Country Report Serbia

Outlook for 2008-09

• The pro-EU parties led by the Democratic Party (DS) scored a surprise victory in the pre-term election on May 11th. However, they fell well short of a majority and will find it hard to form a government.
• The most likely outcome is a government comprising the Serbian Radical Party (SRS), the Democratic Party of Serbia (DSS) and the Socialist Party of Serbia (SPS).
• However, alternative outcomes are also possible, such as a DS-led government or a stalemate and a fresh election.
• The independence declaration by Kosovo in February has raised tensions and soured the overall mood in the region. Although there could be localised violent incidents in Kosovo, large-scale fighting remains unlikely.
• Fiscal policy will remain relatively prudent over the forecast period, owing to strong revenue growth and underspending on capital projects, although an SRS-led government would introduce uncertainty into the budget.
• Real GDP growth is forecast to average more than 5.5% per year in 2008-09, driven by consumer demand and fixed investment.
• The downside risks to this growth forecast are high, owing to the Kosovo crisis, uncertainty following the parliamentary election and a sharp tightening of monetary policy by the National Bank of Serbia (NBS, the central bank).

Monthly review

• The DS-led pro-European alliance emerged from the election with the largest number of votes of any bloc, but the SRS-led nationalist bloc may be better placed to reach agreement with the SPS and form a government.
• The contentious signing of a Stabilisation and Association Agreement (SAA) with the EU just before the election appears to have led to a last-minute surge in support for the pro-EU parties.
• Budget data for January-April 2008, especially a sharp increase in current expenditure, indicate a pre-election spending spree.
• The central bank decided not to raise its key policy rate in May, despite continued strong inflationary pressures and signs that previous rate increases have not yet succeeded in cooling the economy,
• Industrial output, retail sales and wages all slowed in the first quarter compared with the same period of 2007, as inflation continued to rise.
• The first-quarter current-account deficit widened by 47% year on year, despite improvements in the services and transfers balances.

SOURCE: Country Report