Serbia Business Forecast Report Q4 2007

Publication Date	August 2007
Publisher	Business Monitor
Product Type	Report
Pages	47
ISBN Number	1746-5796
Product Code	BMI00305

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Summary

Kosovo To Weigh On Full Economic Potential

The government's ability to implement urgent reforms, such as the country's privatisation programme, will prove vital for maintaining macroeconomic stability and fully developing the country's business potential in the years ahead. Encouragingly, the government has made visible efforts to re-launch the privatisation programme and attract new foreign direct investment (FDI) since the inauguration of a new administration at the beginning of May. Nevertheless, we believe that the coalition is likely to struggle controlling price pressures over the coming quarters, mainly on the back of the government's failure to significantly reduce fiscal spending and to reign in consumer spending.

Yet we maintain our positive outlook on the economy and forecast year-end GDP growth to come in at 6.0% in 2007. With regards to 2008, we project even higher growth of 6.1%, with potential upside risks, if the Kosovo crisis can be resolved without any major repercussions on domestic politics and coalition stability.

The unresolved status of the Kosovo province will continue to represent a considerable risk to government stability and reform efforts. In our view, on the back of ongoing US and EU support and disillusionment after years of fruitless talks, a unilateral declaration of independence by the Kosovar government remains a real risk, especially with general elections looming in the province this November. A key problem is that a potential coalition breakdown over Kosovo could temporarily jeopardise the government's ambitions to join the EU and WTO, removing an important policy anchor in the medium term.

Given the high levels of consumer demand, rising nominal wages and the government's expansionary 2007 budget, we believe that there are considerable risks of a renewed uptick in inflationary pressures. Indeed, June and July experienced a spike in retail price inflation (RPI), increasing by 5.1% y-o-y and 5.9% y-o-y, respectively. If inflation continued to accelerate significantly over the coming months, we are concerned that this is likely to translate into higher unit labour costs in the medium term, therefore eroding the competitiveness of Serbia's export sector over the coming quarters, with negative effects on economic growth.

FDI amounted to US$1.3bn during the first five months of the year, which represented a significant upturn from last year's US$0.5bn during the same time period, and, in principle, boded well for currency strength. Yet despite the likely continuation of strong FDI inflows in H207, substantial increases in the current account deficit and a weakening financial account surplus are expected to dampen the positve impact of FDI on the Serbian dinar. Thus, our year-end target stands at RSD77.50/EUR, which implies only moderate appreciation during the second half of the year.

Content

Executive Summary
Kosovo To Weigh On Full Economic Potential
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Kosovo Endangering EU And WTO Membership
- Despite the government's efforts to re-launch the country's privatisation programme, we believe that the
- administration is likely to face difficulties controlling inflationary pressures, mainly due to its expansionary
- 2007 budget
- Table: Republic of Serbia - Cabinet & Other Key Posts (Aug 07)
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Politics And Inflation Still Risks To Growth?
- Thanks to strong private consumption and high export growth, we forecast Serbian GDP growth to come in at
- 60% in 2007
- Table: Serbia - Economic Activity
- Fiscal Policy
- Low Budget Reforms?
- The final approval of the 2007 budget on June 23 seemed to mark an end to the government's commitment to
- fiscal prudence, with the deficit expected to come in at a minimum of 15% of GDP in 2007, according to
- international accounting standards
- Exchange Rate Policy
- Monetary Tightening To Support Dinar
- We maintain our long-held view that the Serbian dinar still has potential for appreciation during the second
- half of the year, especially on the back of potential tightening of monetary policy and ongoing strong FDI inflows
- Table: Serbia - Monetary Policy
- Credit Rating
- Outlook Revision: Only A Mild Negative
- S&P's decision to revise the outlook on Serbia's BB- long term foreign currency rating to stable from positive is
- only a mild negative The positive credit fundamentals remain in place, and we continue to prefer the local debt
- markets over external debt
- Table: Europe - Long Term Foreign Currency Ratings
- Montenegro
- Juggling The IMF And Calls For Higher Living Standards
- Higher living standards are set to remain a major domestic economic and political priority We expect the
- government to accede to some of the IMF's demands for fiscal reforms, but the government is likely to keep
- the overall tax burden low
- Regional Outlook
- CE and SEE Growth- As Good As It Gets Revisited
- Robust Q1 economic growth throughout the emerging Europe region reinforces our 'As Good As It Gets' view for
- 2007, underpinning BMI 's expecations for further strong regional economic performance this year
Chapter 3: Special Report
- Global Inflation
- Becoming A Concern Once More
Chapter 4: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Legal Issues
- Labour Force
- Table: Demographic Indicators
- Table: Employment Indicators
- Foreign Investment Policy
- Foreign Trade Regime
- Table: Emerging Europe, Annual FDI Inflows
- Table: Serbia & Montenegro, Annual FDI Inflows
- Tax Regime
Chapter 5: Key Sectors
- Food & Drink
- Retail
- By 2011, the Serbian MGR market will almost double, reaching a forecast value of US$14bn, up from an estimated
- US$76bn in 2006
- Table: Serbia Food & Drink Indicators
- Food And Drink