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Serbia, Montenegro and Kosovo Country Risk Report Q2 2016

  • January 2016
  • -
  • Business Monitor International
  • -
  • 37 pages

Core Views

Serbia's economic rebound will remain on track in 2016, but growthwill remain tepid, as fiscal consolidation measures and structuralreforms will prevent a stronger recovery in domestic demand.The opening of accession negotiations between Serbia and the EUat end-2015 offers little cause for optimism that the country will jointhe union any time soon. We see limited possibility that Serbia fulfilsthe EU's main condition for EU membership – normalising relationswith its former province Kosovo, as nationalist elements in Kosovo willobstruct progress on cooperation with Serbia. Meanwhile, Belgradewill continue to deny Kosovo's sovereignty for the foreseeable future.

Serbia's sovereign risk profile has improved on the back of the ongoingaggressive fiscal consolidation programme implemented byPrime Minister Alexander Vucic's cabinet. While 2016 will see somerelaxation of austerity, this will not jeopardise the country's improvedsovereign credentials, reflected in our forecast for the budget deficitto continue narrowing to 3.5% of GDP in 2016, and 3.1% in 2017,from an estimated 4.0% in 2015.Improving external demand and subdued import growth outlook willsee Serbia's current account deficit narrow in 2016 and 2017. Thecredit arrangement concluded in February 2015 with the InternationalMonetary Fund will boost investment inflows, ensuring externalfinancing in the coming years.

Table Of Contents

Serbia, Montenegro and Kosovo Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Recovery On Track, But Growth Remains Tepid8
Serbia's economic rebound will remain on track in 2016, but growth will remain tepid, as fiscal consolidation measures and structural
reforms will prevent a stronger recovery in domestic demand
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS 9
TABLE: PRIVATE CONSUMPTION FORECASTS9
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS10
Fiscal Policy 11
Sovereign Risk Profile Improving11
Serbia's sovereign risk profile has improved on the back of the ongoing aggressive fiscal consolidation programme implemented
by Prime Minister Alexander Vucic's cabinet While 2016 will see some relaxation of austerity, this will not jeopardise the country's
improved sovereign credentials, reflected in our forecast for the budget deficit to continue narrowing to 35% of GDP in 2016, and 31
%in 2017, from an estimated 40% in 2015
Fiscal Policy And Public Debt Outlook 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES12
Monetary Policy 13
Monetary Easing To Resume By End-H11613
The National Bank of Serbia will retain a cautious stance in the early stages of 2016 for fear of inducing further depreciatory pressure
on the dinar However, we expect the authorities to resume monetary easing by end-H116, as inflation remains below target due to both
demand-side and supply-side disinflationary pressures
Monetary Policy Framework 14
External Trade and Investment Outlook 14
External Imbalances Diminishing14
Serbia will continue to make progress on addressing its external imbalances, with the help of the ongoing structural adjustment
programme under the auspices of the IMF We forecast the current account deficit to narrow to 47% of GDP in 2016, and to 45% in
2017, from an estimated 50% in 2015
Outlook On External Position 16
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE16
TABLE: TOP 5 EXPORTS IN 201416
TABLE: TOP 5 GOODS IMPORTS IN 201417
Chapter 2: 10-Year Forecast 19
The Serbian Economy To 2025 19
EU Convergence Key19
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 FORECASTS19
Chapter 3: Political Outlook 21
SWOT Analysis 21
BMI Political Risk Index 21
Domestic Politics 22
Despite Start Of EU Accession Talks, Membership Remains Distant Possibility22
The opening of accession negotiations between Serbia and the EU at end-2015 offers little cause for optimism that the country will join
the union any time soon We see limited possibility that Serbia fulfils the EU's main condition for EU membership - normalising relations
with its former province Kosovo, as nationalist elements in Kosovo will obstruct progress on cooperation with Serbia Meanwhile,
Belgrade will continue to deny Kosovo's sovereignty for the foreseeable future
TABLE: POLITICAL OVERVIEW22
Long-Term Political Outlook 23
Unresolved Tensions Remain Despite Agreement With Kosovo23
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 27
SWOT Analysis 27
Operational Risk Index 27
Operational Risk 28
TABLE: OPERATIONAL RISK28
Trade Procedures And Governance 29
TABLE: EMERGING EUROPE - TRADE PROCEDURES AND GOVERNANCE RISK 29
Vulnerability To Crime 30
TABLE: SERBIA IMPORT AND EXPORT DOCUMENTS 30
TABLE: TRADE PROCEDURES BREAKDOWN 30
Chapter 5: BMI Global Macro Outlook 33
Global Macro Outlook 33
Unfinished Business In 201633
TABLE: GLOBAL ASSUMPTIONS 33
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 34
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 34
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 35
TABLE: SERBIA - MACROECONOMIC DATA and FORECASTS 37

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