Country Report Serbia October 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.
• A significant correction in the exchange rate is unavoidable. The Economist Intelligence Unit estimates the dinar to undergo a real effective depreciation of around 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 10% in 2009. Inflation could be higher, depending on the impact of dinar depreciation.

Monthly review

• The passage of controversial amendments to the Public Information Law, which will have a chilling effect on free speech, has highlighted divisions in the ruling coalition.
• The IMF postponed the finalisation of the second review of the stand-by agreement until October 20th, when a third review is scheduled.
• The Fund agreed to increased budget deficits of 4.5% in 2009 and 3.5% in 2010, provided that non-inflationary sources of financing are available
• 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 contracted by 4% year on year in the second quarter, following a first-quarter contraction of 4.2% (revised; previously 3.5%), resulting in a first-half contraction of 4.1%.
• Inflation fell to 8% year on year in August as measured by the consumer price index (CPI) and to 9.4% as measured by the retail price index (RPI).
• Improvements in all four categories of the current account resulted in a deficit of US$145.4m in July, just 15% of that recorded a year earlier.

Source: Country Report