Serbia - Market Overview Serbia - Market Overview
Serbia has experienced steady economic growth, achieving an estimated 2.8 percent GDP growth in 2016, which is the average level of the countries of Central and Eastern Europe, but slightly lower than the growth of neighboring countries. This was achieved despite fiscal consolidation and a lower-than-expected budget deficit. Analyzing the achieved economic growth in 2016 it should be taken in account that the GDP growth was slightly higher due to the growth in agriculture of over 8 percent (compared with the dry year of 2015). Alongside one-off increase in agriculture, higher economic growth in 2016 was also contributed by the favorable international factors, such as falling oil prices of fuel. Furthermore, GDP growth is projected to rise in the coming years, reaching an estimated 3 percent and 3.5 percent in 2017 and 2018, respectively. In nominal terms, Serbia’s 2016 GDP was estimated at $37.8 billion, while per capita GDP reached $5,294 and inflation continued to drop to 1.5 percent—down from 7.7 percent in 2013. It was still below the lower limit of the National Bank of Serbia (NBS) target band of 4 ± 1.5 percent. Very low inflation enabled a further decrease of restrictiveness of monetary policy. The National Bank of Serbia (NBS) continued to cautiously reduce its key interest rate, which is down to a historically low level of 4.0 percent as of July 2016. The space for further reduction, however, is quite limited. Dinar depreciation resulted in moderate weakening of the dinar against the euro by 1.5 percent by the end of 2016, when the exchange rate amounted to about 124 dinars per euro. NBS intervened heavily in the foreign exchange market, making the dinar one of most stable currencies within the region. Significantly higher depreciation was recorded against the US dollar and Swiss franc reaching 6 percent.
Serbia is making its push to join the European Union (EU), beginning EU accession talks in January 2014. In February 2015, the government signed a three-year, $1.3 billion Precautionary Stand-By Arrangement with the International Monetary Fund (IMF). As part of the IMF deal, the government has implemented fiscal tightening measures, such as public-sector wage and pension cuts, though some difficult structural reforms still lie ahead. These developments present an opportunity for the country to attract new foreign direct investment (FDI), especially as the government moves to align domestic legislation with EU standards and implement other measures to improve the business environment.
The Serbian Government invested significant effort to improve the business climate through changes in construction permitting, land ownership and to the inspections’ system. The number of issued construction permits over the first seven months of 2016 was 13 percent higher than in the same period in 2015, while the value of construction works over the same period was 34.7 percent higher than in 2015. Due to these improvements, Serbia’s overall Doing Business ranking improved from 68th place in 2015 to 59th in 2016. (In Doing Business 2015, Serbia ranked 186 out of 189 countries in the construction permits indicator).
Due to the positive results in fiscal consolidation lowering deficits and public debt, Dun & Bradstreet (D&B) has kept its moderate risk rating for Serbia. However, various factors could prevent a further loan growth if local banks continue to be burdened by non-performing loans (NPLs), which was accounted for 17 percent of overall lending in 2016.
Parliamentary elections held in April 2016 delayed implementation of some potentially politically unpopular reforms. These include privatization and restructuring of former state-owned companies (which employ over 230,000 workers) and reducing the number of public sector employees. A coalition of political parties led by the Serbian Progressive Party (SNS) won almost 50 percent of the vote in the 2016 election, returning Aleksandar Vucic to the Prime Minister’s office. He stated that economic reforms will again be a priority for his government. Presidential elections in April 2017 made further reforms delay. Aleksandar Vucic was elected as a new Serbian president, while appointment of a new prime-minister and reshuffle of the Cabinet are expected in June 2017. In addition, there are some announcements of potential parliamentary elections in September, which will prolong beginning to resolve a number of long-standing issues related to the country’s slow transition to market-driven economic system capitalism. Thousands of public sector employees may face layoffs as the government implements these reforms, therefore job creation will remain a major challenge for the government.
Basic labor market indicators show that there was a strong positive trend in 2016 compared to the previous year. Employment rate in 2016 decreased from 17.7 percent to 15.3 percent compared to the previous year. The number of employees increased in 2016 by about 20,000. Government monitoring of formal employment was improved by including the Central Registry of Compulsory Social Insurance (CROS) as a data source. Despite the increased employment, it is particularly worrying that over 30 percent of those under 30 years old are unemployed. These young people, especially the educated are leaving the country to find work elsewhere, causing Serbia to have a high level of “brain drain.”
The government has focused its efforts on promoting domestic production and FDI as a major source of sustainable growth. Foreign Direct Investment (FDI) increased roughly by 45 percent from USD 1.4 billion in 2014 to almost USD two billion in 2016, keeping almost same level from2015 ($ 2.1 billion). The main sector for FDI is manufacturing. The current account deficit reduced to USD 1.5 billion in 2016, from around USD 2.2 billion in 2014 (or 4.0 percent of GDP in 2016). This result is brought about by a significant reduction in foreign trade deficit.
Public debt at the end of 2016 stood at 74.5 percent of GDP, which is by 1.3 percent of GDP less than at the end of 2015. This indicates that the fiscal consolidation measures gave results, because in 2016 a six-year public debt growth trend in relation to GDP was stopped. However, the risks of its re-growth in the near future have not yet been eliminated.
Value of exported goods in 2016 reached $14.9 billion, which is 11.5 percent above the value realized in 2015. This is a significant growth, as well as accelerated growth, having in mind that exports in 2015 were by 7.9% higher compared to the recorded value of 2014. Export of road vehicles remained at the leading position. FIAT is still the biggest individual exporter with USD 1.5 billion of exports. Goods in the value of $19.3 billion were imported in 2016, which is by 6.1 percent above the realized imports of 2015. The values of imports in 2016 were primarily affected by the low global price of energy, as well as the effects of fiscal consolidation. The EU remained the biggest trade partner, accounting for over a half of Serbia’s foreign trade. This was followed by Russia and signatories to the Central European Free Trade Agreement (CEFTA).
U.S. exports to Serbia in 2016 remained at the same level as it was in 2015, reaching $ 329 million. The main US products exported to Serbia were aviation parts and machines pharmaceutical and medical products, as well as tobacco and optic instruments. FIAT automobiles remained the major export product from Serbia in 2016, followed by tires, raspberries and hunting rifles and ammunition. Total Serbian exports to the U.S. reached $246 million in 2016. (Note: Just as with other countries in the region, reported figures do not encompass the entire volume of trade between Serbia and the U.S. Most American shipments going through Western European countries to Serbia are not recorded in US statistics. Consequently, real United States exports to the region can be higher, in some cases even double).
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