Tough measures by the National Bank of Serbia are paying off
Despite the negative impact of political uncertainty, the Serbian economy is growing. All the indicators are moving in the right direction, albeit too slowly, say observers.
Oliver Roegl, chairman of the managing board at Raiffeisenbank in Belgrade, considers that the economy is in relatively good shape. “Macroeconomically, things went in the right direction in 2006, inflation-wise, economic growth-wise and industrial growth-wise,” he comments.
Retail price inflation in 2006 was 6.6%, down from 17.7% in 2005 after successful monetary measures by the National Bank of Serbia (NBS).
In March this year, inflation had fallen further to 5.6%, and last month (April) the NBS announced its fourth reduction of the year in its key policy rate, to 10%. It has fallen from 14% at the end of 2006. Basing its decision on the core inflation rate falling below the target range of 4-8%, the bank pronounced scope for further rate reductions.
GDP growth in 2006 was 5.7%, after a slightly better 2005, at 6.2%. Industrial production recorded 4.7% growth in 2006, after a disappointingly slow 0.8% in 2005.
Roegl gives the main credit for the macroeconomic situation to the NBS, whose determination to squeeze consumer credit led to some disagreements with the commercial banks over the high levels of mandatory reserves on domestic loans. “It was a tough policy but overall, looking retroactively now, in 2006 they achieved their purpose,” he says.
Concerns
Suzana Grubjesic, MP and member of the presidency of G17 Plus, joins Roegl in praising the NBS’s role in bringing inflation under control – but is concerned that some lack of fiscal discipline may creep in.
Public-sector salaries are a particular worry, Grubjesic says. They rose 9% in 2006, but have showed signs of breaking from their shackles in the aftermath of the election and in a period without a government. She points with concern to a 50% pay rise in the state power company.
Grubjesic is also concerned by the widening trade deficit, which she attributes to the low competitiveness of Serbian companies. But “what we need most of all,” she argues, “is foreign investment, and if possible greenfield investments.
“Last year, we had record foreign direct investment (FDI) of around E4.2 billion, but the first quarter of this year does not look promising, with only E330 million. We don’t think that we can repeat the success of last year, which is why we have to pay more attention to how to attract greenfield investments.”
Back at Raiffeisen, Roegl echoes the need for greenfield investment, pointing out that – apart from a few big ticket items, such as oil company NIS – privatization receipts are coming to an end. He highlights infrastructure and land issues as the priority problems to be tackled.
Small businesses
One other area which concerns Grubjesic is small and medium-sized enterprises (SMEs). “The future of our economy lies in SMEs,” she explains. “We talked a lot in our election campaign about how to revive the SME sector. In the last year 10,000 new enterprises were opened and registered, but this is not enough for Serbia.”
She cites the lack of low-interest loans as the main factor identified by SME associations. “By opening new, favourable credit lines, reducing interest rates with banks, the state could help small businesses.”
Roegl admits that SMEs have had difficulty in obtaining cheap credit. The mandatory reserve regulations did not apply to cross-border transactions, so foreign banks such as Raiffeisen arranged loans for their corporate clients through a sister bank abroad. However, smaller clients who borrowed in Serbia faced higher interest rates partly because of the reserve requirement – which he hopes will follow the NBS’s reference rate and trend downward.
Roegl sees the advantages of investing in Serbia despite the problems. “I’ve been here six years, and I really see the potential,” he states. “I really love this place, especially because there is so much potential, but it’s such a pity that this potential is not used to a large extent.
“Kosovo is psychologically a drag, especially for investors who have a very vague picture of Serbia. They would rather avoid anything they do not know. But if you have a continuation of macroeconomic stability, political stability and solve the Kosovo issue in the proper way, Serbia will have very good opportunities.” —N.S.