Serbia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Stabilization and Association Agreement with the EU allowing 93% of Serbian products to enter without customs duties
- Ongoing EU accession process (17 of 35 chapters have been opened, of which two have been closed)
- Public sector reform in coordination with the IMF and EU
- Natural resources (coal, bauxite, copper, zinc, gold) and food self-sufficiency
- Modern automotive industry
- Lack of transport infrastructure is damaging in a country without maritime access
- Massive and inefficient public sector
- Slow judicial proceedings, customs harassment, corruption, lack of transparency in government
- Sensitivity to climatic conditions (agriculture, energy)
- Lack of productivity (excluding automotive), weak innovation is hurting SMEs
- High level of euro-isation (67%) and limited development of credit (46% of GDP)
- Informal economy remains large: 24% of GDP (35% in 2006) and 20% of employment
- Emigration of skilled labour (youth unemployment: 30%)
Growth still supported by domestic demand
Growth is expected to recover in 2020 after declining in 2019 due to less favorable external demand. Domestic demand will benefit from further fiscal easing in the run-up to the April 2020 parliamentary elections. In addition, inflation will remain contained at the lower end of the central bank's target (1.5% to 4.5%). This, coupled with the firm dinar, which is a significant point given the economy’s declining but still high level of euroization (67% of credit and deposits), should allow the central bank to maintain its accommodative policy, with the key rate at 2.5% in October 2019. Household consumption (77% of GDP) will continue to make the largest contribution to growth, boosted by:
- • the ongoing decline in unemployment (10.3% in July 2019 down from 20% in 2014),
- • additional public sector wage hikes in November 2019 ranging between 8% and 15%,
- • the 5% increase in pensions on January 1, 2020 following the reintroduction of indexation,
- • and an 11% increase in the minimum wage.
Moreover, while the banking sector’s non-performing loans ratio is falling rapidly (4.7% in August 2019), consumer credit is set to continue growing (+9% at the end of 2019) despite relatively high rates (9.8% in dinar and 3.5% in euro). Expatriate remittances should not suffer too much from weakness in the German, Swiss and Austrian economies, while tourism, of which the benefits are spreading throughout the population, will continue to grow. Investment (19% of GDP) is also expected to stay on track, helped by the ongoing credit recovery (+12% at the end of 2019), reforms and improvements to road, rail and inland waterway transport infrastructure thanks to international financing. Exports (50% of GDP) are benefitting from market share gains in the EU and increased manufacturing capacity. However, their growth is being hampered by struggling European economies and the 100% import tax imposed by Kosovo, with the result that the contribution of trade to growth will continue to be negative.
Public sector reform to be completed
Despite fiscal easing measures, public finances will remain on a trajectory that combines a virtually balanced position with a decrease in debt burden as a % of GDP (since 2016). Revenues are benefiting from the reduction in the informal economy and strong growth, while the interest payments continue to fall, with rates ranging from 0.5% to 2% on euro issues and 5.5% on dinar issues. However, while the debt burden is declining, it remains substantial, with three-quarters denominated in euros (40%) or dollars, and 59% held by non-residents, mainly public creditors. The authorities have taken steps to reduce the share in foreign currencies by successfully refinancing it with domestic dinar issues in which non-residents are participating. Wages and pensions are absorbing the fiscal leeway, while public capital expenditure represents only 4% of GDP. The 30-month (non-financial) coordination instrument concluded with the IMF in June 2018 is supporting improvements in public employment management, the adoption of a fiscal rule in 2021, and continued restructuring of the many inefficient state-owned enterprises in transport, energy, extraction and petrochemicals (over 200,000 jobs).
Current account deficit financed by FDI
Trade in goods is running a structural deficit amounting to 15% of GDP. Exports are dominated by motors, pumps, automobiles, tires, refrigerators, agricultural products, metals and manufactured products generally with medium or low added value. A large portion of the deficit is due to investment-related imports. Dividend and interest repatriations by foreign investors represent about 5% of GDP. The services surplus (4% of GDP, including tourism and transport) and remittances from emigrant workers (9%) partly offset this. The remaining current account deficit is largely financed by FDI (6.7%), particularly in industry, real estate and distribution, but also by foreign financing of transport and energy infrastructure, notably from China through the Belt and Road initiative. Foreign exchange reserves stood at six months of imports in August 2019. External debt (59% of GDP at the end of 2019) is mainly contracted with public donors and is decreasing. The same is true of public sector debt, which accounts for 50% of the total.
Good relations with the West and Russia
After being elected President in July 2017, Aleksandar Vučić was replaced as the head of government by Ana Brnabic, while retaining the presidency of the Progressive Party (SNS). Although his position is ceremonial, he remains the real leader. Faced with a divided opposition, despite sporadic anti-government demonstrations denouncing corruption, political interference and lack of media plurality, the Progressive Party (SNS) and its socialist allies are expected to win the April 2020 parliamentary elections. Negotiations for EU membership will continue but are being complicated by the lack of recognition of Kosovo, stormy relations with Bosnia and Herzegovina and Croatia, and the draft free trade agreement with the Eurasian Economic Union. As it does not want to join NATO, Serbia is trying to stay on good terms with both the West and with Russia, against which it does not apply sanctions.