SERBIA: STILL NO GRAND ECONOMIC STRATEGY

UNCLAS SECTION 01 OF 02 BELGRADE 001226

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

E.O. 12958: N/A
TAGS: ECON EINV ETRD EFIN SR
SUBJECT: SERBIA: STILL NO GRAND ECONOMIC STRATEGY

REF: A) Belgrade 1175 B) Belgrade 864

Summary
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1. (SBU) Serbia has so far escaped the worst of the initial effects
of the global financial crisis. The economy is slowing and the
government faces a difficult 2009 with declining revenues, a sharp
slowdown in economic growth, increasing spending demands from the
diverse government coalition and a bleak outlook for investment
inflows. The Serbian government does not have a unified policy or
set of priorities to guide its economic path and to soften the blow.
The 2009 budget process highlights the government's ad hoc approach
and parochial/party interests that are driving internal debate. The
government continues to muddle through the necessary choices on
pensions, public sector wages and infrastructure investment. End
Summary.

Financial Crisis Begins to Bite
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2. (SBU) Some members of the Serbian government recognize that the
global financial crisis has already begun to affect Serbia's economy
and the government has taken some steps, including an IMF stand-by
arrangement (ref A),to respond. However, the government as a whole
does not have a comprehensive economic strategy and or a clear
economic policy leader, so to date government initiatives have been
poorly coordinated and have taken a more shotgun approach to
economic reform and stimulus. The many political parties in the
coalition have not yet unified under a strategy or goal and are
pursuing parochial interests of their own ministries and parties.


3. (SBU) In a November 21 meeting with the Ambassador, Finance
Minister Dragutinovic (DS) outlined the economic challenge. October
government revenues were much lower than projected, which made the
2008 budget rebalance that was passed in September even more costly,
as the government could not cover some of the planned expenditure
increases. Dragutinovic said the IMF deal was important, and that
it would be challenging to get agreement on a 2009 budget that met
the IMF-agreed 1.5% of GDP deficit target for the consolidated
budget deficit. She admitted that the national-level budget deficit
would actually be 1.9% of GDP and that the difference would be made
up with "surpluses" in other areas. The government revised the
official 2009 GDP growth estimate further down to 3-3.5% from 4%
just a few weeks ago. Vlada Cupic, the Chairman of Hypo Bank, told
us on November 14 that he predicted GDP growth in 2009 of between
0.5% and 1.5%.

Budget - Every Ministry/Party for Itself
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4. (SBU) The back room negotiations on the 2009 Serbian budget
highlight the lack of clear economic priorities and the difficulty
of building consensus among the diverse parties and interests in the
governing coalition. The only economic message that every
government official in Belgrade uses is the need to invest in
infrastructure, specifically the Corridor 10 (ref B) highway project
linking Serbia to Hungary and Macedonia. Beyond Corridor 10 the
ministries and ministers fall back to protecting their turf and
their party interests. Janko Guzian, the Finance Ministry State
Secretary with the unenviable task of preparing the budget, told us
on October 28 that he had faced difficult battles with Ministers
within President Tadic's Democratic Party (DS),Deputy PM Dinkic's
G-17, the Pensioners Party (PUPS) and others. Interestingly, he
commented that the only party in the coalition that was not making
heavy spending demands was Deputy PM Dacic's Socialist Party (SPS).


5. (SBU) Dragutinovic complained that the government had not
prioritized spending, which was especially important since resources
next year would be scarce. As a technocrat with no previous
political experience, Dragutinovic is poorly equipped to fight the
bureaucratic and inter-ministerial political battles over spending.
Ana Firtel, executive director of the Foreign Investors Council,
expressed frustration to us on November 25 that the government had
not set out its priorities and had not articulated an economic
vision for Serbia.

Pensions and Wages - The Grand Compromise
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6. (SBU) According to Dragutinovic, the 2009 budget froze pensions
nominally next year, but public sector wages would increase in line
with the cost of living. This was the compromise necessary to bring
PUPS on board with the IMF restrictions on budget spending. This
formula meant that the government would not have to rescind the 10%
extraordinary pension increase passed in September. The details of
this compromise have not been fully absorbed by the Serbian public
and it is unclear how unions and labor will react after two years
with wage increases well above inflation. Dragutinovic said that

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she had a positive meeting with leaders from the teachers union to
reach out and explain the economic situation, but much more work
with labor will be necessary.

Comment
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7. (SBU) The Serbian government lacks a clear economic vision to
carry them through the financial crisis. Prime Minister Cvetkovic,
an economist, has excellent economic credentials, but President
Tadic chose him to lead this government because of his managerial
skills and his ability to identify issues where government consensus
is possible and move ahead with those items. He has respect inside
the government for his management, but he is not the public face of
the government, nor is his style to impose discipline on the diverse
government leadership. As a result, the four Deputy Prime
Ministers -- Dacic (responsible for justice and police),Djelic
(responsible for EU integration),Dinkic (responsible for domestic
economic development),and Krkobabic (pensions) -- are more active
in public pressing their individual economic agendas, leaving the
public without a coherent vision for Serbia's economic future. The
Serbian economic situation will be difficult in 2009 and the
government must pass the test of agreeing to a responsible budget in
the coming weeks. The budget will pass, likely with some
difficulty, but Serbia's real challenge will be to move from
reacting to each economic hurdle individually and prioritize the
economic agenda to minimize the effects of the financial crisis
while advancing the European vision that got this government
elected. End Comment.

BRUSH