Serbia: Risk Assessment

Country Rating¹

Rating: C

Business Climate Rating¹

Rating: C

Risk Assessment²

Increased growth in 2011 driven by exports
After the 2009 recession, the economy rebounded only slightly in 2010 owing to low private demand, restricted by wage and retirement pension freezes. The retail and financial intermediation sectors, as well as mining, transport and communication, posted the strongest growth, whereas construction continued to decline. In 2011, the recovery is expected to take hold. Exports, mainly of manufactured goods and food products, will drive growth, while consumption and investment will make more muted progress. Direct foreign investment inflow will gather pace, with the privatisation of public companies Telekom Srbjia and JAT Airways. Growth in mining, financial intermediation, transport and manufacturing is expected to continue. This growth will, however, be limited by restrictive budget policy. Furthermore, continuing high unemployment rates, at almost 20% of the working population, will continue to hinder household consumption.

Budget consolidation within the framework of the IMF agreement
The country has been subject to an IMF agreement since 2008 and the authorities are thus eager to contain the budget deficit and comply with IMF recommendations. In 2010, the deficit objective was achieved thanks to the stabilisation of current spending. In 2011, the deficit is expected to contract further. Privatisations will swell revenues and current spending (salaries and social transfer payments) is expected to stagnate in favour of investment spending. In coming years, the deficit is expected to shrink with public debt stabilising at around 40% of GDP but remaining very sensitive to exchange rate variations and growth shocks.

High dependence on external financing
The current account is structurally in deficit, due to a lack of competitiveness in certain export sectors and inadequate domestic supply. In 2011, increased exports of metals (particularly steel from the US Steel factory in Smederevo), food products and chemicals will make it possible to compensate for import growth. Direct foreign investment will only meet a small portion of financing needs, and the country will thus have recourse to foreign, mainly private, debt, which has been growing over recent years. The banking sector, which is well-capitalised and which posted satisfactory profitability in 2010, nevertheless has a very open exchange position that makes it vulnerable to external shocks.

Stabilisation of external geopolitical risk
Ten years after the fall of Slobodan Milosevic, a number of political and constitutional changes have taken place. The pro-European coalition, in power since 2008, has worked towards rapprochement with the European Union by moving towards peaceful resolution of disputes with other nations, in particular Kosovo. The country thus won EU candidate status in 2009. Kosovo remains a stumbling block in membership negotiations, however, as Serbia has still not recognised the country. Furthermore, the business environment in Serbia is below average for the region.

Strengths

• International financial backing and economic recovery thanks to political normalisation and economic openness
• Reduction in public debt burden due to debt relief measures
• Consolidated banking system
• Qualified and competitive workforce
• Support from donors

Weaknesses

• High financing needs and dependence on external financing
• Rising corporate external debt
• Overblown public sector
• Relations with EU dependent on Serbia’s continued cooperation with the ICTY and on progress made regarding governance
• Weak governance