Emerging

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EcoEmerging// 1 quarter 2019  
economic-research.bnpparibas.com  
Serbia  
More progress towards convergence  
Economic growth in Serbia has accelerated since 2017, fuelled by consumption and investment. Inflation is still mild thanks to the  
appreciation of the dinar. This favourable environment has produced a fiscal surplus that gives the government some flexibility. The  
public debt is narrowing, even though it is still relatively high and vulnerable to exchange rate fluctuations and the appetite of  
international investors. Several factors continue to strain the potential growth rate of the Serbian economy, including unfavourable  
demographic trends, the slow pace of public sector reforms, and a tough political environment.  
Strong economic rebound  
1- Forecasts  
The acceleration in economic growth observed in 2017 was  
confirmed in 2018. GDP growth reached 3.8% in real terms in  
Q3 2018. The main growth engine is still domestic demand, and  
productive investment in particular, which follows its rising trend with  
growth rate of 6.9% y/y. Investment is buoyant in both the public  
and private sectors. One of the main beneficiaries is construction,  
which rose 18% in real terms compared to the same period in 2017.  
The Serbian economy is still highly attractive for foreign investors.  
Foreign direct investment (FDI) rose 9% in value in the first 10  
months of 2018, and should reach the equivalent of 6% of GDP in  
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017 2018e 2019e 2020e  
Real GDP growth (%)  
2.0  
4.3  
3.8  
3.5  
Inflation (CPI, year average, %)  
Cent. Gov. balance / GDP (%)  
Cent. Gov. debt / GDP (%)  
3.2  
2.0  
0.5  
2.9  
3.0  
1.2  
-0.3  
-0.5  
62  
56  
54  
52  
Current account balance / GDP (%)  
External debt / GDP (%)  
-6.2  
-5.9  
-7.4  
-7.9  
68  
61  
57  
12  
53  
Forex reserves (EUR bn)  
10.4  
11.3  
12.5  
Forex reserves, in months of imports  
Exchange rate EURRSD (year end)  
4.9  
4.7  
4.5  
4.3  
2018. The sector breakdown of FDI is rather diversified, and about a  
118.5  
118.2  
120  
123  
third is devoted to export activities.  
e: BNP Paribas Group Economic Research estimates and forecasts  
Private consumption (+3.3% y/y in Q3 2018) is the other growth  
engine. The unemployment rate continues to fall, even though it is  
still relatively high (11.3% in Q3 2018). Meanwhile, real wage  
growth is averaging above 3% y/y. Remittances from expats are  
another support factor. Remittances were up 18% y/y in October  
2
- Real GDP growth  
Total GDP Net Exports Final Consumption GFCF  
Stocks and Statistical discrepancies  
2
018 and accounted for more than 8% of GDP. Household lending  
contrib., %  
8
continued to accelerate (+12% y/y in November 2018) and made a  
favourable contribution to consumer trends. The significant  
improvement in the public accounts paved the way for a more  
affirmed increase in public spending (+4% y/y in Q3 2018).  
6
4
2
0
Unsurprisingly, foreign trade continued to make a negative  
contribution to GDP growth given domestic demand’s gearing effect  
on imports of consumer goods and capital goods. Imports rose 11%  
y/y in Q3 2018 while exports were up by about 9%. Exports were  
driven by dynamic sales of intermediate goods (notably metals and  
plastics) as well as car parts for the automotive industry.  
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2
4
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2
013  
2014  
2015  
2016  
2017  
2018e  
According to the preliminary estimates of the Serbian statistics office,  
real GDP growth should reach 4.4% in 2018, after 2% in 2017.  
Although the outlook is somewhat less favourable in the short term,  
GDP growth is expected to hold above 3.5% in 2019. Favourable  
labour market trends, purchasing power gains and the decline in  
real interest rates should boost domestic demand. Yet the slowdown  
in European growth (to an expected 1.5% in the eurozone in 2019  
after an estimated 2.2% in 2018) is likely to hamper exports. The  
European Union accounts for about two thirds of Serbia’s exports.  
Source: Statistical Office of the Republic of Serbia, BNP Paribas  
and energy prices. Excluding energy and food, core inflation slipped  
to an average annual rate of 1.3% in 2018. The dinar levelled off  
against the euro in 2018 (+0.2%), which might have helped hold  
down inflation.  
Since 2009, the central bank has officially pursued an inflation-  
targeting monetary policy. Currently the CPI target is an average  
annual rate of 3%, with a fluctuation band of +/- 1.5%. Short-term  
inflation expectations are about 3%. In this environment, and given  
the uncertainty concerning the pace of eurozone monetary  
tightening on the one hand and global pricing trends for energy on  
the other, the central bank decided to maintain the monetary status  
Cautious monetary policy  
Despite buoyant growth, price inflation is still subdued and has  
fallen compared to 2017. Consumer price inflation averaged 2% in  
2
018, down from 3.2% in 2017. The main inflation drivers are food  
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EcoEmerging// 1 quarter 2019  
economic-research.bnpparibas.com  
quo at its 10 January monetary policy meeting and held its key  
policy rate at 3% (unchanged since April 2018). The central bank  
also intervened in the forex market to reduce the volatility of the  
exchange rate (albeit without setting a target price). Euroisation of  
bank balance sheets is high (about 70% of credit and deposits) and  
a very significant share of the public debt is denominated in foreign  
currencies.  
3
- Government debt  
 RDS  EUR  USD  Others  Total, % of GDP (rhs)  
%
of total  
3
2
2
1
1
0
5
0
5
0
5
0
80  
7
0
0
6
Cleaning up public finances  
50  
40  
Thanks to a fiscal consolidation effort conducted under IMF  
supervision (Stand-By Arrangement completed in February 2018) as  
well as strong revenue growth, the public accounts reported a  
surplus for the second consecutive year. After reaching 1.2% of  
GDP in 2017, the fiscal surplus is expected to narrow to 0.5% of  
GDP in 2018 due to noticeable increases in both current spending  
and investment. The primary balance (excluding interest payment)  
should exceed 3% of GDP. Based on expectations of a slight  
slowdown in economic growth and ongoing policies to stimulate  
growth, Serbia is expected to report a slight fiscal deficit in 2019  
30  
20  
10  
0
2010  
2011  
2012 2013  
2014  
2015  
2016  
2017  
Source: Ministry of Finance, BNP Paribas  
The restructuring of state-owned companies remains a key factor in  
the economic transition. Although real progress has been made in  
this area, it is still insufficient. According to EBRD, state-owned  
companies (excluding the financial sector) account for about two  
thirds of GDP and are active in all sectors of the economy. In 2012-  
5, the average profitability of these companies was barely positive,  
which represents a potential risk for the consolidation of public  
finances. Yet given the ongoing privatisation programme (more than  
(
0.3% of GDP).  
This favourable fiscal environment has helped reduce the public  
debt ratio. It slipped to 56% of GDP in 2018 (from 69% of GDP in  
2016), and is expected to narrow to 54% in 2019. The medium-term  
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risk premium applied to external sovereign debt in foreign  
currencies has steadily declined. It is currently below 110 bp, down  
from more than 200 bp at year-end 2016. Yet the composition of  
government debt is still a source of vulnerability. At year-end 2017,  
about 42% of total government debt was denominated in euros and  
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5 companies have been privatised since 2015), their weight on  
public finances has diminished. Government guarantees amounted  
to 3.7% of GDP in October 2018, down from 7.8% of GDP in 2013.  
19% in USD. All in all, more than 77% of government debt is  
denominated in foreign currencies (36% of domestic market issues),  
even though the government has pursued a debt dinarisation  
strategy since 2012. Serbia is highly dependent on non-resident  
investors, which hold more than 70% of the debt.  
Lastly, the political and institutional environment is another factor  
straining Serbia’s growth potential. Indicators of governance are not  
really good (notably concerning the application of the rule of law and  
the control of corruption) and the regional political situation could  
potentially become a major source of tension. All of these factors  
are holding back the acceleration of Serbia’s accession to the  
European Union.  
Several factors limit refinancing risk. Thanks to long-term securities  
issued in the domestic market, the residual maturity of almost half of  
the locally-issued securities (in foreign currency and dinars) is  
longer than 3 years. Several factors also limit currency risk,  
including the central bank’s conservative forex policy, the use of  
hedging products, and the improvement in the external accounts,  
which supports the dinar’s appreciation. In 2018, the central bank  
increased its foreign reserves by 14% to EUR 11.3 bn, the  
equivalent of more than 4.7 months of imports of goods and  
services.  
Persistent structural weaknesses  
Despite a favourable cyclical environment and rather upbeat growth  
prospects, a number of structural weaknesses persist that have a  
negative impact on Serbia’s economic growth potential.  
With about 7 million inhabitants in 2018, Serbia’s population has  
been shrinking for several years. The population is declining at an  
annual rate of 0.5%, and the country has lost about 480,000  
residents since 2002. Labour productivity is also low compared to  
the average for other countries in the region, and value added per  
employee is even lower than in the western Balkans countries.  
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.
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