Serbia and Montenegro Business Forecast Report Q2 2008

Publication Date	March 2008
Publisher	Business Monitor
Product Type	Report
Pages	55
ISBN Number	1746-5796
Product Code	BMI00750

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Summary

Serbia: Medium-Term Outlook Remains Positive

We Expect Serbia's Economic Growth to Remain Robust, Averaging 6.1% of Gdp through Our Fiveyear Forecast Period to 2012. Going Forward, We Caution That A Key Risk to Our Outlook Is Inflation, Which Came in at 10.7% Year-on-Year (Y-O-Y) in January. We Expect That Inflationary Pressures Will Continue to Be Felt Due to Rising Soft Commodity Prices and Likely Fiscal Policy. We Anticipate That Kosovo's Declaration of Independence on February 17 Will Lead to Instability in Domestic Politics and Social Relations, in The Short to Medium Term. This Will Detract from Necessary Economic and Political Reforms in The Short to Medium Term. in Addition, Serbia's Relationship with The Eu Has Been Significantly Undermined by The Damage Inflicted on Western Embassies and Businesses following Kosovan Independence, as Well as The Country's Decision to Reject The Eu's Offer to Sign A Political Agreement as An Interim to The Stabilisation and Association Agreement (Saa). That Said, We Believe That The Relationship Is Not Damaged beyond Repair, with Our View That The Saa Will Be Signed in The Medium Term Still Firmly in Place.

We Anticipate That The Re-Election of Incumbent President Boris Tadic on February 3 Will Be Supportive for Policy Continuity, Particularly in The Areas of Eu Convergence and Economic Reforms over The Medium Term. While The Serbian President Has Limited Powers, The Election Was Highly Important Symbolically as It Was Framed by The Issue of Kosovan Independence. It Was Seen as A Referendum on The Future Direction of The Country, Marking A Choice between Closer Ties with The Eu (Tadic) or A Move towards Russia, through Support of Tomislav Nikolic of The Serbian Radical Party. That Said, A Key Risk to Our Outlook Is That The Instability and Unrest following Kosovo's Declaration of Independence Could Continue for Longer than Anticipated - This Would Undermine Domestic Policy-Making.

Serbia's Economic Growth Story Continues to Remain Positive, and The Country Had A Real Gdp Growth Rate of 7.2% Y-O-Y in Q307. While We Anticipate That Economic Growth Peaked in 2007, We Forecast That It Will Remain Robust Averaging 6.1% of Gdp through Our Five-Year Forecast Period, Coming in at 6.8% and .8% of Gdp in 2008 and 2012, Respectively. in Our View, Export Growth and Private Consumption Will Remain The Main Drivers of Economic Expansion over The Medium Term. That Said, Surging Import Demand, Which Grew by 39.3% Y-O-Y to Us$18.35bn in January- December 2007, Will Continue to Represent A Drag on Serbian Real Gdp Growth.

at 0.8, Serbia Falls into The Middle of The Pack in Our Business Environment Ratings for Emerging Europe. While in The Early Stages of Opening up to Foreign Investors, Serbia Is A Particularly Appealing Market for Investors Because of Its Advantageous Geographical Position, Which Allows Easy Access to The Rest of Europe and The Low Cost and Abundant Supply of Skilled Labour. However, The Prevalence of Corruption and The Poor State of The Country's Infrastructure Make It A Challenging Market for Foreign Investors.

Content

Executive Summary
- Serbia: Medium-Term Outlook Remains Positive
Chapter 1: Political Outlook
- Swot Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Electoral Outcome Supportive of Economy
- over The Medium Term We Expect That The Re-Election of Pro-Western Presidential Candidate Boris Tadic Will
- Provide Support for Key Serbian Economic and Political Reforms.
- Table: Cabinet & Other Key Posts
- Kosovo
- Trying times Ahead
- We Anticipate That Further Unrest and Difficulties Lie Ahead following Kosovo's Declaration of Independence on
- February 17.
Chapter 2: Economic Outlook
- Swot Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Economic Growth to Moderate
- We Forecast That Serbian Economic Growth Will Remain Robust over The Long Term, Averaging 6.1% over Our Five-Year
- Forecast Period. This Will Be Supported by The Government's Plan to Speed up Privatisation.
- Table: Serbia, Economic Activity
- Debt Policy
- External Debt Dynamics to Improve
- We Forecast That Serbia's External Debt Pile Will Decrease during Our Five-Year Forecast Period, from An Estimated
- 63.4% of Gdp at End-2007 to 34.8% by End-2012.
- Table: Serbia, Foreign Debt
- Monetary Policy
- Inflation Remains A Risk
- The Serbian Monetary Policy Committee Hiked Rates by 75bps to 10.75% on February 6. Going Forward, We
- Anticipate That Further Monetary Tightening Lies Ahead, with Our Year-End Forecast for The Key Policy Rate at 11.0%.
- Table: Serbia, Monetary Policy
- Investment Climate
- Strategic Gas Deal with Russia Agreed
- in The Medium Term, We See The Recent Deal Giving Gazprom A Controlling Stake in Serbian State-Owned Monopoly
- Nis as A Positive Development for The Serbian Economy as It Will Lead to Increased Fdi Inflows.
Chapter 3.1: Montenegro - Political Outlook
- Swot Analysis
- Domestic Politics
- Election Outcome Will Not Change Policy Direction
- We Anticipate That President Filip Vujanovic Will Be Re-Elected for A Second Term in The Presidential Election
- Scheduled for April 6.
- Table: Republic of Montenegro - Cabinet & Other Key Posts
Chapter 3.2: Montenegro - Economic Outlook
- Swot Analysis
- Economic Activity
- Proceed with Caution
- Overall, We Retain Our Positive View on The Montenegrin Economy, Due to The Country's Positive Macroeconomic
- Fundamentals.
- Table: Montenegro - Economic Activity
Chapter 4: Special Report
- Looking beyond 2008
- The Future of The World, in Three Acts
- Us: The Rebalancing Act
- Unwinding The Imbalances
- We Believe That A Substantial, Multi-Year Shift in The Us External Accounts Is under Way. A Weak Us Dollar and
- Subdued Domestic Consumption Should Lead to A Narrowing in The Us's Structural Current Account Deficit.
- China: What If We're All Wrong?
- Our Core Scenario for China
- We Are Retaining Our Positive Headline Growth Projections for China across The Forecast Period to 2012,
- with Our Expectations of The Continued Success of The Urbanisation Process and Export-Driven Growth
- Model Underpinning Our Assumptions.
- Japan: Immigration Key to Long-Term Growth
- Demographic Woes Portend Long-Term Decline
- Immigration Remains The Only Realistic Way That Japan Can Overcome Its Long-Term Economic Challenges.
Chapter 5: Business Environment - Serbia
- Swot Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook - Q2 2008
- Institutions
- Table: BMI Business and Operational Risk Ratings
- Table: BMI Legal Framework Ratings
- Infrastructure
- Market Orientation
- Table: Serbia & Montenegro Fdi (Us$Mn)
- Table: BMI Trade Ratings
- Operational Risk
Chapter 6: Key Sectors
- Serbian Information Technology
- Executive Summary
- The Total Size of The Serbia It Market in 2007 Was Estimated by BMI at Us$454mn, up from Us$366mn in 2006.
- Table: Serbia's It Sector - Historical Data and Forecasts