SERBIAN ECONOMISTS WORRIED OVER FUTURE--AS WELL THEY SHOULD

UNCLAS SECTION 01 OF 02 BELGRADE 000216

SIPDIS

SIPDIS

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

E.O. 12958: N/A
TAGS: ECON EINV EFIN SR
SUBJECT: SERBIAN ECONOMISTS WORRIED OVER FUTURE--AS WELL THEY SHOULD


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Summary

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1. The most prominent Serbian economists, business and economic
leaders, and some government officials expressed concern about
the country's economic future at the traditional winter
conference of the Association of Economists of Serbia. A
majority of the participants criticized the slowdown of economic
policymaking, agreeing that Serbia must speed up reforms and
that Serbia has no other future than the EU path. Some
suggested that Serbia could simultaneously pursue two paths -
the west and the east. Foreign investors expressed satisfaction
with their results so far, carefully avoiding comment on the
current political situation. End Summary.

Economists: Transition Must Speed Up

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2. Econ FSN attended the traditional winter gathering of
prominent Serbian economists, business leaders, and government
officials at the Kopaonik mountain resort at from 4-6 March,
under the headline "Transition, Reaching EU and Linked Topics:
The Role of Investors from Slovenia, Russian Federation and
Austria." At the unusually well-attended conference, the
majority of speakers agreed that economic reforms must speed up
and that Serbia's future was in the EU. However, those close to
PM Kostunica, led by Trade Minister Bubalo, claimed that Serbia
should turn to both - the west and the east.

Some Speakers Bluntly Warned, Other Avoided Crisis

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3. Most participants criticized the current economic policies
as "unsustainable in the long run" since the lack of
coordination between relaxed fiscal and tight monetary policy
had led to appreciation of the dinar making imports cheap and
exports expensive. This imbalance created the high current
account deficit of 16% of GDP in 2007. This deficit makes
Serbian economy extremely vulnerable to decreases in foreign
capital inflow and thus political instability could cause
serious shocks in the economy. While some of the key speakers
-- Slobodan Ilic, State Secretary in the Finance Ministry;
Vladimir Cupic, President of the Board of Hypo Alpe Adria Bank
-- emphasized that decisions on Serbia's direction would
directly influence quality of life of Serbian citizens for the
next decade, others -- Finance Minister Cvetkovic -- remained
calm and claimed that economy is functioning well and budget
would run a surplus.

Financial Sector Unhappy With NBS Restrictiveness

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4. Financial sector representatives - banks, insurance
companies, and investment funds, expressed their unhappiness
with restrictions from the National Bank of Serbia (NBS),which
they said were even more restrictive than the European Central
Bank and thus were obstructing the economy's development. Most
of them agreed with Veroljub Dugalic, Secretary General of the
Association of Banks of Serbia, who said that the monetary
policy had reached its limits and it could not fix problems that
resulted from pressures in the economy - fiscal relaxation, poor
competitiveness of Serbian companies, low productivity and
inefficiency. Further monetary tightening would only hurt the
economy further and the price of keeping low inflation would be
much higher than its benefits. Vice-Governor Diana Dragutinovic
defended NBS claiming that the Bank had yet to build its
credibility, unlike the European Central Bank.

Russian, Slovenian & Austrian Investors Happy Here

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5. Foreign investors seemed satisfied with their business
results in Serbia. They avoided discussing the current
political instability and its possible consequences, but instead
presented their plans for expanding their businesses. A
representative from Slovenian-owned JUB Paints stated Serbia had
great potential. He said that the empty land near their
factory, located 15 kilometers west of Belgrade, increased its
value over 50 times in the period 2002-2008. Russian companies
Lukoil and Gazprombank representatives, supported by Russian
Ambassador Alekseev, explained that they wanted to become a
reliable long term partner, bringing new technology and know how
to the Serbian market.


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Comment

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6. Participants at the conference expressed much more concern
over the current political situation on the margins than on
stage. The overall message from the conference was not
optimistic: reforms have slowed down, economic policies leading
to an unsustainable current account deficit, and political
developments could lead to an economic crisis that would rival
the 90's and leave Serbia even further behind. Perhaps more
important than who actually governs, political uncertainty
remains the bigger concern for investors and businesses. End
Comment.
MUNTER