Country Report Serbia May 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 generate dissension in its ranks and economic hardship leads to rising popular dissatisfaction.
• The government insists that Serbia will not recognise Kosovo's independence. The International Court of Justice (ICJ) will deliberate on Serbia's appeal against the legality of Kosovo's independence declaration.
• Severe financing constraints and the new IMF agreement have necessitated a significant budget revision and swingeing 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 hard by plummeting demand. We expect a weak rebound, of just 0.5% growth, in 2010.
• We forecast average inflation of 9.7% in 2009 and of 6.4% in 2010. Inflation could be even higher, depending on the impact of dinar depreciation.

Monthly review

• A proposed rationalisation of government ministries has created tension in the ruling coalition, especially between the DS and the Socialist Party of Serbia (SPS), and appears to be on hold.
• The governments of Serbia and Kosovo have presented their submissions to the ICJ on the legality of Kosovo's independence declaration.
• Serbia has protested to the UN Security Council about the reduction of the UN Interim Administration Mission in Kosovo (UNMIK).
• Parliament has approved a significant budget revision and package of measures to cut spending and boost revenue.
• The National Bank of Serbia (NBS, the central bank) lowered its key policy interest rate twice in April, citing slowing inflation and the stabilising effect of the IMF loan.
• Real GDP growth decelerated to 2.8% year on year in the fourth quarter of 2008, and the first quarter of 2009 has brought a further slowdown in output.
• The economic slump brought about a sharp external correction in January-February 2009, with the current-account deficit narrowing by more than 40% year on year.

This report covers the following industry codes:
SIC Code: 60
NAICS Code: 52