Vujović reinforces reform agenda as Serbia’s star rises

Following much needed but long delayed reforms, Serbia is turning its economy round and attracting foreign investment at an unprecedented rate. But can the Balkan country keep up the momentum? GlobalMarkets talks to Serbia’s finance minister Dušan Vujović about the next challenges, including fiscal consolidation, trade blocs and EU accession

  • By Lucy Fitzgeorge-Parker
  • 14 Oct 2017
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GlobalMarkets/Elliott Lee
In his 3-1⁄2 years in office, Serbian finance minister Dušan Vujović  has overseen a remarkable turnaround in the country’s prospects.

When he took on the role in mid-2014, Serbia’s economy was in freefall. After a shallow recovery in 2012, GDP was shrinking again. The fiscal deficit was tipped to reach 8.8% of GDP, the current account deficit was in double digits and the debt to GDP ratio was rising at the fastest rate in the recent history.

Three years on, the picture looks very different. GDP growth resumed in 2015 and reached 2.8% in 2016. The fiscal deficit was slashed to just 1.3% of GDP last year while the primary budget was in surplus for the first time in more than 10 years. As a result, debt to GDP peaked at 74% last year and is now down to less than 64%.

“I am very proud of the fiscal and the overall macroeconomic results achieved during the past three years of reforms, especially when viewed against the starting position,” says Vujović.

Serbia’s achievements have been recognised by international rating agencies. In December, Standard & Poor’s upgraded the outlook on the country’s sovereign rating to positive. Then in March, Moody’s upgraded its rating to Ba3, bringing it into line with S&P and Fitch.

Both agencies cited Serbia’s impressive fiscal consolidation and improved growth outlook as the main drivers for their actions.

Analysts at Euromoney Country Risk say further ratings upgrades may be imminent. An ECR survey of Serbia experts in July showed that all five of the economic risk indicators measured had been upgraded over the previous 15 months. Overall, Serbia rose eight places to 76th in ECR’s country ranking during the period.

Serbia has also jumped in the World Bank’s Doing Business rankings, moving up 16 places to 47th over the past two years thanks to a clutch of reforms designed to improve the operating environment.

A key component of this impressive recovery was the approval of a new €1.2bn three year credit facility by the IMF in February 2015. Vujović, one of the leading architects of the programme, says it was critical to the country’s recent economic success.

“IMF support was essential not only in forging commitment to a specific set of detailed macro-stability and structural objectives but also in specifying and observing structural benchmarks and constraints — especially expenditure ceilings,” he tells GlobalMarkets.

Life after the IMF

With the IMF programme expiring early next year, however, some analysts are questioning whether the recent pace of reform in Serbia will be maintained. Vujović says he is “reasonably confident” but cautions that sustainability issues often loom large in transition economies.

“Serbia is no exception given its late start of reforms and the perceived and real weak ownership of reforms,” he says. “It is therefore critical to complete structural reforms in public administration, the financial sector and state-owned companies.”

Under the leadership of Alexander Vu˘ci´c, who was elected president in May after three years as prime minister, Serbia’s government has promised to accelerate progress on a raft of much needed institutional reforms.

These include moves to improve public and private sector governance, strengthen the rule of law — especially in relation to creditor rights and contract enforcement — and reduce persistently high non-performing loan (NPL) ratios. Policymakers are also backing initiatives to make the tax system more transparent and predictable.

Foreign direct investors are already convinced. Serbia attracted $2.3bn of inflows in each of the past two years and is a world leader in greenfield investment. In 2016, the number of new projects in the country reached 89, with manufacturing — mainly of electronic and automotive components — seeing the most interest from overseas firms.

Vujović warns that the level and efficiency of both public and private investment needs to increase further, however, if Serbia is to achieve higher sustained GDP dynamics and convergence in incomes and standards of living with the EU and its regional peers.

“More money for investment will not be enough if we do not continue to remove barriers to economic growth,” he says.

Balkan trade bloc

He is also a proponent of regional integration. In March, the EU’s neighbourhood policy and enlargement commissioner, Johannes Hahn, floated the idea of a common market for the western Balkans. The proposed grouping would include Bosnia, Montenegro, Macedonia, Kosovo and Albania as well as Serbia and would have a combined GDP of $88bn.

“The countries of the western Balkans already trade a lot,” he says. “Deepening this to a common market concept makes a lot of economic sense. It will expand trade flows to free movement of capital and people, foster technological and managerial synergies and enhance the competitiveness of the region in external markets.”

He adds that the introduction of a common market would also lower or eliminate protection barriers. “It would thus better prepare the western Balkan states for eventual EU accession,” he says.

Questions have been raised over whether Serbia will be able to achieve EU membership in the near future, given the dwindling appetite for enlargement in many member states and the reluctance of policymakers in Serbia to address the question of Kosovo’s status.

Vujović insists that, if Serbia continues to open new policy chapters, the accession process could realistically be completed by 2022. He admits, however, that this may not be achievable. “This would be a straight engaging path to EU membership,” he says. “In real life, burdened with politics and complex game plans, it is not always obvious that honest and straight strategies prevail.”

He notes, however, that the EU accession process is valuable in itself. “I see it as a test of our ability to get our institutions and policies right,” he says. “Although every country should do most of these improvements for their own benefit, EU membership as the final step in this process is important as a credible signal, a tangible target.”

Opaque SOEs

One of the most intractable challenges facing reformers in recent years has been the restructuring of Serbia’s state-owned enterprises (SOEs). Opaque and unprofitable, many of these have been a constant drain on the public finances but have been able to muster powerful backing to resist change.

Progress is now being made, however, thanks in part to the IMF, which made the sale of these firms a key plank of its programme for Serbia although the country has a mixed record on privatisation. Attempts to sell Telekom Srbija have twice been called off late in the process to the frustration of bankers and investors.

Policymakers insist, however, that this time promised disposals will go ahead. Vujović notes that a handful of large SOEs — mostly in the metals, chemicals and pharmaceuticals sectors — are now approaching the final stages of privatisation and restructuring.

“Most of them will likely find strategic buyers and restore competitiveness in the domestic and export markets through management and production restructuring,” he says. “If needed, we have adequate budget resources to cover severance payments and retraining programmes.”      

The deal that is likely to attract the most interest from Serbia watchers over the next six months, however, is the sale of Komercijalna Banka. The country’s number two lender has been radically modernised and overhauled over the past 18 months by new CEO Alexander Picker in preparation for privatisation.

An agreement between the shareholders, which include the EBRD and IFC as well as the Serbian state, calls for the sale process to begin this year and be completed in 2018. According to Vujović, the formal privatisation process will likely be resumed this month (October).

Some M&A specialists have been sceptical of the likely extent of demand for Komercijalna, noting that Serbia is not seen as a strategic market by the big regional banking groups, most of which are in any case still in defensive mode. Interest has, however, reportedly been expressed by a number of private equity firms.

Vujović says Komercijalna has “obvious upside potential” both in the domestic market and the wider region. He notes that Serbia’s relatively fragmented banking market — 30 lenders currently serve a population of just seven million — offers good opportunities for consolidation.

“Regionally, Komercijalna can potentially develop a much stronger footprint in most western Balkan countries and effectively compete for a significant portion of the trade finance currently supported by large EU banks,” he adds.

China eyes Serbia as key Belt & Road link 
For a small country, Serbia has proved remarkably adept at attracting capital from one of the world’s economic superpowers. Since 2010, China has provided nearly $2bn of funding for infrastructure projects in Serbia, including motorways, a coal-fired power plant and a new bridge over the Danube.

An already close relationship between the two governments was deepened following the announcement by President Xi Jinping in late 2013 of plans to create a new Silk Road for trade between China and Europe.

As well as several overland routes, the Belt & Road Initiative is also due to include one that combines maritime and rail transport. The Land Sea Express Route will see cargo shipped to Greece by sea and then travel by train through the Balkans to Hungary and then on to western Europe. An initial shipment of Chinese furniture made the journey in January in a blaze of publicity.ON 


Serbia’s central position on this route combined with policymakers’ early embrace of Belt & Road has enhanced the country’s appeal for China. Last year, Chinese state-owned group Hesteel bought the Smederevo steel plant from the Serbian government, which had been forced to nationalise the loss-making facility in 2012.

In January, Bank of China opened its first Balkan branch in Belgrade. Then in May, at the Belt & Road Forum in Beijing, Serbian transport minister Zorana Mihajlovic signed contracts worth $3bn for a clutch of new road projects including a motorway that will link Belgrade to the port of Bar in Montenegro.

Whether Serbia’s more important Belt & Road projects will come to fruition, however, is open to question. Work on a $2.9bn high-speed rail link between Belgrade and Budapest, which began in 2015, was halted this year following reports that the European Commission was investigating whether the Hungarian government had violated EU laws in awarding the contract to a Chinese firm.

  • By Lucy Fitzgeorge-Parker
  • 14 Oct 2017

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