ISSN: 2560-1601

Vol. 14, No.2 (RS)

January 2019

Serbia economy briefing: ECONOMY OF IN 2019 – A FORECAST IIPE

1052 Budapest Petőfi Sándor utca 11.

+36 1 5858 690 Kiadó: Kína-KKE Intézet Nonprofit Kft. office@-cee.eu Szerkesztésért felelős személy: Chen Xin

Kiadásért felelős személy: Huang Ping china-cee.eu 2017/01

ECONOMY OF SERBIA IN 2019 – A FORECAST

1. Results from the previous year

According to the reports and official statements from different Governmental Bodies, Serbian Government is very satisfied with achieved economic results in 2018, and for 2019 they are predicting the same trend.

Most of economic results that are available at the beginning of 2019, show improvement comparing to the last year’s results. According to report issued by in December 2018: "In six years, Serbia has transformed to a low and stable growing economy, with fiscal surplus, declining public debt, significantly reduced external imbalances and labour market recovery." In this Report, NBS stated that GDP growth for the period Q1- Q3 in 2018, was 4.5% y/y mainly thanks to investment activity that was supported by consumption and exports. According to NBS final GDP growth rate will be 4.2%. EBRD predicted that by the end of 2018, the growth rate will be around 4%.

NBS stated that inflation rate at the end of November was around 1.9%, while still remaining below central target point of 3.0%. National dinar (RSD) did stayed stable, with average value of 118.3 RSD for 1 through 2018. Budget surplus continued to grow and it will be around 1.5% at end of 2018 and that is increase of 0.5% points from 2017.

Regarding public debt, according to Minister of Finance Mali, it fell down even more from the last year, and at the end of 2018, public debt was 56.6% of share in GDP.

The unemployment rate also fell down from 2017, and we ended this year with 12% of unemployment rate.

Prime Minister Brnabic also stated that this year Government had a lot of success regarding solving problem of state enterprises that were unsuccessful, either by selling them or by finding a strategic partner for them. Companies such as IMT, RTB Bor, PKB, , Lasta, BIP or Port of are among those companies that were troubled, but from which our Government expects a lot in upcoming years due to changes.

Temporary pension cuts that were introduced in 2014 as a measure to cut down public debt were finally abolished in 2018, suggesting that the crisis in Serbia is over, and that we have enough money to fulfill our liabilities.

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Still, there are suggestions coming from the different international institutions and domestic analytics that say that even though this year was better than the previous one, there was a room for more improvements. Among arguments what could have been done this year and it wasn’t were: further privatization of unsuccessful state companies (e.g. Petrohemija), GDP growth rate is still below the rate in CEE countries, level of the investments could be higher (especially coming from small and medium companies), Doing Business List – Serbia fell down a couple of places, small export to regional countries while at the same time exporting a lot to EU, relatively small transparence of results coming from the state companies and from domestic point of view very important note is that the economic standard of our citizens is still going down.

Having in mind all the above mentioned we can conclude that most of the planned measures from 2017 were put in the practice in 2018 and Serbia achieved better results than it was planned. With a new budget for this year we will see what are economic measures and forecast of Serbian Government for 2019.

2. Budget and forecast of Serbian Government for 2019

At the beginning of December 2018 Serbian National Assembly accepted the proposed budget coming from the Serbian Government. Main idea behind this budget is further and rapid development of Serbian economy, with a fiscal and monetary stability, and an increase of living standard of Serbian citizens. Besides that, one of the main characteristics of this budget is further help for companies that have business in Serbia through tax reduction (e.g. tax for unemployment or tax on income…) and implementation of different economic incentives that will improve their growth.

Also, one of the suggestions that was coming from the IMF and WB was implemented into this budget, and that is the increase of capital investments (mainly infrastructure), and for that purposes Government will spend 220 billion RSD. Those project include investments in roads, such as Moravski corridor, detour around , further work in Preljina and Pozega, scientific and technological park in Novi Sad, Clinical Center in Belgrade etc.

Serbia's government plans a fiscal deficit 0.5% of the estimated GDP in 2019, but that is done with the agreement of IMF, so unlike the last year Serbia will not have fiscal surplus. Estimated GDP growth rate for 2019 is 3.5%. Also, the government will stay with same

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Government also plans to reduce even more unemployment rate, mainly with opening of new companies in Serbia and tax reductions that will stimulate further employment.

One of priorities is to work on those law measures that unfortunately were not adopted in 2018, that led to losing good position on Doing Business List.

Main sectors that will have more money in this year according to this budget is health, and employment (salaries in the public sector will be raised between 7-12%).

Government will continue its work in strengthening corporate governance in EPS (state electricity company) and other key public enterprises, while at the same time trying to downsize still existing grey economy in Serbia.

3. International Institutions Forecast

The European Commission raised the expected economic growth of Serbia for 2019 from the previous 3.3% to 3.8%, and the same growth is expected in 2020 as well. According to the same institution Serbia’s public debt will drop to 54.1% in 2019, and then to 52.1% in 2020.

The EC gave its opinion that: "Investments in Serbia in 2019 will be robust and domestic consumption will receive a further boost from rising employment and income. Financing conditions and fiscal policy are forecast to be supportive of growth." But, they also think that this increase in domestic demand and worsening terms of trade, will lead to inflation and external imbalances.

EC also stated that Serbian budget deficit will continue to decrease not only through 2019, but also through 2020. They think that by continuing reforms in tax policy, public administration and by completing privatization of state enterprises Serbia will have good fiscal results.

Forecast of EC for unemployment rate in 2019 is 12%, and 10.9% in 2020. Regarding inflation EC stated that in 2019 it will be probably around 2.9%, and 3% in 2020. Conclusion of EC that after 2018 that had unexpectedly good results, Serbian economy will slow down the pace, but it will continue to be strong mainly due to strong domestic demand.

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Prognosis from EBRD and IMF are relatively the same, with small differences comparing to EC. Both of those institution are less optimistic then EC, but the conclusions are more or less the same. According to bneIntelliNews: "Despite the slight differences in the forecasts, all international institutions have noted that the economy will be driven by strong domestic demand, which came thanks to rising private and public consumption, but also to changes in inventories and double-digit investment growth." It is worth mentioning that besides already mentioned infrastructural projects by Serbian Minister of Finance, foreign media and analyst also take into account very important projects such as building of the highway between Belgrade and Sarajevo (70 million ) or water transportation projects – loan by EIB (200 million euros). Besides that the same news agency cited Fitch that recognized one very important thing while discussing economic forecast for Serbia in 2019, and that is negative population rate and relatively low level of domestic savings, which can hurt domestic economy.

In the IMF final report for 2018 (that was done and issued in November during IMF visit to Serbia), we can see that for the most part, IMF is satisfied with Serbia’s Government results, and that they will continue to give support to the Serbian Government to all reforms that will take up the place in the next year. Theirs forecast is slightly less optimistic then Serbian Government, but the overall feeling is that they are on the same page.

4. Final Conclusion

Having in mind everything that is written we can conclude following: Serbia had in 2018 better results then it was expected. Most of the main macroeconomic indicators were good, or were going in the right direction. Government was trying, on its own and with a help of international institutions such as IMF and , to achieve better economic results.

Prognosis for the next year are similar like for the last year. The main thing that will slow down is the GDP growth rate, and that is the main negativity for the next year. Even though the capital investments will be high, even though Serbia will start or finish with some important projects, that is still not good enough to reach GDP growth rate above 4%. We also have to bear in mind, that there is possibility that Serbia will have one more election circle and usually that means worse economic results. Political problem with is still existing, and that is at the same time huge problem for domestic economy.

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It is a positive thing that the public debt is steadily going down, as well as that Serbia has stabile monetary and fiscal policy. All the changes in the law policy will help to improve some economic indicators in 2019.

Regarding budget for 2019, we can see some of the positive changes in economic policy. First the budget for the agriculture and health is increased. At the same time a lot of money will go to police, military, health workers and teachers, and that measure will at the end improve the living standard of those categories of citizens. In that regard Ministry of Internal Affairs and Ministry of Military Affairs will be given generous amount to improvement of their security and defending system.

At the same time, unfortunately Ministry of education, Ministry of culture and Ministry of social welfare will not benefit this year. This is in a way worrying, having in mind that without good educational system we cannot develop as society and prepare for the Forth Industrial Revolution.

It is also of outmost importance to stabilize domestic small and medium companies, which are still struggling to become respectable on domestic market. Some of the changes in the tax reduction will help them, but there are still many measures that can be implemented to give them the boost to perform better. It is also important to recognize national champion companies to which Government can provide support to go abroad and spread their business. Only with strong domestic companies, we can improve our market. It doesn’t mean that we should not support international companies and investments, but we should give more support and pay attention to domestic companies.

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