Population 7.566 million
GDP 37.199 US$ billion
@rating
country
Business climate
assessment
| 2009 | 2010 | 2011(e) | 2012(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
1 |
1.6 |
-1.5 |
1 |
|
Inflation (yearly average) (%)
|
6.2 |
11.2 |
7 |
8 |
|
Budget balance (% GDP)
|
-4.8 |
-4.9 |
-6.7 |
-4.5 |
|
Current account balance (% GDP)
|
-8.6 |
-9.3 |
-12 |
-10.5 |
|
Public debt (% GDP)
|
44.8 |
45 |
60 |
55 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Support of financial backers
- Skilled labour force
- Consolidated banking sector
- Normalised relations with most neighbours
WEAKNESSES
- Dependence on external financing
- Sharp increase in private external debt
- Dispute with Kosovo obstacle to EU accession process
- High unemployment rate
- Business environment could be improved
Risk assessment
Modest economic recovery expected
The Serbian economy is expected to recover in 2013 after a sharper recession than expected in 2012, but will not achieve the government’s 2% growth target. Growth will be underpinned by exports of Fiat vehicles and steel from the Smederevo plant, as well as by sales of agrifood products. Higher output from the modernised refinery of the NIS oil company and from the mining sector (carbon, copper, gold) will also boost growth. It will also be buoyed by continued public investment in infrastructures. Nonetheless, activity will be limited by the economic situation in EU, the main trading partner.. Meanwhile, persistently high unemployment (affecting a quarter of the labour force, in late 2012) will continue to curb household consumption. Inflation eased during the first half of 2012 in response to depressed domestic demand and prudent monetary policy, albeit constrained by economy’s dependence on the euro. Since then, inflation has started to rise again and, in 2013, it is expected to settle above the Central Bank target due to a surge in agrifood, administered and import prices.
Search for fiscal consolidation leading to a possible new agreement with the IMF
Each year the authorities have tried to keep the fiscal deficit below 5% of GDP, but in 2012 (election year) they were unable to prevent slippage. In February 2012, the IMF suspended its 18-month $1.5bn loan, approved in September 2011 considering that the reform programme was put aside. The 2013 budget was qualified by the government as a turning point in terms of fiscal consolidation. Thanks to a 5% spending cut achieved by reducing transfers to local authorities and certain subsidies and better spending control, the public deficit target reaches 3.6% of GDP. However, this target appears ambitious because it is based on an over-optimistic growth forecast. In 2013, a new agreement with the IMF is possible, but it would imply consolidation of the public finances. Serbia will have to undertake fiscal adjustment by significantly cutting current expenditure in favour of investment. The country also needs to reform the social security system and restructure its state-owned enterprises. Nonetheless, an arrangement with the IMF could be a source of political and social tensions, especially regarding the complex public-sector reform. In 2012, the public debt rose significantly, far exceeding the legal ceiling of 45% of GDP, and is expected to remain well above the ceiling in 2013.
Structural deficit of external trade and dependence on external funding
External trade is structurally in deficit due to insufficient domestic supply and lack of competitiveness in some sectors. Almost 60% of exports are destined for the EU and, to a lesser extent (less than 20%) for partners in the free trade area of the Balkans (CEFTA). In 2013, the current account deficit is likely to edge downwards, despite weak European demand, as exports of manufactured, agrifood and chemicals goods will increase more than imports. With foreign direct investments only covering a small proportion of financing needs (about a quarter), the country’s external debt has risen considerably (80% of GDP). Serbia benefits from bi- and multilateral funding and from financing through public/private partnerships but as this is not sufficient still has to resort to private debt. As for the dinar, it will stay in area of turbulence while most economic operators (public entities, companies, households) mostly hold euro-denominated debt. Meanwhile, although bank sector capitalisation and profitability is satisfactory, the increase in non-performing loans is worrying and its dependence on European banks makes the sector vulnerable.
Ongoing efforts to EU accession process
The leader of the Socialist Party of Serbia (SPS), Ivica Dacic, was appointed as Prime Minister after the May 2012 parliamentary elections. The coalition government, nationalist but pro-European, is made up of the SPS, the Serbian Progressive Party (SNS) and the United Regions of Serbia (URS). The SPS and URS were part of the outgoing coalition, so policy is likely to remain relatively unchanged. Joining the EU is still one of Serbia’s main objectives and this has pushed it to settle its disputes with external partners. However, negotiations with the EU come up against the issue of Kosovo, which Serbia has not recognised. As a result, the country is unlikely to achieve EU candidate status in 2013.
