Serbia and Montenegro Business Forecast Report Q3 2008

Uncertain Times As BMI's Q308 Business Forecast Report for Serbia goes to print, the country's future hangs in the balance following the inconclusive election on May 11. Closer links with euro-Atlantic institutions - and the political, economic and investment benefits that this will bring - await Serbia; however there is a risk that the country may move back towards international isolation and onto a rocky economic trajectory. Ultimately, our core view is that Serbia will choose to enhance its links with euro-Atlantic institutions and on the back of this we forecast that economic growth will average 6.3% through our five-year forecast period.

Serbia signed the Stabilisation and Association Agreement (SAA) with the European Union (EU) on April 9, overcoming one of the key initial hurdles for EU membership. The SAA was initialled in early November 007, but the signing of the agreement has been delayed in large part due to political wrangling over the issue of Kosovan independence. Serbian President Boris Tadic has stated that Serbia is now seeking to become an official candidate for EU membership later in 2008.

We view the SAA and the recent developments between the EU and Serbia as positive, however we caution that this is unlikely to provide Serbia with any of the tangible benefits associated with signing the SAA, over the medium-term. Indeed, no EU states will ratify the treaty, nor will Serbia start receiving any trade or visa benefits, or any of the financial or economic incentives that come with the SAA, until it is seen to be fully co-operating with the International Criminal Tribunal for Yugoslavia.

Providing that a pro-Western governing coalition is formed, we expect key Serbian macroeconomic fundamental indicators to improve through our five-year forecast period. Indeed, we forecast that the current account deficit will narrow from 17.4% of GDP in 2007, to 15.5% in 2008, and will average 12.8% through our five-year forecast period. While we expect Serbian imports to continue to outpace exports, we expect that the majority of these will continue to be used for capital and intermediate goods. Indeed, these two items accounted for 89.3% of total imports between January and March 2008. An additional positive indicator for Serbia's balance of payments dynamics is that we expect Serbia to continue attracting additional strong FDI inflows beyond the medium-term, providing a boost to our five-year growth forecast.

At 50.8, Serbia falls into the middle of the pack in our Business Environment Ratings for emerging Europe. While in the early stages of opening up to foreign investors, Serbia is a particularly appealing market for investors because of its advantageous geographical position, which allows easy access to the rest of Europe and the low cost and abundant supply of skilled labour. However, the prevalence of corruption and the poor state of the country's infrastructure make it a challengingmarket for foreign investors.

• Executive Summary
• Uncertain times
• Chapter 1: Serbia Political Outlook
  • SWOT analysis
  • BMI Political Risk Ratings7
  • Domestic Politics8
  • Divided Vote Heightens risk of Fractious Parliament
  • The pro-Western party bloc, led by President Boris Tadic's Democratic Party, won the largest share of the vote
  • (38.7%) in Serbia's parliamentary election, held on May 11 - on the surface confirming the Serbian electorates
  • preference for a European path
  • Foreign Policy
  • Moving Closer to the EU?
  • We see the European Union's signing of the Stabilisation and Association Agreement with Serbia as marking
  • an important step in the country's path to eventual EU membership
  • Table: Serbia Political overview
• Chapter 2: Serbia economic outlook
  • SWot analysis11
  • BMI economic risk ratings
  • economic activity
  • Hanging in the balance
  • We believe that the formation of the next governing coalition will be crucial to the pursuit of necessary
  • political and economic reforms and the country's growth prospects
  • Table: Serbia - economic activity15
  • Exchange rate Policy
  • Volatile times
  • Monetary Policy
  • elevated risk of rate Hikes
  • Having pursued an aggressive monetary tightening policy in previous months, the National Bank of Serbia left the
  • two-week repo rate unchanged (at 15.25bps) at the May 15 monetary policy board meeting
  • Table: Serbia - monetary Policy
  • Balance of Payments
  • Current Account Deficit Set To Narrow
  • Table: Serbia - balance of Payments19
• Chapter 3.1 Montenegro - Political Outlook
  • SWOT analysis21
  • Political outlook
  • Re-election of Vujanovic to reinforce Policy Continuity
  • Following the re-election of President Filip Vujanovic to the presidency in April, we believe that few changes
  • will occur to Montenegro's policy agenda
  • Table: montenegro Political overview
• Chapter 3.2: Montenegro - Economic Outlook24
  • SWOT analysis24
  • Economic Activity
  • Positive outlook over the Long-term
  • We retain our core view that the outlook for the Montenegrin economy is positive over the long-term
  • Table: montenegro - economic activity25
  • investment Climate
  • a boost From moody's
• Chapter 4: Special report
  • Business Outlook For global Frontier markets
  • Growing Fast on the new Frontier
  • The 41 states that BMI examines in a new report on our online service may make up only a small slice of the world
  • economy, but they possess characteristics that will see them gain importance in the eyes of investors and global
  • businesses over the coming years
  • Table: Frontier markets - Key Data and Projections For top 10 Countries
  • Frontier investment
  • Potential and Pitfalls
  • Table: GDP Per Capita, US$ (in order of % increase)
  • Table: Diversity Through Frontier Markets - Correlation Coefficients January 2004-April 2008
  • Table: Frontier market indices
  • Regional Overview
  • Laos
  • Neighbouring economies the Key to growth
  • Yemen
  • Huge Potential, but Don't bank on gCC membership
  • Table: Yemen economic activity
  • Democratic Republic of the Congo
  • Mining industry to Drive growth
  • Table: Democratic republic of the Congo - economic activity38
  • Cuba
  • Investment Prospects after Fidel
  • Table: Cuba macroeconomic Data and Forecasts42
  • Mongolia
  • Minerals to Drive economic boom
  • Table: Mongolia - Economic Activity
• Chapter 5: Business Environment45
  • SWOT analysis - Serbia45
  • BMI business environment risk ratings46
  • Serbia business environment outlook
  • Institutions
  • Table: BMI business & operational risk ratings
  • Infrastructure
  • Market Orientation
  • Table: Emerging Europe FDi
  • Operational Risk
  • Montenegro Business Environment Outlook
  • Institutions
  • Table: BMI Legal Framework ratings
  • infrastructure
  • market orientation
  • Operational Risk
• Chapter 6: Key Sectors64
  • Pharmaceuticals & Healthcare
  • Table: otC market indicators66
  • autos
  • Table: Serbia autos Sector - Historical Data and Forecasts69