Serbia: January-August Macro Results - Waiting for the

UNCLAS SECTION 01 OF 02 BELGRADE 001101

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

E.O. 12958: N/A
TAGS: ECON EINV EFIN SR
SUBJECT: Serbia: January-August Macro Results - Waiting for the
Global Economic Crisis to Hit

Summary
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1. Serbian macroeconomic indicators through August of this year
show the first signs of the global slowdown that is beginning to hit
Serbia. Import growth slowed but continued to grow faster than
exports, widening the trade deficit. Local economists warn that the
deficit threatens balance of payment sustainability with inevitable
reductions in foreign investment as the global economy contracts due
to the financial crisis. Stojan Stamenkovic of the Economic
Institute said that the global crisis could hit Serbia hard, causing
a significant slowdown in GDP growth and recommended that the
government reduce its 2009 budget accordingly. End Summary.

Industrial Production Growth Slows in August
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2. Serbian industrial production dropped by 8% in August 2008
compared to the previous month, or 4.4% compared to August 2007.
This slowdown reduced cumulative January-August 2008 production
growth from 4.3% in July to 3.1% in August year on year (y/y). The
drop was distributed across nearly all sectors, led by the fall in
tobacco and food industry production. The only growth was in the
chemical industry and base metals. August results are typically
weak with many Serbs on vacation, but few expect September results
to reverse this trend.

Retail Trade Falls in August, Still Up 6.8% Cumulatively
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3. August 2008 retail trade volume was lower than in July by 0.7%
in real terms. However, accumulated Jan-Aug y/y retail trade volume
increased in real terms by 6.8% due to the strength of Serbian
economic growth early in the year. The average monthly wage reached
$543 in August 2008, and was up 4.23% in real terms for the first 8
months of 2008 y/y. Household demand decreased in July and August
2008 over the same months last year in real terms by 4.7% and 3.9%
respectively. This reduction was mostly due to the reduction in
consumer credit and an increase in household savings. Inflation
slowed down in the second half of the year and the consumer price
index in September 2008 y/y reached 10.9%, mostly due to decreases
in oil and food prices.

Imports Growth Slows, But Trends Remain Upward
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4. Serbian imports also recorded a slowdown in August, reaching
$1.83 billion compared to the 2008 monthly average of $2 billion.
Overall, import growth continues with a January-August 2008 value of
$15.95 billion, up 40% y/y. Serbian exports grew slower than imports
in the same period - at a rate of 38.6% y/y and reached $7.72
billion, thus widening trade deficit to $8.23 billion. The biggest
contributors to export growth were iron and steel, road vehicles,
and telecommunications devices, while the largest imports were oil
and gas, and industrial machines.

Current Account Deficit Up By 66.4% y/y, BOP Negative
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5. Local economists, including the Economic Institute's
Stamenkovic, warn that the growth in the trade deficit endangers the
sustainability of Serbia's balance of payments. The current account
deficit increased by 66% in January-August y/y to $6.16 billion,
mostly due to growth in the trade deficit. This current account
deficit has been sustainable because foreign direct investment (FDI)
and international portfolio investment has been strong in recent
years. From January-August 2008 Serbia ran a $132 million balance
of payments deficit that had to be covered from reserves. While
Serbian reserves of more than $12 billion can absorb this deficit in
the short-term, it is a warning of the difficulties Serbia will face
in the coming months. The deficit was largely fueled by a stark
turnaround in portfolio investments which went from a net inflow of
$706 million in Jan-Aug 2007 to net outflow of $100 million in
Jan-Aug 2008.

Worldwide Crisis Ill-timed for Serbia
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6. Stamenkovic warned that Serbia could suffer from the global
crisis in the coming year, beyond the initial hopes of simply facing
an increased cost of international capital. He expected slower GDP
growth in Serbia and the 2009 budget should be cut to fit this
assumption, since the slowing economy meant less revenues for the
budget. He listed several areas of concern: domestic demand would
slow down due to decreased loans; growth in FDI would stagnate;
cross-border credits had been reduced due to decreased liquidity of
parent banks; EU economic slowdown would cut Serbian export growth
since the EU is the biggest export market for Serbia.


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COMMENT
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7. The August statistics provide an early indicator that Serbia
will not escape the effects of the global financial crisis. The
crisis hits Serbia at a particularly difficult time as the new
government is seeking to deliver on election promises and continue
the strong economic growth of the past three years. Local economic
leaders, including the Vice Chairman of Raiffeisen Bank and the
Securities Commission President, told us that the real effects of
the worldwide financial crisis had not hit Serbia yet, but they soon
would. They claimed that liquidity in the Serbian banking sector
was not threatened due to high reserve requirements (some as high as
45%). While the Serbian government has taken prudent measures to
bolster confidence in the financial sector, such as increasing
deposit insurance limits from $4000 to $65,000, the Serbian economy
is slowing and the macroeconomic pressures in 2009 will be
significant. The Serbian government will be faced with difficult
choices in the next month as they prepare the 2009 budget, with
revenue growth stagnating. The government hopes to renew its
engagement with the IMF in order to find a scapegoat for looming
budget cuts. Clearly, Serbia will struggle in 2009 economically as
the effects of reduced international investment, the slowing global
economy and Serbia's long running trade deficits combine to
challenge the new government's agenda of delivering a better
standard of living through progress toward the EU. End Comment.

MUNTER