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Serbia - Economy

In 2012, Serbia went through another recession and the economy contracted by 1.7%. The economy slightly recovered in the first half of 2013. High exports growth has softened the effects of depressed domestic demand. Fiscal consolidation efforts were taken mostly on the revenue side. The process of restructuring state-owned enterprises was revived. Some progress has been made with regard to fighting corruption and improving property rights.

Serbia's economy is still shaped by the wars, sanctions and economic neglect of the 1990's. The country is trying to make up for lost time, but the economic liberalization process has been drawn out, with limited tangible benefits for average Serbians. Average Serbs perceive the privatization process as a disaster, seeing their once prestigious firms sold for fire sale prices to shady investors, who later declared bankruptcy and fled. When the global financial crisis hit, Serbia was quick to reach out to the IMF and in May 2009 signed a $4 billion Stand-By Arrangement. Since then, the Serbian dinar has been relatively stable; however, in recent weeks, the dinar has come under pressure. Serbia's rustbelt suffers from sustained high unemployment exceeding 25%.

Since the fall of Slobodan Milosevic, Serbias economic progress has been substantial, but economic reform and restructuring are continuing challenges for the Serbian Government. Unemployment, a lack of liquidity in the economy, corruption, and labor unrest remain ongoing political and economic problems. The dinar (RSD) has fallen by more than a third against the Euro since the onset of the global financial crisis in 2008, highlighting Serbias fragile and structurally weak economy. However, the dinar has stabilized in 2011, settling at around 100 RSD to the Euro.

Although the positive changes in the gross domestic product per capita (GDP) in Serbia ($3177 in 2004 and in $6800 in 2008) were encouraging, their impact was almost diminished when the value of GDP was expressed in terms of purchasing power parity in 2008. The 35 index points from the average for EU countries placed Serbia among the countries with the lowest values in Europe. In the period 20002008, the unemployment rate in Serbia was constantly increasing from 3.3% in 2000, to 14.7% in 2008. This is significantly higher than the average rate of 7.2% in EU countries, as well as in neighbouring countries (9.6% in Croatia; 7.7% in Slovenia; 6.9% in Bulgaria).

On August 31, 2011 Serbian authorities and International Monetary Fund (IMF) officials reached an agreement, subject to approval by IMF management and the Executive Board, on a 1 billion Euro (approx. $1.4 billion) Precautionary Stand-By Arrangement (SBA) for a period of 18 months. The agreement, which will oblige the Serbian Government to undertake structural reforms in the labor market, property regime, and public enterprises, is conditioned on Serbia adopting both a rebalanced 2011 budget and a law on property restitution. Serbian Government officials have indicated that they do not intend to draw on the financial resources made available under the arrangement unless an external financial shock requires it. Serbias last SBA, a $4 billion credit line, expired in April 2011.

Serbia experienced a relatively healthy GDP growth rate in 2008 (5.5%), but the global economic crisis caused Serbias GDP to tumble, and growth turned negative (-3%) in 2009. A slow economic recovery commenced in 2010 (with 1% GDP growth), and the IMF projects growth of 2% for 2011. In late 2010, Serbia adopted a new model of economic growth based on increased savings, investment, production in tradable goods, and exports. The model has achieved some success. Exports, for example, rose by 26% in 2010, due in significant measure to the depreciation of the dinar and the incipient recovery of the global economy. Export-led growth continued through 2011, with exports increasing by 30.4% during the January-July 2011 period compared to the same period in 2010.

Rising inflation became a concern in the first half of 2011, peaking at 14.7% year-on-year in April. Inflation declined to 10.5% by August but remains significantly above the National Bank of Serbias (NBS) 3%-6% target range for this year. Inflation is expected to return to single digits by the end of 2011, but will not likely return to the NBS target band before next year. To combat inflation, the NBS raised its benchmark interest rate several times since the summer of 2010. By March 2011, the NBS benchmark rate stood at 12.25%, the highest in Europe. High interest rates have helped curb rising inflation but also tended to inhibit domestic investment and growth. In mid-2011, the NBS began to ease monetary policy and, as of September 8, 2011, the rate stood at 11.25%.

Growing inflation and official price increases for controlled products and services, such as public transportation, electricity, and natural gas, have compounded the economic difficulties facing Serbian citizens, whose average net incomes (minus taxes, medical insurance, and retirement contributions) have remained stagnant at approximately $540 per month. Poverty levels have risen steadily since the onset of the global financial crisis, reaching approximately 8.8% of the population at the end of 2010. The official unemployment rate stood at 22.2% as of April 2011, and unemployment levels in many provincial cities and among women and minorities exceeds 30%. The IMFs projected 2% GDP growth rate for 2011 is not sufficiently robust to significantly reduce unemployment this year.

Property rights remain unsettled to a significant degree. In September 2011, the Serbian Government approved and sent to Parliament for adoption a restitution law that addresses the states seizure of private assets since the onset of World War II. Though the restitution law will help clarify and settle titles to many properties, Serbias property rights regime remains in need of reform. Legal procedures for converting of rights of use of property to full property ownership rights are unclear, and conversion applications are processed very slowly, or often not at all, creating a great deal of uncertainty in local property markets. Serbia must legalize, register, and establish property titles to thousands of illegal structures that have been built throughout the country without licenses or proper registration in official property records. The central government is also contending with how to return thousands of public properties from the central government to local municipalities. These deficiencies in the property regime tend to inhibit real estate development and other investment projects.

Economic reform has been moving forward in many areas, driven largely by Serbias decision to seek membership in the European Union (EU) and in the World Trade Organization (WTO). Serbias accomplishments in modernizing legislation to conform to EU and international standards in nearly all areas affecting the economy, from intellectual property rights to foreign trade, have been impressive. Implementation of these new laws, however, remains inconsistent. In addition, important sectors of the Serbian economy and society, such as education, health, and energy, have yet to undergo serious structural reforms. Political appointees preside over large, inefficient state enterprises that are run more as social welfare organizations than as modern businesses. Much of the economy and employment structure remains dominated by an inefficient public sector. More than 25% of all people employed in Serbia work for state-owned enterprises or the central and local governments. The World Bank estimates that two-thirds of all university graduates in Serbia work for the public sector, and only one-third in private enterprises.

Privatization is far from complete. In addition to the unsuccessful effort to privatize Telekom Srbija in 2011, approximately 100 socially-owned companies, whose privatization was to have been completed by the end of 2008, remain under state stewardship. Competition remains limited in key economic sectors, including certain agricultural subsectors (sugar, sunflower oil, soybean products, wheat seeds, mineral fertilizers, and some dairy products), food retailing, and energy, which are dominated by a handful of major market players.

Serbia maintains 35 large State-Owned Enterprises (SOEs) and more than 650 municipal enterprises in select sectors of the economy. SOEs dominate many of the leading sectors of the economy, including energy, transportation, utilities, telecommunications, infrastructure, mining and natural resources. According to the European Commission's October 2012 Progress Report for Serbia, SOEs incur approximately EUR 1.0 billion (USD 1.3 billion) in combined losses annually, approximately 40 percent of all losses in the economy. The losses amount to approximately 3.5 percent of GDP. In addition, total government subsidies and transfers to state enterprises amount to an estimated 2.3 percent of GDP.

By 2012 the number of "failed privatizations" exceeded 27 percent since the beginning of the privatization process in 2000. Over the previous ten years, a total of 2,350 companies were privatized; of this figure, 646 privatization contracts (27 percent) were annulled because of the buyers' failure to fulfill the contract terms. Approximately 535 companies awaited privatization in 2012, their prospects clouded for a variety of reasons.

The new Serbian government that took office in the summer of 2012 has adopted a number of new laws in an effort to introduce economic reform and to improve the business climate. In addition, in January 2013, the National Assembly passed Amendments to the Trade Law, which remove administrative barriers to investments by eliminating the requirement for a market impact study for large trade centers (larger than 2,000 square meters) and by abolishing the Center for Development of Trade, a public agency that issued licenses for large trade centers. The Amendments also improve legal protection for unfair competition by introducing legal grounds for a company to sue unfair competitors for non-material damages for having harmed a firm's business reputation.

In addition to new legislation, the government announced ambitious plans to decrease its budget deficit from 6.7 percent of GDP in 2012 to one percent by 2015 and to reduce total public debt levels from 60.5 percent of GDP in 2012 to 45 percent by 2020.

Foreign direct investment (FDI) was relatively strong prior to the global financial crisis ($2.2 billion in 2007 and $2.3 billion in 2008), but fell off in 2009 ($1.9 billion) and has remained at disappointing levels ($1 billion in 2010 and $820 million in January-June 2011). Efforts to attract additional FDI were dealt a setback in March 2011, when a tender to sell a majority stake in the state telecommunications company, Telekom Srbija, failed to attract a minimally acceptable bid. On the other hand, a number of leading foreign investors have recently announced significant expansions of their operations in Serbia.

Serbia attracted approximately EUR 638 million (USD 829 million) in FDI in the first ten months of 2012, according to the National Bank of Serbia's October 2012 Balance of Payments report. (The exchange rate used throughout this report is 1 EUR=1.3 USD.) Net FDI during this period, however, was only EUR 81 million (USD 105 million) because FDI outflows (EUR 557 million/USD 724 million) were unusually high. The high level of FDI outflow is attributable to Telekom Srbija's payment of EUR 381 million (USD 495 million) for the buyback of its shares and Norwegian investor Telenor's repatriation of EUR 176 million (USD 229 million).

Well-known multinational companies, including Italy's Fiat and Benetton, Germany's Siemens and Grundfoss, Belgium's Delhaize, Korea's Yura, and from the United States, Cooper Tire and Rubber and Johnson Controls, completed major new investments in Serbia in 2011 and 2012. Foreign investors cite Serbia's strategic location in the Balkans, relatively inexpensive labor rates and skilled labor force, free trade agreements with key markets (the European Union, Russia, Turkey, Central European Free Trade Agreement countries, and others), and Serbian government support mechanisms for investors as the prime incentives to opening new businesses in the country.

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Page last modified: 18-10-2013 14:19:06 ZULU