Invest in Serbia


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Window of opportunity for investors: Serbia Macroeconomic Outlook - Jan 2013

January 08
08:21 2013
Author: Sinteza Invest Group, IIS

Serbia Macroeconomic Outlook - Jan 2013: Due to the new wave of the crisis that appeared as the debt crisis of some euro-zone countries, the planned economic growth of Serbia in 2012 did not occur. Moreover, the country fell in recession, as three quarters in a row recorded decline in GDP year-on-year.

The current situation in national economy is very hard, especially for MSE that are closed more than opened during this year. Following, the unemployment rate has been increasing and right now is beyond 30% is one of the highest rate in all Europe.

In February, the IMF suspended its standby agreement with Serbia in response to the government's relaxation of its fiscal stance. The country received EU candidate status in March, but a date for accession talks hasn't been set. In August, Standard & Poor's Ratings Services downgraded its credit rating on the Republic of Serbia by one notch to BB- with negative outlook as the government failed to quickly adopt policies that would promote confidence in its monetary policy regime and restore post-election fiscal  stability (new Serbian government took office on July 27). The rating could be lowered again if Serbia continues with deterioration of its fiscal position or reversals on prior commitments to structural reform in the country's labor and product markets. On the other side, a successful negotiation of a new fiscal consolidation and reform program with the IMF could stabilize the rating.


In 2Q of 2012, Serbian GDP fell in real terms by 0.8%, compared to the corresponding period of 2011. Observed by activities, the most significant growth in the gross value added was noted as follows: the section of information and communication - 11.7%, the section of transport - 4.2%, the section of financial and insurance activities - 4.2% and the section of manufacturing - 3.2%. The most significant fall in the gross value added was recorded in the section of electricity, gas, steam and air-conditioning supply - 14.6%, and the section of mining and quarrying - 7.7%.

According to the Statistical Office of the Republic of Serbia flash estimate for 3Q 2012, the GDP fell in real terms by 2.2% year-on-year.

Also, the Office estimates real fall of GDP by 2% for 2012, (World Bank made same estimate) largely due to a decline of global activities, especially in euro-zone, natural conditions (agriculture production plunged 20%), measures to restructure the economy and political factors (election year). On the other side, there is a real chance that some of law and economic measures make GDP to come back in positive territory in 2013, rising by 2%, priory thanks to agriculture, auto-industry (FIAT) and oil refinery.

Consumption (C) as a component of GDP, especially the private consumptions will have the largest negative contribution to the decline in GDP in 2012 which is indicated by a sharp drop in turnover in retail in October 2012 of 4.9%. The downward trend in consumption is likely to continue due to the extremely low employment and increase in unemployment. The negative contribution will also have state consumption and investment (I) as a result of the initiated measures of fiscal consolidation.

On the other hand, net exports (X) should have positive contribution on GDP in the fourth quarter due to the growth in exports of motor vehicles. The prospect of exports for 2013 is uncertain, but the level of risk is lower than in 2012 as global economy starting to revival. Positive contribution on GDP in 4Q should have private investment too, as increase in equipment import was recorded in October this year (in the first nine months, foreign direct investments (FDI) recorded a net outflow of EUR 21.2m, primarily due to recession in the EU member states and unfavorable macroeconomic indicators in Serbia). It is expected that investment component of GDP will have a weak, but positive contribution to GDP trend. It is estimated that GDP should record a slim fall of 0.2% in 4Q 2012 and 2% in 2012, but in 2013 it could see rise of 2-2.5%.

Industrial Production

The industrial production in the Republic of Serbia in October 2012, when compared to October 2011, increased by 1.6% and in relation to 2011 average, increased by 10.2%. In the period January-October 2012, industrial production decreased by 3.2% over the same period 2011.

Observed by sections, in October 2012 compared to the same month 2011, the trends were noted as follows: manufacturing - growth of 4.1%, electricity, gas, steam and air conditioning supply - fall of 5.2% and the section of mining and quarrying - fall of 6.9%.

The data on industrial production by destination in October 2012, compared to October 2011, expressed growth in the production of the following goods: durable consumer goods by 32.1%, non - durable consumer goods by 11.4% and capital goods by 3.4%. The fall was noted for energy by 2.6% and intermediate products, energy excluded, by 8.5%.

The industrial production volume in October 2012, compared to October 2011, showed the following trends: growth in 18 divisions that in the structure of industrial production participate with 55% and fall in 11 divisions that participate with 45%.

The seasonally adjusted industrial production index for October 2012 from September 2012 indicates 3.2% growth of the overall industrial production and 3.7% growth of manufacturing.

Foreign and Public Debt

Total foreign debt at the end of October 2012 amounted to EUR 25.5bn, which is an increase of 5.8% compared to the end of 2011. At the end of September, the debt totaled to EUR 24.8bn. The external debt of the public sector amounted to EUR 11.6bn (EUR 10.9bn in September) and private external debt amounted to EUR 13.9bn (same in the previous month). The share of short-term external private debt in the total external debt was 2.3% in October 2012 from 2.7% in 2011.

Serbia's public debt, despite the fact that is too high (considerably beyond the law mark of 45%) has a very negative structure because it is mostly expressed in euros (more than 80%) and is in the hands of foreign investors.

External Trade

The total external trade of goods in the Republic of Serbia for the period January - September 2012 amounted to: USD 22,016m, which presents a decrease by 5.9% year-on-year. Exports of goods amounted to USD 8,195m, which is a decrease by 7.4% year-on-year, and imports amounted to USD 13,821m, a decrease of 4.9% in relation to the same period last year.

Deficit amounted to USD 5,626m, which is an increase by 1.1% compared to the same period 2011. Exports - imports ratio equaled 59.3% and is lower than in the same period last year (60.9%).

The total external trade turnover in September 2012 amounted to USD 2,455m which is decrease by 8.2% in relation to September 2011. In September 2012 exports of goods amounted to USD 987m, which is a 0.4% decrease relative to September 2011. Imports amounted to USD 1,468m, which is a 12.7% decrease in relation to September 2011.

Deficit amounted to USD 514m, a decrease of 30.4% year-on-year. Exports - imports ratio equaled 67.2% and is lower than that in the same period last year, when it equaled 58.9%.

In September 2012, the major external trade partners in exports were Italy, USD 117m (fall of 0.5% relative to the same period last year), Germany, USD 107m (growth of 1.4%), Bosnia and Herzegovina, USD 96m (growth of 1.4%), Russian Federation, USD 82m (fall of  0.4%), and the Republic of Montenegro, USD 69m (growth of 1.4%).

The major trade partners in imports were Germany, USD 155m (growth of 1.0%), Italy, USD 129m (growth of 1.2%), China, USD 119m (growth of 0.7%), Hungary, USD 82.5m (fall of 0.9%) and Russian Federation, USD 72m (growth of 6.1%).

Employment and Unemployment

According to the monthly survey of the Statistical Office of Republic of Serbia, the total number of employees in September 2012 was unchanged compared to the previous month and totaled to 1,725 thousand, while compared to the same months of 2011, it decreased by 0.7%. In the first nine months of 2012 the total number of employees decreased by 1.3% compared to the same period 2011 and amounted to 1,731 thousand. Number of active unemployed at the end of September 2012 amounted to 751 thousand, an increase of 1.2% relative to 2011, while compared to the previous month there was no change. 

Registered unemployment rate of persons actively seeking employment in September amounted to 30.3%. According to data from April 2012, the unemployment rate of population aged 15 and over increased compared with the same period of 2011 by 3.3 percentage points and amounted to 25.5%. 

The average gross salaries and wages paid in October 2012 amounted to RSD 57,733. Compared to the average gross salaries and wages paid in September 2012, this was an increase of 3.3% in nominal terms and 0.5% increase in real terms. Compared to October 2011, an increase was by 9%, in nominal terms, while in real terms was decrease by 3.5%.

The average net salaries and wages paid in October 2012 in the Republic of Serbia totaled RSD 41,558. Compared to the average net salaries and wages paid in September 2012, this was 3.2% increase in nominal terms and 0.4% increase in real terms, while compared to October 2011, it saw 8.9% increase in nominal terms and 3.5% decrease in real terms.

Monetary Policy

At the end of November 2012, National Bank of Serbia foreign exchange reserves amounted to EUR 10.6bn (a decrease of 11.7% compared to 2011) while currency reserves of commercial banks totaled to EUR 1.3bn. The level of National Bank of Serbia foreign exchange reserves was sufficient for coverage of 337% of the M1 money supply and for near nine months of imports of goods and services.

During 2H of 2012 inflation continued to rise and the main inflation pressures were seen in food prices and regulated prices, as well as in international developments. The projected inflation for the end of 2012 is around 13% (the aim for this year was 4% ± 1.5%). The inflation should see decline in mid-2013, so it is expected to be within the target of 4% (plus/minus 1.5%) by its end.

The weakening of the dinar in the first half of 2012 was influenced by the increase of the effects of monetary financing of the state, freezing arrangement with the IMF and the reduced inflow of foreign investment. In 2H 2012, the FX rate was much more stable, which is the result of the decline in risk premiums, restrictive monetary policy measures (key rate and reserve requirements) and approval of subsidized loans to businesses. The Government estimate RSD/EUR exchange rate at 120 dinars per euro in calculation of national budget for 2013. 

During 2012, in order to slow down the inflation, National Bank of Serbia lifted the key rate 6 times after lowered it to 9.5% at the start of the year. Last and the biggest rise was in December - 30 basis points to 11.25%.

On the last auction of Euro denominated 5-year bonds Serbia borrowed USD 750m at the rate of 5.45%.


Following the fall in GDP and industrial production, as well as negative trend in economic conditions, unemployment continued to rise and crossed 30%, which is the highest rate in Europe. It will not be the surprise if the rate continues to grow next year, but it is expected that unemployment stops growing after mid-2013. 

Public debt is another problem as it is very large, but the thing here is its bad structure as more than 80% is in euros which lift the debt risk on even higher level (as most of the debt is in foreign hands). This risk can be lowered and that’s why it is necessary to work on the development of the domestic securities market. On the other side, public debt, or its share in GDP will be lowered to more stable and sustainable level when its basic problem is put under control - an overall weak economy. Thus, all eyes are on the new Government that announced a lot of changes in the coming year (as this one was already lost due to the elections and government formation). If the authority success to establish some of the planned economic measures which will restructure the economy, there is a solid possibility that domestic GDP will see recovery in 2013 of around 1.5%-2.0%. 

Additionally chance for this percent growth gives the low base foundation too.

Current credit rating given to the country by both credit rating agencies, S&P and Fitch is BB- with negative outlook and will probably stay like that until some of the economic conditions are improved, as well as new arrangement with MMF is signed (new meeting with MMF is scheduled for 1H 2013). The rating may also be improved by starting the negotiation process for EU membership which could be around mid-2013.

For a better view of potential resources for country’s development, as well as weaknesses and threats that can slow down Serbian economy we gave a comprehensive view of the most important factors in lines below:


- EU member candidate,
- High level of National Bank of Serbia’ official foreign reserves,
- Approaching EU law, policies and practices,
- Cheap labor force,
- Government subventions,
- A lot of opportunities for mergers and acquisitions. 


- Decreased credit rating with negative outlook,
- High external financing needs,
- Large foreign currency exposure,
- Unemployment (double than the EU average),
- High foreign trade deficit,
- Unfinished privatization, 
- Weak domestic demand,
- Fall in GDP, industrial production, retail and export,
- Misbalanced country development,
- Increase of budget deficit,
- Still high level of corruption.


- Starting the negotiations talks for EU membership
- Export to emerging markets (BRIC…),
- Strong long-term growth potential,
- Industrial zones,
- Agriculture and development of the GMO products,
- Good cooperation with Germany and Russia
- South Europe gas stream,
- Privatization of the public companies. 


class="Apple-tab-span" style="white-space: pre;"> Half of export goes to EU that records a slowdown of economy,
- FX volatility,
- High inflation,
- Termination of the EU membership candidate.

The total score for the Serbian macroeconomic factors is 25 (previous was negative of -21), which means that the outlook is positive and economic activities is expected to grow.

The maximum limit or the highest possible score on these factors is 117, which indicates that although there is a positive trend, it is not so high and there is a lot of room for growth in next year or two, and at same time there is still plenty of risk. For the overall economy to grow with stronger pace the Government firstly needs to remove the essential weakness of the domestic economy and then to utilize all possible opportunities that will come in the period ahead.