Country Report Serbia July 2009

Outlook for 2009-10

• The ten-party governing coalition led by the Democratic Party (DS) is likely to come under increasing strain as austerity policies and political disagreements generate dissension.
• The government insists that Serbia will not recognise Kosovo's independence. The International Court of Justice (ICJ) will rule on Serbia's appeal against the legality of Kosovo's independence declaration in the next 18 months.
• Severe financing constraints and the new IMF agreement have necessitated a significant budget revision and deep spending cuts, and the government may be severely tested by mass protests.
• A significant correction in the exchange rate is unavoidable. The Economist Intelligence Unit forecasts that the dinar will undergo a real effective depreciation of 8% in 2009.
• We forecast a contraction in real GDP of 4% in 2009, as the outlook for the world economy worsens and the Serbian economy is hit by plummeting demand. We expect a weak rebound, to growth of just 0.5%, in 2010.
• We forecast average inflation of 9.8% in 2009 and of 6.4% in 2010. Inflation could be even higher, depending on the impact of dinar depreciation.

Monthly review

• The ruling Democratic Party (DS) suffered a shock defeat in two important municipal elections in the capital, Belgrade, in June, suggesting rising dissatisfaction among its core electorate.
• The Serbian Progressive Party (SNS) of Tomislav Nikolic, which split from the ultra-nationalist Serbian Radical Party (SRS) in 2008, won the elections and is emerging as a new force in national politics.
• EU foreign ministers have said that they will ease visa restrictions on Serbs travelling to the EU by the end of 2009, but opposition to allowing Serbia's further EU integration remains among some member states.
• A further deterioration in budget revenue intake and current spending in January-May means that the government will have to make further spending cuts or raise tax rates to reduce the deficit and so meet IMF loan conditions.
• First-quarter real GDP contracted by 3.5%, according to preliminary estimates from the Statistical Office of the Republic of Serbia, but second-quarter output data suggest that the worst is not yet over.
• The current-account deficit in January-April declined by half compared with the year-earlier period, as import demand slowed sharply and current transfers increased year on year.

Source: Country Report