Serbia’s European Solidarity Schism
Serbian voters joined French and Greek ones at national polls with both President Tadic’s party and the opposition espousing pro-EU views in a mutual post-independence first as the initial application was accepted by Brussels. As the last accused war criminals await trial at The Hague the race focused on the economy with flat GDP growth and over 5 percent inflation with the stock market off almost 10 percent on the MSCI index through April. FDI has been on hold after the opening of a big Fiat plant and the central bank has spent EUR 750 million or 5 percent of reserves intervening and paused with interest rate reduction to stem currency depreciation. To inject liquidity into the two thirds foreign-owned banking system reserve ratios have been relaxed instead, as outsize fiscal and current account deficits at respective 5 percent and 10 percent of GDP marks have upended an IMF post-crisis successor program since February. Budget performance has lagged ex-Yugoslavia neighbor Macedonia which tapped the prequalified Fund credit line with a gap half the size, and is due to get a 7 percent commercial loan from Deutsche Bank in the near future at the same time the lender has been paring exposure to historical rival Greece. Growth and inflation there are both at 2 percent, with shares slightly up in local terms. Kosovo, whose fate had been an issue in previous Serbian contests, has approached the IMF too for a EUR 100 million facility after the original one derailed. It is on a path to full self-governance after declaring autonomy five years ago and receiving bilateral and multilateral aid. Officials adopted the euro and diaspora remittances from Germany and Switzerland support domestic consumption and coverage of the 20 percent of GDP current account hole.
The fiscal side has slipped with telecoms privatization delay but the public debt ceiling is capped at 40 percent of output by law. Spending has focused on social needs and infrastructure including a new highway to Albania, and 3-month T-bills have been introduced for domestic borrowing. Capital adequacy is high in the internationally-dominated banking sector with non-performing loans at 5 percent of the portfolio and a revised deposit insurance scheme in course. Competitiveness is an immediate priority with the state’s low ranking in the World Bank’s Doing Business reference. Assistance providers urge Pristina to follow the example of Romania in keeping to a structural reform agenda despite labor and political obstacles. The government there fell again on a no-confidence vote, and replacements vow to honor Fund-EU commitments even as the leu dropped to 4.5 to the euro. Credit expansion remains weak on NPLs at 15 percent of the total as cross-border network connections break.
