Serbia: Markets React to a Roller-Coaster Political

UNCLAS BELGRADE 000156

SIPDIS

SIPDIS

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

E.O. 12958: N/A
TAGS: ECON EINV SR
SUBJECT: Serbia: Markets React to a Roller-Coaster Political
Environment

Ref: Belgrade 155

Summary
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1. Following President Tadic's reelection February 3, the primary
Belgrade Stock Exchange index rose by 6.34% on February 4, but then
returned to its long-term downward trends after PM Kostunica refused
to discuss signing a political agreement with the EU. The dinar
exchange rate followed the same path, with the dinar strengthening
after the election but than sharply declining by 5% on February 7,
forcing the National Bank (NBS) to intervene. Serbian markets are
sending clear messages about the market view of positive
(profitable) political developments and negative (loss-making)
political developments. End Summary.

Post-Election Stock Exchange Jumps, Then Falls
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2. On February 4, a day after Tadic's reelection, the Belgrade
Stock Exchange (BSE) blue chip shares index BELEX 15 rose 6.34%, its
second largest one day gain. Investors demonstrated relief in
Tadic's victory. However, already on February 5, political
uncertainty hit the market after Prime Minister Kostunica's negative
comments on the EU movement toward launching a security and law
enforcement mission in Kosovo. As the government paralysis
continued throughout the week, the BELEX 15 slid further -- down by
4.17%, 4.25% and 1.34% from February 5-7 respectively, annulling the
initial post-election gains. The BELEX 15 regained 1.1% on February
8, following the government decision on the sale of RTB Bor (septel)
and after President Tadic made a statement saying he would schedule
to meet with PM Kostunica in order to calm the political situation.


Central Bank Increased Bank Lending Rate By 0.75%
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3. NBS Governor Jelasic announced on February 6 that the NBS had
increased the primary bank interest rate from 10% to 10.75% in order
to suppress growing inflation and to ease pressure on the dinar.
Jelasic said that the economic situation in Serbia was deteriorating
with accelerating inflation, growing current account deficit and
slowing GDP growth.

Dinar First Strengthens then Falls, NBS Intervenes
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4. Similar to the stock exchange results, the dinar appreciated
post-reelection by 1.8%, reaching 81.44 dinars/euro. However, in
the next few days, the dinar began sliding, even with increased
interest rates, until the morning of February 7 when the drop
sharpened to 5% in one day, reaching 85.5 dinars/euro. The NBS
intervened to prevent further devaluation and sold $29 million in
reserves to stabilize the currency at 83 dinars/euro. These flows
highlighted Jelasic's February 4 warning that the "foreign exchange
market is highly sensitive to political risks and in the short run
the stability of the forex market depends on participants'
expectations regarding political stability and macroeconomic
trends."

Comment
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5. The recent events demonstrate the vulnerability of the Serbian
economy and the need for political stability and predictability.
The markets' movements are also an indicator of the potential
economic cost of slowing Serbia's advance toward the EU. So far the
effects of this week's political instability have been felt only in
the markets. In our discussions with current and potential U.S.
investors none of them have changed their plans in Serbia, but they
have expressed concern that the current political paralysis must be
resolved soon. End Comment.

MUNTER