Emerging

Favourable prospects

rd  
Eco Emerging // 3 quarter 2021  
economic-research.bnpparibas.com  
1
5
SERBIA  
FAVOURABLE PROSPECTS  
The Serbian economy was only moderately affected by the consequences of the Covid-19 pandemic in 2020. Activity  
barely contracted, whilst the central bank maintained an adequate level of foreign-currency liquidity against a  
background of significant euroisation of the economy. These good performances can be linked to the economy’s  
attractiveness for international investors, as well as to past fiscal consolidation measures, which meant that the  
government had more scope to support the economy last year. In the short term, the recovery is likely to be strong,  
in particular thanks to exports, and inflation should remain under control. Looking further ahead, the ability of the  
authorities to maintain the economy’s competitiveness will be crucial in reducing currency risk.  
A RESILIENT ECONOMIC ACTIVITY  
FORECASTS  
In 2020, economic activity withstood the fallout from the pandemic  
quite well, and the early signs of recovery in 2021 are encouraging. Real  
2
019  
2020  
2021e  
2022e  
GDP contracted by only 0.9% in 2020. This good performance can be  
explained by three factors: the modest drop in household consumption  
Real GDP growth (%)  
4.2  
1.9  
-0.2  
53  
-0.9  
1.5  
5.0  
2.5  
-7.0  
60  
4.5  
2.5  
-2.5  
59  
Inflation (CPI, year average, %)  
Cent. Gov. balance / GDP (%)  
Cent. Gov. debt / GDP (%)  
(
-2.5%) given the limited lockdown measures, various government  
measures to support corporates and household income (equivalent to  
more than 10% of GDP), and the strength of goods exports. Meanwhile,  
unlike other countries in the Western Balkans, the small share of  
tourism in GDP limited the drop in service sector activity.  
-8.1  
57  
Current account balance / GDP (%)  
External debt / GDP (%)  
-6.9  
66  
-4.2  
71  
-5.3  
65  
-5.6  
62  
In the first quarter of 2021, dynamic growth in investment (+10% y/y)  
and exports (+7.9% y/y) enabled real GDP to increase by 1.7% y/y,  
despite the fact that household consumption (-1.9% y/y) was still  
dented by the fallout from the pandemic. The short-term outlook is  
fairly positive due to a relatively high vaccination rate and an export  
sector that should benefit from the economic recovery in the Eurozone.  
Real GDP is likely to grow by around 5% this year.  
Forex reserves (EUR bn)  
13.4  
5.7  
13.5  
6.1  
15.1  
6.2  
15.7  
5.9  
Forex reserves, in months of imports  
e: ESTIMATES & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
CONTRIBUTION TO REAL GDP GROWTH  
In recent years, the Serbian economy has become more reactive to  
international economic conditions due to the growing weight of exports  
in GDP. Exports accounted for 52% of GDP in 2019, up from 23% in 2004,  
and are concentrated in the manufacturing sector. In the meantime,  
the role of the domestic market as an engine of growth has diminished  
Private Consumption  
Gross Capital Formation  
Net Exports  
Public Consumption  
Others  
Total GDP  
8 %  
6
4
2
0
2
4
6
for both household consumption and public spending (from 13% of  
GDP in 2004 to 9% in 2019).  
INFLATION SHOULD STAY UNDER CONTROL  
In 2020, the National Bank of Serbia (NBS) adopted measures that  
allowed the country to avoid liquidity constraints. In addition to cutting  
its policy rate by 125bp to 1%, bank liquidity was boosted by an increase  
in currency swap transactions, repo transactions and purchases of  
public and private-sector securities. Even so, since March 2020, the  
central bank’s balance sheet has only grown by the equivalent of 5%  
of GDP.  
-
-
-
2
010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020  
CHART 1  
SOURCE: EUROPEAN COMMISSION, BNP PARIBAS  
In the short term, the conduct of monetary policy is likely to prove  
more delicate. First, the health situation remains uncertain, meaning fade and we are not expecting a significant increase in oil prices on  
that monetary easing could continue to be necessary. Secondly, global markets in the second half. Overall, inflation is likely to remain  
inflationary pressures have increased since the beginning of the year. moderate and reach 2.5% on average in 2021. Against this background,  
The Consumer Price Index (CPI) rose by an annualised 3.6% in May the central bank remains in a position to pursue an accommodating  
2
021, compared to average inflation of 1.6% in 2020. Unsurprisingly, monetary policy that will help support domestic liquidity.  
energy prices (and to a lesser extent food prices) were the main driver  
of inflation in the first half of 2021. CPI inflation is currently above the  
central bank’s target of 3%, but remains below the 4.5% upper bound  
FISCAL CONSOLIDATION REMAINS RELEVANT  
of its tolerance interval. We estimate that inflation will remain within Due to the contraction in economic activity and policy stimulus  
this interval and fall back below the target rate in the second half of measures, the government recorded a substantial deficit in 2020 (8.1%  
the year. The base effect that is driving up energy prices will gradually of GDP). The deficit is likely to remain high in 2021 (at an expected 7%  
The bank  
for a changing  
world  
3rd quarter 2021  
economic-research.bnpparibas.com  
1
6
of GDP) given the persistence of the epidemic and the associated  
spending. However, public finances remain sound. As a matter of fact,  
when the Covid-19 crisis started last year, public accounts were in  
much better shape than a decade before. Fiscal consolidation efforts,  
helped by financial and technical support from the IMF, allowed the  
government to run budget surpluses in 2017 and 2018 and an almost  
balanced budget in 2019. The primary surplus averaged 2.5% of GDP  
between 2016 and 2019, compared to an average deficit of 2.9% of GDP  
between 2011 and 2015.  
FOREX RESERVES AND EXCHANGE RATE  
1
6
4
126  
124  
122  
120  
118  
NBS FX reserves (EUR bn)  
RSD/EUR (RHS)  
1
12  
1
0
8
6
4
2
0
Government debt is nevertheless relatively high, at 57% of GDP in  
2
020, and thus represents a source of vulnerability given the high level  
of exposure to currency risk. Around 70% of debt is denominated in  
foreign currency, with 51% in euros and 12% in US dollars. The govern-  
ment has adopted a strategy of dinarisation of its debt in recent years.  
The issuance of medium-term and long-term debt (up to 20 years) in  
the local market is increasing – whereas the market was dominated by  
short-term debt securities up to 2017. The share of debt denominated  
in dinars has increased from 22% to 30% of the total since 2015.  
116  
114  
2017  
2018  
2019  
2020  
2021  
CHART 2  
SOURCE: CENTRAL BANK, BNP PARIBAS  
A GOOD EXPORT PERFORMANCE  
In 2020, Serbian exports stood up well to the economic contraction  
in the European Union (EU). Whilst EU imports of goods fell by 6% in  
volume terms, Serbian exports fell by only 3% in volume and 1.8% in Serbia remains attractive to foreign investors. Since 2015, net FDI  
value. According to the central bank, there were two explanations for inflows have exceeded 6% of GDP on average. Over this period, coverage  
this good performance. First, strong exports of agricultural products: of the current account deficit by net FDI has averaged 140%. The bulk  
although these represent only 7% of total exports, they grew by more of FDI relates to the manufacturing sector (30% of the total since 2014)  
than 11% in value in 2020, in part due to rising global prices. Secondly, and, to a lesser extent, the financial sector (17%), where inflows have  
strong FDI inflows in export-oriented sectors have supported a robust been driven notably by the privatisation of some state assets.  
performance of exports of manufactured goods.  
Prospects for external accounts are favourable, and the exchange rate  
policy adopted by the monetary authorities should continue to help  
FOREIGN-CURRENCY LIQUIDITY PRESERVED  
to deal with international turbulence. However, some vulnerabilities  
remain. External debt remains high (71% of GDP in 2020) and debt  
servicing (interest and principal) has represented an average of  
The ability of the central bank to limit foreign exchange volatility in  
periods of turbulence in international markets is particularly important  
for macroeconomic stability given the euroisation of a substantial part  
of the economy. In addition to the high portion of government debt  
that is denominated in foreign currency, around 60% of banks’ balance  
sheets are also denominated in foreign currency, exposing banks to  
significant credit risks in the event of a major fall in the dinar.  
2
8% of exports of goods and services since 2014. With this in mind,  
Serbia’s ability to continue to attract FDI and maintain its international  
competitiveness will be crucial for macroeconomic stability.  
Completed on 5 July 2021  
Foreign-currency liquidity remained satisfactory in 2020, despite the  
slight fall in remittances from expatriate workers and in foreign direct  
investment. Principally thanks to the sharp reduction in repatriation  
of profits by international companies and the government’s issue  
of Eurobonds, the NBS’s forex reserves increased slightly (to  
EUR 13.5 billion by end-2020) and now cover more than six months  
of imports. The healthy level of forex reserves has allowed the NBS  
to intervene in the foreign exchange market to maintain the dinar’s  
stability against the euro.  
Pascal DEVAUX  
pascal.devaux@bnpparibas.com  
In the short term, the expected increase in forex reserves should  
allow the NBS to continue to manage exchange rate volatility. The  
current account deficit is likely to remain relatively high, but FDI  
inflows and government debt issues on international markets will  
cover this financing requirement. In addition, the European Central  
Bank has extended to March 2022 the availability of the EUR 1 billion  
precautionary line to help tackle any pressure on the currency.  
The bank  
for a changing  
world  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
Ce site présente leurs analyses.
Le site contient 1589 articles et 282 vidéos