Serbia

Improved economic policies but continued external vulnerabilities

C2

SENSITIVE RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

GDP USD41.4bn (World ranking 89, World Bank 2017)
Population 7.0 million (World ranking 104, World Bank 2017)
Form of state Parliamentary Republic
Head of government Ana BRNABIC (Prime Minister)
Next elections 2020, legislative
  • 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
  • Still high systemic political risks, notably the unresolved Kosovo conflict
  • Elevated public debt
  • High external financing needs and debt burden
  • Exchange rate vulnerability to shocks
  • Deficient infrastructure (roads, railways)
  • Elevated level of perceived corruption and bureaucracy

Despite improvements, structural challenges persist

The Serbian economy faces a number of structural weaknesses, including a susceptibility to natural disasters that can cause GDP growth volatility at times and a vulnerable export structure. A number of key export markets currently face weaknesses as well, notably Bosnia & Herzegovina, Montenegro, Italy, Russia and Romania.

The structural business environment in Serbia has improved over the past decade and is now slightly above average in our assessment of 191 economies. The World Bank's Doing Business 2019 survey assigns Serbia an overall ranking of 48 out of 190 economies: on key sub-components it ranks 23rd on ‘trading across borders’, 65th on ‘enforcing contracts’ and 49th on ‘resolving insolvencies’. The World Bank Institute’s Worldwide Governance Indicators 2018 survey indicates moderate weaknesses with regard to the regulatory framework, the rule of law and measures to combat corruption, i.e. there is still room for improvement.

In recent years, Serbia has benefited from steady foreign direct investment (FDI) in-flows, increasingly from Chinese investors which acquired, for example, the country’s largest steel mill in 2016. The government recently adopted new regulation to attract more FDI. Low labor cost and generous state subsidies for the creation of new jobs also 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.

Robust growth to continue

Following a floods-related recession in 2014-2015 – the third downturn in six years – a sustained recovery has taken hold in the meantime. Real GDP growth accelerated to +4.4% in 2018 on the back of strong domestic demand, in particular surging capital spending. The latter has benefited from substantial FDI inflows. External trade activity was also firm, with sound export growth of around +7% but even stronger double-digit import expansion, so that net exports made a negative contribution to overall growth. We expect the growth pattern to broadly continue in 2019-2020. However, domestic demand should lose some momentum as the catching-up effects after the triple-dip recession are gradually waning. Following a floods-related recession in 2014-2015 – the third downturn in six years – a sustained recovery has taken hold in the meantime. Real GDP growth accelerated to +4.4% in 2018 on the back of strong domestic demand, in particular surging capital spending. The latter has benefited from substantial FDI inflows. External trade activity was also firm, with sound export growth of around +7% but even stronger double-digit import expansion, so that net exports made a negative contribution to overall growth. We expect the growth pattern to broadly continue in 2019-2020. However, domestic demand should lose some momentum as the catching-up effects after the triple-dip recession are gradually waning. Overall, we expect GDP growth to slow down to still robust rates of +3.2% in 2019 and +3% in 2020.

Enhanced economic policies but external financing risks

Improved monetary policy has led to low inflation since 2014 and exchange rate sta-bility since 2016. After gradually weakening from 2008 to 2015, the RSD steadied in 2016 and even improved slightly in 2017-2018. Meanwhile, average annual consumer price inflation fell to 2% in 2018. As a result, the Central Bank has lowered its key monetary policy interest rate to 3.0% in April 2018. Going forward, we expect currency stability to continue in the near term, however, (occasional) downward pressure may reoccur in the medium term, especially in the event of any domestic or global bad news. We forecast inflationary pressures to pick up moderately in 2019-2020 as a result of robust domestic demand, rising wages and some fiscal loosening. However, headline inflation should remain in check, i.e. below or around 3%. Nevertheless, the Central Bank may start monetary tightening by end-2019.
Public finances have much advanced in recent years. Supported by IMF advice, fis-cal con¬solidation (e.g. less state involvement) has moved the annual fiscal account into surplus in 2017-2018, after large deficits until 2015, and reduced public debt from 76% of GDP in 2015 to less than 60% in 2018. Yet, as around 70% of the public debt is denominated in USD or EUR and since Serbia will remain sensitive to exchange rate fluctuations, the debt burden continues to be a source of external vulnerability. Going forward, we expect fiscal policy to be loosened somewhat as unpopular measures may be reversed after Serbia successfully completed its latest IMF funding program.

The current account posted sizeable annual deficits of more than -5% of GDP in 2017-2018, in part due to high energy imports, and is forecast to continue to do so in the next two years. Positively, the shortfalls have been entirely covered by net FDI inflows in 2015-2018, in contrast to earlier years.
Gross external debt has fallen from 81% of GDP in 2012 to 66% or so in 2018 but this is still large compared to peers and includes ongoing external arrears (5% of the gross external debt). The annual debt service on medium- and long-term debt is fore-cast at a relatively high 25% of export earnings in 2019.
Foreign exchange reserves have broadly moved sideward since 2010 and stood at just over EUR10bn at end-2018. Nonetheless, they are still comforta¬ble with regard to import cover (currently about 4.8 months, though down from over 6 months at end-2015) or, in other terms, coverage of all external debt payments due within 12 months.
Overall, external liquidity and debt risks have moderated in recent years but remain considerable.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
Italy 15%
1
13% Germany
Germany 13%
2
10% Italy
Bosnia and Herzegovina 8%
3
8% China
Romania 6%
4
8% Russian Federation
Russian Federation 5%
5
5% Hungary

Trade structure by product

(% of total)

Exports Rank Imports
Road vehicles 10%
1
9% Road vehicles
Electrical machinery 8%
2
6% Petroleum products
Vegetables and fruits 5%
3
5% Electrical machinery
Cereals 5%
4
3% Other industrial machinery
Power generating machinery 5%
5
3% Pharmaceutical products

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings