Serbia: Market Reaction After Kosovo's Declaration of

UNCLAS BELGRADE 000189 SIPDIS SIPDIS USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH E.O. 12958: N/A TAGS: ECON EINV SR SUBJECT: Serbia: Market Reaction After Kosovo's Declaration of Independence Summary -------------- ¶1. The Belgrade Stock Exchange reacted to Kosovo's declaration of independence with an unprecedented low volume of trade. Share values continued their slow long-term decline. Although there was little change in the exchange rate, the Central Bank (NBS) injected 10 million euros into the market to promote stability. Analysts believe investors calculated and accounted for Kosovo risk, which explains the limited reaction in the stock market and exchange rate. End Summary. Stock Exchange Grinds to a Halt -------------- ¶2. On February 18, the day after Kosovo declared independence, trade volume on the Belgrade Stock Exchange (BSE) sharply declined to an "unprecedented low level of trade of only one million Euros," according to BSE Business Operations Director Sinisa Krneta. Trade activity was one-tenth the previous twelve-month daily average. Dragijana Radonjic-Petrovic, Chairman of the Board of M&V Investments told Econ FSN that this was a "horribly low level of trade and if it continued, it would not be good." However, trade began to recover slowly, reaching around $5.25 million on February ¶19. The Belex 15 Index (Serbia's blue chip shares index) continued its slow decline, dropping -0.11%; -0.6%; -0.76% from February 18-20, respectively. Investors are waiting for further political developments. ¶3. On February 19, the President of the Securities Exchange Commission Milko Stimac said the financial market effects of the political turmoil were temporary. He added, "It is normal that investors are cautious when something big is going on in a society. Capital markets withdraw, wait for the situation to calm down, and then return to normal flow." Exchange Rate Stable -------------- ¶4. On February 18, money market turnover was six times lower than usual and the trend continues. Despite the stable dinar-euro exchange rate at around 83 dinars to the euro post declaration, the NBS intervened and sold $15 million of euros in the money market on February 18 to "proactively influence stability of the market," according to an NBS statement. The benchmark interest rate also remained unchanged at 10.75 percent. According to Serbian Chamber of Commerce analyst Goran Nikolic, businesses "went through events better than analysts expected" because businesses had already included Kosovo risk into their operations. Comment -------------- ¶5. Serbian capital markets managed to survive the declaration of Kosovo's independence without large disturbances. Capital markets are not likely to remain idle as political developments within Belgrade unfold, especially the split between President Tadic and his DS party and PM Kostunica and the DSS over Serbia's relationship with the EU. The many political scenarios that businesses now must factor into their operations and investment strategies will likely bring increased market volatility. End Comment. MUNTER