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Serbia, Montenegro and Kosovo Country Risk Report Q1 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views

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 Vucic's austerity agenda and structural reform programme. The principal political threat to the current Serbian government is from abroad. Ethnic tensions are threatening the stability of Bosnia and Herzegovina and poor relations with Croatia are delaying Serbia's EU accession. Domestically, with its large majority in parliament, the government is tasked with ensuring that it implements its own manifesto effectively and overcomes the political protestations of the newly elected right-wing parties. The recovery of Serbian real GDP growth will consolidate in 2017 and 2018 on the back of rising consumer spending and less severe government austerity. Growth will be limited, however, by a shortterm deceleration in investment motivated by structural reform and deterioration of the trade balance. We forecast GDP growth of 3.3% in 2017, and 2.9% in 2018. Serbia's current account deficit will widen in 2017 on account of weaker external demand, stronger import demand, and rising commodity prices. However, the deficit does not pose a major risk to economic stability, given that structural reforms are increasing export potential and attracting more foreign direct investment. We forecast the current account deficit at 4.1% of GDP and 5.2% in 2017 and 2018, respectively. While the National Bank of Serbia will retain a cautious stance, examining keenly inflation within the EU and US, we expect the rate cutting cycle is has finished leaving the main policy rate at 4.00%. The bank is now discussing when to raise rates to manage inflation from rising domestic demand and rises in global commodity prices, especially oil. Serbia's fiscal and debt metrics will continue to improve in 2016- 2017, as Prime Minister Alexandar Vucic's austerity and structural reform agenda has been bolstered by his victory in the general election in April 24.

Table Of Contents

Serbia, Montenegro and Kosovo Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Private Consumption Growth Confirms Recovery.......................................................................................................................8
Serbian real GDP growth will accelerate in 2016 and 2017 on the back of rising consumer spending and less severe government
austerity. Growth will be limited, however, by a short-term deceleration in investment motivated by structural reform and deterioration of
the trade balance.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS......................................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................10
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................10
Fiscal Policy And Public Debt Outlook.................................................................................................................. 11
Ambitious Forecasts Put Austerity Agenda At Risk..................................................................................................................11
Prime Minister Aleksandar Vucic's austerity and structural reform agenda, legitimised by his victory in the snap general election
in April, is in danger. Overly-ambitious forecasts of government spending and rising political risks suggest that a clear and certain
implementation of austerity will be unlikely. This will increase uncertainty for investors as they are left to guess when and how the
government will acknowledge the forecast's shortcomings and the risk it represents to Serbia's IMF programme.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.............................................................................................................................13
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................13
External Trade And Investment Outlook................................................................................................................ 14
Widening Deficit No Cause For Alarm.........................................................................................................................................14
Serbia's current account deficit will widen in 2017 on account of weaker external demand, stronger import demand, and rising
commodity prices. However, the deficit does not pose a major risk to economic stability, given that structural reforms are increasing
export potential and attracting more foreign direct investment.
Outlook On External Position.................................................................................................................................. 15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................15
TABLE: TOP 5 EXPORTS IN 2015..........................................................................................................................................................................16
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................16
Currency Forecast.................................................................................................................................................... 17
RSD Set To Appreciate Against EUR...........................................................................................................................................17
The Serbian dinar will remain stable in the short term and appreciate gradually thereafter. Appreciation will be driven by improvements
in Serbia's growth and fiscal dynamics, and investors capitalising upon rising interest rate differentials.
TABLE: BMI CURRENCY FORECAST....................................................................................................................................................................17
Monetary Policy........................................................................................................................................................ 18
Interest Rates Reach Their Nadir As Inflation Picks Up............................................................................................................18
The decision by the National Bank of Serbia to keep the country's key policy rate unchanged at 4.00% in July signals the end of its
rate-cutting cycle. Strengthening international and domestic inflation will prompt rate increases in H117 and H217. However, the hike
necessary to offset inflation will only be 50 basis points as Serbian monetary policy benefits from the fruits of austerity, strengthened
central bank credibility and the global shift of investors to emerging markets.
Monetary Policy Framework.................................................................................................................................... 20
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................20
Chapter 2: 10-Year Forecast................................................................................................................... 23
The Serbian Economy To 2025............................................................................................................................... 23
EU Convergence Key....................................................................................................................................................................23
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. That said, we caution that political instability,
particularly around Kosovo, poses the greatest risk to our forecasts.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................23
Chapter 3: Political Outlook................................................................................................................... 25
SWOT Analysis......................................................................................................................................................... 25
BMI Political Risk Index........................................................................................................................................... 25
Domestic Politics..................................................................................................................................................... 26
Regional Instability Greatest Threat To Government................................................................................................................26
The principal political threat to the current Serbian government is from abroad. Ethnic tensions are threatening the stability of Bosnia
and Herzegovina and poor relations with Croatia are delaying Serbia's EU accession. Domestically, with its large majority in parliament,
the government is tasked with ensuring that it implements its own manifesto effectively and overcomes the political protestations of the
newly elected right-wing parties.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................26
Long-Term Political Outlook................................................................................................................................... 28
Unresolved Tensions Remain Despite Agreement With Kosovo.............................................................................................28
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................................................................................................................... 31
SWOT Analysis......................................................................................................................................................... 31
Operational Risk Index............................................................................................................................................ 31
Operational Risk....................................................................................................................................................... 32
TABLE: OPERATIONAL RISK.................................................................................................................................................................................32
Business Crime........................................................................................................................................................ 33
TABLE: BUSINESS RESPONSE TO RISK.............................................................................................................................................................34
Government Intervention......................................................................................................................................... 36
TABLE: BUSINESS TAXES.....................................................................................................................................................................................36
TABLE: PERSONAL INCOME TAX.........................................................................................................................................................................37
Chapter 5: BMI Global Macro Outlook................................................................................................... 41
Global Macro Outlook.............................................................................................................................................. 41
Broad Recovery But Three Notes Of Caution.............................................................................................................................41
TABLE: GLOBAL FORECASTS, 2015-2020...........................................................................................................................................................41
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %....................................................................................................................................42
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...................................................................................................................................43
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................45

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