Country Report Serbia November 2009

Outlook for 2010-11

• The ten-party governing coalition led by the Democratic Party (DS) is likely to come under increasing strain as the economic crisis generates more strikes and public protest, as well as intra-coalition political disagreement.
• Visa-free travel for Serbian citizens in the Schengen area from 2010 looks likely after the European Commission recommended that the visa regime be lifted in early 2010.
• The need to make further deep cuts in public-sector spending and employment to meet IMF-agreed budget deficit targets heightens the risk of a popular backlash and social discontent.
• The Economist Intelligence Unit estimates the dinar to have undergone a real effective depreciation of around 5.7% in 2009.
• We forecast weak GDP growth, of 1%, in 2010, picking up to 4% in 2011, following an estimated contraction of 4% in 2009.
• We forecast average inflation of 6.4% in 2010 and 4.4% in 2011, following estimated average inflation of around 10% in 2009. Inflation could be higher, depending on the impact of dinar depreciation.

Monthly review

• The Russian president, Dmitry Medvedev, paid an official visit to the Serbian capital, Belgrade, on October 20th, underlining growing political and economic ties between Russia and Serbia.
• In October the European Commission published a relatively favourable report on Serbian progress towards EU integration.
• An IMF delegation arrived in Belgrade in late October to begin a third review of the stand-by agreement.
• Despite some improvement in revenue collection in July-August, the government is under pressure from the IMF to agree a comprehensive programme of spending cuts or to increase taxes to meet deficit targets.
• Real GDP declined by 2.7% year on year in the third quarter, according to preliminary estimates by the National Bank of Serbia (NBS, the central bank), representing an improvement compared with the first half of 2009.
• Inflation fell to 7.3% year on year in September as measured by the consumer price index (CPI), but remained almost unchanged at 9.5% as measured by the retail price index (RPI).
• Improvements in all four categories of the current account resulted in a deficit of US$109m in August, just 18% of that recorded a year earlier.