 3% and 2,3% previously. Regarding the banking sector assets structure, the absolute domination of Loans to Customers category continues, with 56% share, at the level of last year values, and Securities and Cash also remain stable at mutual level of 31%. The total outstanding loans at the sector level grew by 7,3%, to 212 billion dinars. Loans to private individuals grew by 85 billion dinars in volume, lead by the housing loans disbursements, while other categories’ shares have dropped. The share of housing loans at the end of 2022 was above 40%. One of the reasons for such portfolio structure is that measures brought in 2020, allowing the banks to refinance or extend maturities for additional 2 years, or 5 for housing loans, accompanied with relaxed criteria of objects completion and down-payments reduction from 20% to 10%, continued in 2022. Portfolio currency structure is still dominantly indexed in foreign currencies, remaining stable at 63%. Anticipating the decrease in the repayment capacity, NBS has enabled banks in December to restructure receivables from clients facing difficutlties, by extending the tenor of cash, consumer and housing loans. 

Assets Structure
Loan Currency Structure
Loans by Sector

Given that one of the key identified challenges for the regional economy, particularly for small business which add up to the 90% of the total environment, is namely the restrictive crediting and collateral requirements rigidity, a significant financing gap emerges, most visible in financing fixed assets, which are one of the cornerstones of sustainable development and competitiveness. Meangingful relaxation in that respect, particularly given the supply side restrictions, is not to be expected. Therefore, as one of the ways to to overcome the challenge, alternative financing models are gaining relevance and finding their place in the market, just as are the tailored programmes of support which certainly have the capacity to absorb significant segment of SMEs financing needs. Factoring, especially combined with digital platforms, made a boom in 2022 and it is the fastest growing model, overwhelmed by demand despite the cost, and alternative investment funds are also present. Within the pallette of special programmes with relaxed requirements we can certainly recommend announced government support programmes, EBRD Women In Business, Start-up support programme by Serbian Entrepenerusihip Foundation and USAIDs Big Small Business, as the most relevant available options. All of them, and the programmes focused on sustainable development goals, will be individually analysed in editions of „Straight-up 10 PB“ to come. As always, we will closely montior and analyse what in that context brings 2023 and years after it.

Banking sector activity in years preceding 2022 was dominantly shaped by support measures aiming to mitigate COVID crisis impact, placed through the sector. That significantly contributed to not only preserving the liquidity in the economy, but also, to a good measure, the banks’ portfolio quality. Research have concluded, and the practice has confirmed, that the investment sentiment of regional businesses is oriented towards growth significantly more than earlier, and that, to a significant extent, they expect adequate external financial support to overcome challenges, and also for investments which should enable using the emerging opportunities for taking new positions. The banking sector will have to adjust to that, both through the strengthening of internal capacity and improvement of existing services and products for businesses, and challenges on that road are multiple. The trend of sector consolidation, leading to the decrease of the number of banks for nearly a third in the last decade continues, indicating the reduction of support inclusiveness, to which the prices increase doesn’t help, just like the increased restrictive approach aiming to offset portfolio quality decrease and global trends in Q1 2023, which, fueled by bad investments, already have led to significant shocks with first signs of reduced financing sources.

Ministry of Economy: Development Programmes Grants in 2023

In ten years of Private Briefing, we have reached the 7th year in which local businesses have access to structured business support packages coordinated through the Ministry of Economy and state support institutions. Throughout the years, the structure has evolved, but it remains within the framework which can be considered as a materialization of the initiative started in 2016 labelled back then as the “Year of Entrepreneurship”, which later developed into the “Decade of entrepreneurship”. The evolution of the models and goals of support aligns with the entire business environment, standard models are adjusted, whether in terms of amounts or specific purposes, while the new aspects are introduced, in line with the identified challenges faced by the businesses in volatile environment. This year, the programmes package kick-off is announced for March-April, and since they haven’t officially started, we analyse the Development Programme announcement, channeling support to investments in fixed assets.

The call aims at entrepreneurs, SMEs and farming cooperatives, as well as the large enterprises, for purposes ranging from purchase, through construction, extension and reconstruction, to investment maintenance of production facilities and business premises, as well as warehousing. Exceptionally, for businesses in high-tech services, the funding can be used to purchase the office space. Furthermore, the eligible purposes list includes the purchase of production and construction equipment, as well as for the delivery vehicles for the transport of own products and those used in the production process. Eligibility criteria also include financing permanent working capital, which can account for a maximum of 10% of the total investment, as well as the purchase of software and IT equipment. Finally, the funds can be used for machines and equipment to improve energy efficiency and

environmental protection aspects of production. Eligible beneficiaries are businesses older than 2 years, during which they have been profitable. Grants are available in the amount of up to 20% of the value of the investment, or up to 30% if the beneficiaries are registered in the underdeveloped areas. The amount of the entire investment supported through the programme ranges from 75.000 dinars for entrepreneurs and 250.000 dinars for legal entities, to 12,5 million dinars. All entrepreneurs and MSMEs meeting the requirements of the Programme can request grants of up to 2.5 million dinars, or up to 3.75 million for businesses operating in the underdeveloped area. Beneficiaries can also apply for grants over 2,5 million, or over 3,75 million dinars in underdeveloped areas, if they meet the criteria of fast-growing development or stabile operations.

The total budget for grants under this call is 900 million dinars, which is an impressive increase compared to the last years’ 350 million, and even more so to 200 million in 2021. As a rule, the programme assumes a cap for share of funds allocated to medium or large enterprises, meaning that the primary target group are micro and small enterprises and entrepreneurs, who actually are the most in need and at the same time have a very narrow choice of support options, especially when it comes financing fixed assets and closing the maturity gap between short-term liabilities and assets. Assuming that an average grant is 2 million dinars, the total number of programme beneficiaries could surpass 400, which is a significant reach compared to similar programmes.

> The mix of purposes, which includes permanent working capital and investments in fixed assets, with traditionally well measured repayment periods and favourable interest rates, makes this financing option a well-tailored solution for financing SME investments, which can affect long-term improvements of capacity and competitiveness. The precondition to meet these goals is a good investment plan and a careful analysis of the economic framework and market potential. These parameters are also required within the business plan which is an integral part of the application package in the case of entrepreneurs, or investment programme in the case of companies, which is also a fundamental precondition for a successful, adequate and purposeful implementation of the planned investments, enabling them to yield desired effects.

UNDP: Acceleration and Financing for Green Transition

The United Nations Development Program (UNDP) in Serbia, with the support of the EU, the governments of Sweden and Switzerland, in partnership with the Ministry of Environmental Protection and in cooperation with the European Investment Bank (EIB), announced this year’s call within the multi-year Challenge for Innovative solutions for the Green Transition of the Serbian economy. The goal of this programme is to support the implementation of innovative business solutions in all five areas of the Green Agenda for the Western Balkans, including decarbonization, circular economy, reducing environmental and air pollution, protecting and preserving nature and biological diversity, and establishing sustainable systems for food supply and rural development. The challenge is open to public, private and social enterprises, research institutions, civil society organizations, local governments and protected areas management organisations, individually or jointly in the form of a consortium.

Applicants are expected to initiate projects that apply new technologies or promote new applications of existing technological solutions to achieve the goals of each of the segments of the Green Agenda. The best proposals will receive mentoring and technical support for further development, while the most successful among them will be provided with co-financing in order to be implemented. After the end of the acceleration phase, the commission will re-evaluate all

projects’ documentation to identify the projects with realistic implementation potential, which are sustainable and most efficient for ecological, social and economic development, to receive co-financing in the amount of 30 to 50% of estimated total investment value of the project. The amount of financing is segmented within the categories of small projects (up to 100.000 EUR), medium (up to million EUR) and large projects, assed at above one million EUR.

Phased support, which provides an initial acceleration that increases the capacity of users to use the consequent financial support, has proven in a series of programmes in which we also participate, to be the most effective model for the utilization of development-oriented projects. This call is specific in that it enables support for a wide range of possible beneficiaries and projects of varying scope, with both access to knowledge and access to a number of development-oriented financial aggregators. Therefore, it represents an excellent opportunity for incremental development from an innovative, green-oriented idea to a successful business venture.

KEY ECONOMIC INDICATORSMar - 23
1Annual inflation16.10%
2Reference interest rate5.75%
3Unemployment rate9.20%
4Average net salary - RSD82,769
5Average pension - RSD37,813
6Exchange rate RSD/EUR
On the last day of the month117.3087
Average exchange rate for the month117.3268
7Exchange rate RSD/USD
On the last day of the month110.7835
Average exchange rate for the month109.4539

For additional information or questions, please contact us. Share your impressions, inquiries and news, or share the updates on the current projects.

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