Serbia Affected by the Worldwide Financial Crisis

UNCLAS BELGRADE 001062

SIPDIS
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH

E.O. 12958: N/A
TAGS: ECON EINV EFIN SR
SUBJECT: Serbia Affected by the Worldwide Financial Crisis

Summary
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1. At an October 7 conference about the effects of the world
financial crisis on Serbia, speakers from the government, Central
Bank and commercial banks concluded that loans in Serbia would get
more expensive, but that banking sector in Serbia had significant
reserves and thus was more resistant to crisis than in other
countries. Commercial banks asked citizens not to withdraw deposits
from banks. The crisis was reflected in Belgrade Stock Exchange's
leading index dropping 30% in just one week. End Summary.

Conference: Global Financial Crisis & Impact on Serbia
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2. On October 8, the Belgrade Economic Faculty and Ekonomist Media
Group organized a forum entitled "Global Financial Crisis and its
Influence on the Region and Serbia" with participation of National
Bank of Serbia (NBS) Governor Jelasic, Finance Ministry State
Secretary Slobodan Ilic, Securities Commission member Jovanovic and
a number of most prominent banks' managers. The participants
concluded that due to global financial crisis the supply of credit
in Serbia would decrease and the price of credit would go up
significantly, but no other dramatic developments were expected.

Governor Jelasic: Sleep Tight...
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3. Governor Jelasic pointed in his presentation to worldwide
governments' responses to the crisis, such as pumping huge sums of
money into the system, or increasing guaranteed deposits to 100%,
and said that he saw no reason for further Serbian government
engagement or additional deposit insurance since the banking sector
in Serbia was different. Total savings in Serbian banks of 5.7
billion euros were fully covered by NBS reserves of almost 10
billion euros. Obligatory reserves on foreign exchange deposits
were 45% and there was a high capital adequacy of 28% (compared to
8-9% in developed EU countries). The Governor joked that the
current crisis would actually help solve most of the NBS' headaches
- overheated demand for credits that generated inflation, strong
growth in consumer debt.


4. The Governor said that the crisis has already affected Serbia
through more expensive credit. He also noted that demand for credit
had also decreased. The real long term challenge for Serbia was
balance of payment financing in a situation of increased cost of
borrowing abroad, and foreign investors' cautiousness. He
encouraged the government to be more restrictive in spending.

Finance Ministry, Securities Commission, BSE
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5. Finance Ministry State Secretary Slobodan Ilic stated that the
state guaranteed for deposits up to 3,000 euros and said that the
possibilities to increase this amount were limited. A government
working group has been established for crisis monitoring. Djordje
Jovanovic, a regulator from the Securities Commission, stated that
the influence of the crisis was obvious in the withdrawal of foreign
investors from the Belgrade Stock Exchange (BSE),where their share
in trading was only 24% on October 7 compared to the usual 50%. He
also asked for more authority for Securities Commission and to
improve financial markets regulatory framework. The Belex15 index
has lost 65% of its value since the beginning of 2008. Only 0.31%
of Serbia's citizens are directly invested in Serbian capital
market, and the first local mutual funds started in 2007.

Commercial Banks Reps: Don't Withdraw Deposits
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6. Representatives of commercial banks (Intesa, Societe General,
Meridian Credi Agricole Group, Komercijalna) tried to reassure
depositors, and
encouraged them to stop withdrawing deposits. They said that
Serbian banks had enough liquidity to respond to all customer
requests. They all agreed that Serbia would suffer the consequences
of the world crisis; the question was only to what extent. All of
them announced higher interest rates and lower credit volume.
Mihajlovic from Komercijalna stated that commercial customers would
suffer more than banks due to restrictions on cross border credits
taken directly from multinational banks' home offices, which were
facing difficulties now.

Real Estate Prices To Drop, Lehman Brothers To Blame
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7. Vlada Cupic from Hypo Alpe Adria Bank stated that not all
existing credit lines would be renewed. Companies would have to use
their own reserves and/or sell property in order to provide working
capital. This could lead to a drop in business real estate prices
and could spread later in the housing sector. Zoran Petrovic of
Raiffeisen Bank added that the key accelerator of the world crisis
was the Lehman Brothers bankruptcy since it had introduced systemic
risk inside the financial system - the rule "too big to fail" did
not apply anymore. He said that trust among banks had decreased to
the lowest possible level and banks no longer trusted each others'
balance sheets. If foreign financing was blocked for a long time,
most likely even already approved loans would get more expensive,
Petrovic said.

COMMENT
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8. Serbia has not escaped the effects of the financial crisis as
reflected in the fall in the Belgrade Stock Exchange and the
tightening of credit. Several of Serbia's largest banks announced
that they have stopped issuing all loans indexed to Swiss Francs,
and announced increased interest rates. Banks, however, have
significant reserves due to high NBS requirements, so do not face
liquidity problems. The real effect of the financial crisis in
Serbia is likely to hit in the coming months as export sales slow,
increasing the already high trade deficit, reducing government
revenues which will put pressure on the government's growing
spending. Serbia's privatization schedule will also likely be
affected as there are fewer customers for Serbia's communist-era
factories.

Serbia already faced a difficult environment for attracting enough
foreign direct investment to shore up the current account deficit.
Now that international investors' credit lines are drying up, Serbia
will feel the effects of the economic crisis in the coming months.
End Comment.

MUNTER