Country Report Serbia February 2009

Outlook for 2009-10

• The fractious governing coalition led by the Democratic Party (DS) is likely to remain intact, although there is some risk of an early election.
• The government continues to insist that Serbia will not recognise Kosovo's independence. Despite some recent hardening of rhetoric, there has been an overall softening of policy on Kosovo.
• Severe financing constraints will necessitate a policy tightening to narrow the large current-account deficit. The government is unwieldy, but probably strong enough to push through fiscal tightening in 2009.
• A significant correction in the overvalued exchange rate is unavoidable in view of Serbia's large external imbalance and poor outlook for financing. The Economist Intelligence Unit forecasts that the dinar will lose about 11% of its value against the euro in 2009.
• We assume that Serbia will need to draw on IMF funding under its stand-by agreement, perhaps revised to allow for a larger sum than can be drawn under the current arrangement.
• We forecast zero real GDP growth in 2009, and expect a weak rebound, to 2% growth, in 2010, as global conditions improve slightly.
• We forecast average inflation of 7.9% in 2009 and of 6.3% in 2010. Inflation could be higher, however, depending on the impact of dinar depreciation.

Monthly review

• The ruling coalition has patched up its differences to unite behind a strategy to counter the economic crisis, but underlying tensions will persist.
• The formation of the Kosovo Security Force (KSF), soon after an outbreak of violence in northern Kosovo in January, angered Serbia.
• The central budget ran a deficit of 1.9% of estimated GDP in 2008, owing to strong growth in current spending and a deceleration of revenue growth in the final quarter.
• The dinar came under further pressure in January 2009, leading to a sharp exchange of views between government and officials of the National Bank of Serbia (NBS, the central bank).
• The NBS eased monetary policy in January, with a cut of 125 basis points in its two-week repo rate, taking it down to 16.5%.
• Real GDP grew by an estimated 5.4% in 2008, following a sharp slowdown in the fourth quarter.

This report covers the following industry codes:
SIC Code: 49
NAICS Code: 22