Leaving summer behind

 

Serbia reached an agreement with the International Monetary Fund (IMF) on a macroeconomic framework for 2009 that allows a larger than planned budget deficit but urges a commitment of the authorities to significant fiscal tightening. While authorities assisted on a spending-base approach, the mission suggested that a VAT increase could be the most effective in closing the remaining fiscal gap. But while there is considerable resistance in business circles and within the government to increasing taxes, only the finance minister, Diana Dragutinovic, seems to be in favour. Therefore, in anticipation of a sound and credible fiscal program, IMF agreed to postpone the second review and combine it with the third review, currently planned to take place in late October. Consequently, if the IMF Executive Board approves the review in October, the second and third loan tranches, which amount to a combined EUR 1.4bn, will be paid out together.

Recent data suggest that the worst of the global economic downturn may now be ending, although we remain cautious about the prospects for recovery over the short term. While Serbia´s real GDP declined 3.5% y/y in 1Q09, the second-quarter data indicate that the slump may have worsened. Following the second program review, IMF revised GDP forecast down to -4% y/y in 2009 compared with a 2% y/y decline in the first program review. Economic Intelligence Unit also expects a 4% contraction in real GDP in 2009, but a weak rebound is forecast for 2010, when they expect real GDP to expand by just 0.5% as the global economy makes a feeble recovery. As far as market performance is concerned, investor sentiment towards the Serbian market has improved in recent weeks while the BelexSentiment signals that the market is on the path to recovery. At the same time, foreign investor participation in turnover almost doubled in August, compared to July. Serbia’s stock market has lagged behind the recovery in EME stock markets in the 1H09, but last couple of months have been exceptionally well, as Belex15 advanced close to 25%. While index performed broadly in line with CEE peers, Belex15 outperformed major Western-European, US, and Asian markets.

Market commentary: Sandra Janković, Head of research