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Serbia, Montenegro and Kosovo Country Risk Report Q4 2016

  • July 2016
  • -
  • Business Monitor International
  • -
  • 41 pages

Core Views

Serbia's ruling Progressive Party (SNS) emerged as the winner ofthe April 24 general election, which will reaffirm public support forPrime Minister Aleksandar Vu'i?'s austerity agenda and structuralreform programme. However, with ultranationalist parties now alsoentering parliament, the passage of legislation will now be a moredifficult and protracted process.Real GDP growth will slow in Serbia as the new government resumesan ambitious austerity agenda, which will act as a constraint ondomestic demand growth. Although modest, Serbia's recovery willremain on track, driven mainly by the export sector, underpinning ourforecast for full-year GDP growth of 1.7% in 2016 and 2.5% in 2017.Serbia's Stand-By Credit Arrangement with the IMF and the privatisationprogramme of Prime Minister Aleksandar Vu'i? will bolsterforeign investor interest in the export-oriented manufacturing sector,contributing to a reduction in Serbia's massive current accountdeficit. We forecast the current account deficit to narrow to 4.8% ofGDP and 4.2% in 2016 and 2017, respectively.While the National Bank of Serbia will retain a cautious stance towardseasing in the coming months, we still expect one rate cut of 25 basispoints by end-2016. The need to offset the fiscal consolidation pushby the new government in the context of persistently below-targetinflation underpins our view.Serbia's fiscal and debt metrics will continue to improve in 2016-2017, as Vu'i?'s austerity and structural reform agenda has beenbolstered by his victory in the general election in April 24.

Table Of Contents

Serbia, Montenegro and Kosovo Country Risk Report Q4 2016
Executive Summary. 5
Core Views5
Key Risks .5
Chapter 1: Economic Outlook 7
SWOT Analysis.. 7
BMI Economic Risk Index 7
Economic Growth Outlook. 8
Recovery Slowing But Remains On Track8
Real GDP growth will slow in Serbia as the new government resumes an ambitious austerity agenda, which will act as a constraint on
domestic demand growth. Although modest, Serbia's recovery will remain on track, driven mainly by the export sector, underpinning our
forecast for GDP growth of 1.7% in 2016 and 2.5% in 2017.
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS 9
TABLE: PRIVATE CONSUMPTION FORECASTS.9
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS.10
TABLE: NET EXPORTS FORECASTS .10
Fiscal Policy And Public Debt Outlook 11
Election Supports Sovereign Profile.11
Serbia's fiscal and debt metrics will continue to improve in 2016-2017, as Prime Minister Aleksandar Vu?i?'s austerity and structural
reform agenda has been bolstered by his victory in the general election in April 24.
Structural Fiscal Position. 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES..12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS..12
External Trade And Investment Outlook. 13
Reform Agenda To Ease External Imbalances13
Serbia's structural reform and privatisation programme will bolster foreign investment into the export-oriented manufacturing sector,
contributing to a reduction in Serbia's current account deficit and more stable deficit financing. We forecast the current account deficit to
narrow to 4.8% of GDP and 4.2% in 2016 and 2017, respectively.
Outlook On External Position. 14
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE..15
TABLE: TOP 5 EXPORTS ..15
TABLE: TOP 5 GOODS IMPORTS .16
TABLE: CURRENT ACCOUNT BALANCE FORECASTS16
Monetary Policy . 16
Cautious Stance Giving Way To Rate Cut By Year-End16
While the National Bank of Serbia will retain a cautious stance towards easing in the coming months, we still expect one rate cut of 25
basis points by end-2016. The need to offset the fiscal consolidation push by the new government in the context of persistently belowtarget
inflation underpins our view.
Monetary Policy Framework 18
TABLE: MONETARY POLICY FORECASTS.18
Currency Forecast. 19
RSD: Fundamentals To Drive Long-Term Depreciation19
While the Serbian dinar will see modest appreciation against the euro in the coming months, it will resume its long-term depreciatory
trajectory beyond a six-month time horizon, weighed down by the still sizeable external imbalances. Nevertheless, the central bank's
concern over FX indebtedness and resolve to maintain FX stability will prevent a more pronounced weakening of the dinar.
TABLE: BMI CURRENCY FORECAST..19
4 www.bmiresearch.com Business Monitor International Ltd
SERBIA Q4 2016
Chapter 2: 10-Year Forecast. 21
The Serbian Economy To 2025. 21
EU Convergence Key..21
Serbia's convergence process with the more developed states of Western Europe is expected to continue apace over the long term,
with the harmonisation of the underlying domestic legal and regulatory framework with that of the EU being a fundamental factor driving
growth. This will lead to marked improvements in Serbia's business environment, enabling greater access to the export markets of EU
member states and enhancing the country's appeal to foreign investors in the process.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.21
Chapter 3: Political Outlook. 23
SWOT Analysis 23
BMI Political Risk Index. 23
Domestic Politics . 24
Governing Coalition Retains Power, More Challenges From Far-Right Ahead..24
Serbia's ruling Progressive Party (SNS) emerged as the winner of the April 24 general election, which will reaffirm public support for
Prime Minister Aleksandar Vu?i?'s austerity agenda and structural reform programme. However, with ultranationalist parties now also
entering parliament, the passage of legislation will now be a more difficult and protracted process.
TABLE: POLITICAL OVERVIEW..24
Long-Term Political Outlook.. 26
Unresolved Tensions Remain Despite Agreement With Kosovo26
Unresolved regional tensions and a fractious domestic political environment are expected to continue to hang over Serbia's political risk
profile over the long term. In turn, the country's EU accession prospects and economic growth profile could suffer as a result. However,
owing to the large diplomatic presence in the region, which we expect to persist over the long term, we believe it is very unlikely that
lingering disputes will devolve into open conflict.
Chapter 4: Operational Risk. 29
SWOT Analysis 29
Operational Risk Index.. 29
Operational Risk 30
TABLE: OPERATIONAL RISK30
Market Size And Utilities .. 31
TABLE: EMERGING EUROPE - MARKET SIZE AND UTILITIES RISK.31
Labour Costs 34
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE.. 34
Chapter 5: BMI Global Macro Outlook 37
Global Macro Outlook. 37
Brexit Risk Casts A Long Shadow..37
TABLE: GLOBAL ASSUMPTIONS..37
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %38
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %..39
TABLE: MACROECONOMIC DATA and FORECASTS.41

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