Growth momentum picks up but external vulnerabilities remain large

Country Rating D3


  • Adequate business environment relative to regional peers, according to the World Bank’s annual Doing Business surveys

  • Comfortable level of foreign exchange reserves

  • Low labor cost plus generous state subsidies for foreign companies


  • High systemic political risks: history of instability, weak policymaking and unresolved Kosovo conflict
  • Poor macroeconomic policy track record
  • High public debt
  • High external financing needs and debt burden
  • Exchange rate volatility and vulnerability to shocks
  • Deficient infrastructure (roads, railways)
  • Elevated level of perceived corruption and bureaucracy


Economic Overview

Acceleration of growth ahead

Serbia’s economy is expected to expand by +1.7% in 2017 before accelerating to +2.5% in the next two years. This growth will stem from strong exports due to rising foreign demand as well as the expansion of production capacities. The latter is due to the investment efforts of previous years in manufacturing and mining.


The country has benefited from steady FDI inflows, increasingly from Chinese investors which acquired, for example, Serbia’s largest steel mill in 2016. The government recently adopted new regulation to attract more FDI. The expansion of investment and industrial production should accelerate over the next years, driving GDP growth.


Cheap labor cost and generous state subsidies for the creation of new jobs entice foreign investors to relocate facilities to Serbia. Yet, financial incentives are distributed in a non-transparent manner, which opens the door to corruption. It has become the new normal for Balkan countries to outbid one another in terms of subsidies to attract new foreign companies, despite their fiscal constraints.


Wages in Serbia are among the lowest in the Balkans, weighing on consumer spending. The government and the IMF agreed to raise public wages and pensions by 5-10% in 2018. Improving labor market conditions may lead to wage increases in the private sector, though real wage growth will be more modest due to higher inflation. This should help boost the still relatively low purchasing power.


External financing risk and debt burden

Public finances are gradually improving. Fiscal consolidation (e.g. less state involvement) has brought down the fiscal deficit to adequate levels since 2016. Yet public debt will remain high. In relation to GDP, it has risen from 32% in 2008 to currently 73%, mainly due to the continued depreciation of the RSD. Around 72% of public debt is denominated in USD or EUR. Being highly sensitive to exchange rate fluctuations, this is a source of external vulnerability, which has forced the Central Bank to be interventionist beyond its inflation mandate.


The current account deficit is set to come in at -5% of GDP in 2017 because of higher energy imports and lower agricultural commodity exports due to a bad season. Although most of the external shortfall is financed by (relatively stable) FDI inflows, the creditworthiness of Serbia remains an issue.


The RSD has continuously weakened since the onset of the global financial crisis and the ensuing domestic triple-dip recession. Downward pressures have been exacerbated by the high share of borrowing in foreign currency accompanied by the rise in gross external debt (77.5% of GDP in 2017).

Last review: 2017-12-01