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Serbia, Montenegro and Kosovo Business Forecast Report Q2 2014

  • January 2014
  • -
  • Business Monitor International
  • -
  • 81 pages

Core Views

As we expected, the new Serbian government has embarked on
a fiscal consolidation drive motivated by a growing foreign debt
burden and longer-term goals of EU accession. Although the budget
shortfall will remain elevated in 2014 as the government makes
one-off payments to smooth the planned restructuring and privatisation
of state-owned enterprises, Serbia's medium-to-long-term
fiscal sustainability prospects are brighter. As such, we forecast
the budget deficit to narrow from 7.3% of GDP in 2014 to 2.7% by
Having gained EU candidate status on March 1 2012, Serbia was
to start formal talks on EU membership on January 21, meaning
that the path towards EU integration is firmly set. While this will
provide an important policy anchor for the country and encourage
much-needed investment, problems in the contentious northern
district of Kosovo – Mitrovica – will continue to bedevil Serbia's
progress on becoming a member of the EU. We do not expect the
country to join the bloc before 2020.

Major Forecast Changes

The harsh austerity measures envisioned in the 2014 budget – focusing
on VAT hikes and public sector wage and pension cuts – will
weigh on household consumption in 2014. As such, we have revised
down our forecasts for 2014 and 2015 real GDP growth, from 2.4%
to 1.6% in 2014 and from 3.6% to 1.9% in 2015. In the long term,
however, the government's demonstrated willingness to implement
structural reform, by way of reducing its role in the economy and
generous subsidies to unprofitable state-owned enterprises, bodes
well for growth, underpinning our fairly sanguine forecasts.
We expect the National Bank of Serbia to continue its aggressive
rate-cutting cycle in 2014 as disinflationary demand-side pressures
and tepid economic growth tip the balance in favour of looser monetary

Key Risks To Outlook

Our relatively positive long-term view on Serbia is grounded in EU
accession providing a policy anchor for the Serbian government.
While the path towards EU membership is much clearer now that
an agreement has been reached with Kosovo, continued progress
in implementation and enforcement of the accord is required. There
is strong opposition to the deal from both sides given deep-seated
ethnic divisions and strong nationalist sentiments, and the potential
for unrest to disrupt further progress remains elevated.

Core Views

A s accession talks get under way, Montenegro will need to adhere
to the EU's acquis communautaire accumulated legislation, which
will require the incorporation and implementation of all EU norms
and regulations into the country's legal system. Given the still substantial
gap that needs to be bridged between the Montenegrin and
EU legal systems, we expect that accession talks will last at least
until the latter half of the decade.
Deleveraging is going to continue dragging on economic growth
into 2014. The private sector accumulated large amounts of debt in
the run-up to the financial crisis, requiring it to deleverage over the
last few years. Government spending, coupled with robust tourism
inflows, supported growth as this process unfolded. However, we
expect the government to significantly curtail spending as it struggles
with rising debt levels, leaving only services exports, namely
tourism, to drive growth.

Major Forecast Changes

T he Montenegrin economy will remain under pressure in 2014 and
2015, as the country's biggest industrial plant is now officially bankrupt,
and private sector balance sheets are only gradually recovering from
the credit bubble years. We forecast real GDP to grow by 1.6% in 2014
and by 1.9% in 2015, while the export sector, and a pickup in private
consumption, will drive a more robust growth from 2015 onwards.

Key Risks To Outlook

As volatility in the international financial bond markets is unlikely to
ease over the course of 2013-2014, we highlight the risk that Montenegro
may have to pay a substantial premium to place its bonds
and may therefore quickly slip into a debt spiral that would lock it
out from global financial markets, preventing it from borrowing to
finance the current account deficit, even in the short run.
D espite not being part of the eurozone, Montenegro has adopted
the euro as its currency since it went into circulation in 2002. As a
consequence, the country is highly exposed to a potential disorderly
breakdown of the eurozone. Although this is not our core scenario,
we highlight that the dissolution of the currency bloc would leave
Montenegro vulnerable to sharp capital outflows and soaring imported
inflation, or the Central Bank of Montenegro could be forced
to artificially fix its new exchange rate to a future core European

Core Views

An EU-brokered accord between Kosovo and Serbia is the first
official acknowledgement of the legal authority of Pristina over
northern Kosovo by Serbia. Although tensions are likely to remain
elevated, with unrest in the north remaining a risk, a major hurdle
in the way of eventual EU accession is now cleared.
The Kosovan economy faces significant challenges, including a
low level of development and a very high level of unemployment,
and the country remains one of the poorest in Europe in GDP
per capita terms. However, recent progress towards eventual EU
accession could boost long-term growth potential and expedite
improvements in the domestic economy.

Major Forecast Changes

We have revised down our 2014 real GDP growth forecast to 4.4%,
from 4.8% previously, as growing tensions in the northern provinces
ahead of municipal elections are likely to further hamper private
sector spending.

Key Risks To Outlook

We caution that failure to rein in spending or secure short-term
financing from international lenders would result in a fiscal crisis for
Kosovo, with substantial repercussions for economic and political
stability in the region. Social unrest could lead to a fall of Prime
Minister Hashim Thaçi's government, pushing the country to yet
another early election. A strong international military and diplomatic
presence would prevent an escalation of violence, but the country's
bid towards progressive political normalisation would face another

Table Of Contents

Serbia, Montenegro and Kosovo Business Forecast Report Q2 2014
Executive Summary - Serbia 7
Chapter 1 1: Political Outlook - Serbia 10
Domestic Politics 10
Snap Elections Possible, But Policy Continuity On Track 10
TABLE: Serbia - Political Overview 10
Long-Term Political Outlook 11
Unresolved Tensions Remain Despite Agreement With Kosovo 11
Chapter 1 2: Economic Outlook - Serbia 16
Economic Activity 16
Souring 2014 Growth Prospects 16
Fiscal Policy 18
Harsh Austerity Measures To Bear Fruit In The Long Term 18
Monetary Policy 19
Tepid Demand To Prompt Further Rate Cuts In 2014 19
Balance Of Payments 21
Persistent But Sustainable Current Account Deficits Ahead 21
Exchange Rate Policy 23
Sustaining A Moderate Depreciatory Trend 23
TABLE: Serbia - Currency Forecast 23
Chapter 1 3: 10-Year Forecast - Serbia 25
The Serbian Economy To 2022 25
EU Convergence Key 25
TABLE: serbia - Long-Term Macroeconomic Forecasts 25
Chapter 1 4: Business Environment - Serbia 27
SWOT Analysis 27
BMI Business Environment Risk Ratings 27
Business Environment Outlook 28
Institutions 28
Infrastructure 31
Market Orientation 33
Operational Risk 34
Chapter 1 5: Key Sector Outlook - Serbia 35
Autos 35
Food and Drink 38
Other Key Sectors 43
Business Monitor International Ltd www businessmonitor com 3
Executive Summary - Montenegro 45
Chapter 2 1: Political Outlook - Montenegro 48
Domestic Politics 48
Coalition's Political Clout On The Rise 48
Long-Term Political Outlook 48
Converging Towards The EU 48
Chapter 2 2: Economic Outlook - Montenegro 52
Economic Activity 52
Aluminium Plant Bankruptcy To Weigh On Short-Term Growth 52
Chapter 2 3: 10-Year Forecast - Montenegro 55
The Montenegrin Economy To 2023 55
Business Environment Reforms Crucial For Convergence 55
TABLE: Montenegro - Long-Term Macroeconomic Forecasts 55
Chapter 2 4: Business Environment - Montenegro 57
BMI Business Environment Risk Ratings 57
Business Environment Outlook 58
Executive Summary - Kosovo 65
Chapter 3 1: Political Outlook - Kosovo 67
Domestic Politics 68
Kosovo-Serbia Tensions To Continue Bedevilling Kosovo's EU Bid 68
Table: Kosovo - Political Overview 68
Long-Term Political Outlook 69
Political Future Far From Certain Despite Serb Agreement 69
Chapter 3 2: Economic Outlook - Kosovo 74
Economic Activity 74
Tensions In The North Likely To Weigh On Growth 74
Chapter 3 3: 10-Year Forecast - Kosovo 77
The Kosovan Economy To 2023 77
Economy To Remain Least Developed In Region 77
TABLE: Kosovo - Long-Term Macroeconomic Forecasts 77
Chapter 4: BMI Global Assumptions 79
Global Outlook 79
Momentum To Continue In H114 79
Table: Global Assumptions 79
Table: Developed States, Real GDP GrowtH, % 80
Table: Emerging Markets, Real GDP Growth, % 81

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