Serbia's "Davos" at Kopaonik Mountain

UNCLAS SECTION 01 OF 03 BELGRADE 000245 SENSITIVE SIPDIS USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH E.O. 12958: N/A TAGS: ECON EFIN EINV PGOV SR SUBJECT: Serbia's "Davos" at Kopaonik Mountain REF: Belgrade 212 SUMMARY -------------- ¶1. At the annual gathering of economists known as the "Serbian Davos" at the Kopaonik ski resort, government economic ministers accompanied by the President Tadic, openly voiced concerns over the worldwide crisis hitting Serbia. In the course of the gathering, the government reached consensus on an expansive fiscal policy, a moderately restrictive monetary policy, and a stable exchange rate. Economists pressed for continuing reforms and anti-recession policies, while bankers asked for stable and not too high exchange rate, and businessmen criticized the government seeking more financial support during the crisis. End Summary. Government, Tycoons, and Economic Experts Together -------------- -------------- ¶2. The 16th gathering of economists at the Kopaonik ski resort from March 3-5, 2009 called "Growth Under Conditions of Global Recession and Financial Crisis: (Non) Conventional Initiatives" for the first time attracted strong government participation. President Tadic and Prime Minister Cvetkovic attended and listened to sessions during the first two days. Ministers were unusually frank in raising their concerns about what the appropriate policy choices were for fiscal policy or supporting the exchange rate. Also for the first time several of the most influential tycoons appeared at the gathering including Delta Holding owner Miroslav Miskovic, East Point owner Zoran Drakulic and MK Komerc owner Miodrag Kostic, who had just bought most of the Kopaonik resort facilities, including the premises where the event was held. While government representatives "came to learn" as Tadic phrased it, and asked experts to be creative and help find solutions for the worldwide crisis that was about to hit Serbia, the tycoons came to lobby for their own interests, such as a stable exchange rate. Government Finally Concerned About the Crisis -------------- ¶3. After months of unfounded optimism and hope that Serbia would avoid the crisis, the government and President Tadic admitted that Serbia would face the crisis this year and that nobody knew how long and how severe it would be. Tadic characterized Serbia's economic reality as very difficult and asked all to think unconventionally about solutions. Tadic said that everyone, including businesses, had to change their behavior since the crisis was a different experience where big businesses would earn less profits, SMEs would find less credit and ordinary people would face job losses. ¶4. Prime Minister Cvetkovic said that Serbs should be aware of the situation but still nurture some optimism. Finance Minister Dragutinovic admitted that the crisis arrived much sooner than she had expected, while eternal optimist Economy Minister Dinkic warned that this would be a difficult year but Serbia could still avoid recession. Deputy PM Djelic admitted that growth projections would be revised to zero, and that inflation would be higher than projected, but the government would try to keep it around 10%, and the $2.6 billion FDI projections for 2009 were unrealistic. Experts: Finish Reforms, Government: Bad Timing -------------- -- ¶5. While government representatives highlighted that the Serbian financial system successfully survived a first blow from the crisis when citizens withdrew $1.3 billion (17%) of savings from banks in October-November 2008, economic experts assessed that the Serbian economy would face a more difficult situation than other countries due to Serbia's unfinished economic reforms and transition. President of the Association of Economists Dragan Djuricin characterized Serbia as a country in permanent transition. Experts also called on the government to use the crisis as an opportunity/excuse to execute necessary reforms in the oversized public sector. However, government ministers (Dinkic, Djelic, Dragutinovic) insisted that the crisis was not a good time to cut employees in the public sector or their salaries since it would decrease demand, further slow the economy, and would put additional people into an already collapsing job market. Former Deputy PM Miroljub Labus called for a halt to the de-industrialization of Serbia as the share of industrial production in GDP dropped from 24% in 2001 to 18% in 2008. Only President Tadic Stood For Reforms -------------- ¶6. Surprisingly President Tadic admitted there were structural problems in the economy "we spent more than we earned." Tadic called for deep reforms, both economic and social, since it was the only guarantee for a better future. Tadic said Serbs must delink criminals, businesses, the judiciary and politics that had become BELGRADE 00000245 002 OF 003 linked during the 90's (reftel). Unfortunately, the economy was partially based on principles of criminality, and post-Milosevic reforms should have been radical, said Tadic. Government Consensus: Expansive Fiscal & Moderately Restrictive Monetary Policies -------------- -------------- ¶7. Government ministers agreed that 2009 budget deficit projection needed revision, from 1.75% to 3% of GDP, leaving a gap of around $2 billion. Finance Minister Dragutinovic revealed that January-February budget revenues were down by 5% nominally y/y, which together with increased expenditures y/y endangered budget liquidity. Ministers agreed that the gap should be covered with external borrowing, mostly from IFIs and bilateral loans, accompanied by a new stand-by arrangement with the IMF. However, Deputy PM Dinkic claimed that part of the money would have to be borrowed locally because it was faster than the lengthy procedures when borrowing abroad. Pavle Petrovic of the Economic Faculty warned that this could drain out liquidity from already dry domestic market. National Bank Governor on the Opposite Side -------------- ¶8. Despite the consensus in the government on expansive fiscal and moderately restrictive monetary policy as DPM Dinkic phrased it, and a need for a stable exchange rate, NBS Governor Jelasic presented a lone counterpoint. Jelasic said that Serbia must urgently cut consumption, increase revenues, withdraw approved funds from IFIs, identify additional funding sources and agree to a new IMF arrangement. He added that Serbia had four alternatives to fill the current account gap: cut budget expenditures, increase taxes, borrow abroad, and continue privatization. In the end, there would be a mixture of these measures. He emphasized that the government must be proactive since whatever the government did not address would be reflected in the exchange rate and inflation. He said that due to the still double-digit annual inflation interest rates had to remain high. Exchange Rate: Government & Tycoons versus Governor -------------- -------------- ¶9. Several discussions centered on the exchange rate with businessmen and bankers demanding a stable exchange rate. Vladimir Cupic, Chairman of the Hypo Alpe Adria bank in Serbia, claimed that it was much cheaper to keep a stable exchange rate than let it go to 120-130 dinars/euro since then people wouldn't be able to pay back credits, unemployment would increase, panic-driven demand for euros would increase, and that would put additional pressure on the exchange rate. Tilo Berlin, Chairman of Hypo Alpe Bank International claimed that a 10% depreciation of the dinar resulted in $65 million losses for the bank due to increased non-performing loans. Jelasic was alone defending a flexible market-driven exchange rate for the dinar. He said the dinar's value was the result of economic policies and not a goal itself and that if one excluded adjustment of the economy via the exchange rate it would adjust (break) in some other way. Businessmen/Tycoons Criticize the Government -------------- ¶10. The sharpest critics of the government came from businessman/tycoon - Nenad Popovic, vice president of the opposition DSS party, but also from former DSS member Zoran Drakulic (East Point Holdings),and from Miodrag Kostic (MK Commerce),a close friend of late Prime Minister Djindjic. Popovic claimed that government had no strategy to combat the crisis, but only a number of unconnected measures. Drakulic criticized the government's anti-crisis measures claiming they were insufficient, and subsidizing of Fiat car sales that provided limited benefits to Serbia instead of supporting wheat exports. Kostic criticized the state for not providing enough money to support agriculture as Serbia's largest net export. Comment -------------- ¶11. The broad, high-level attendance at the Kopaonik conference from the government, tycoons and economic experts reflected the keen interest and concern in Serbia about the economy. The event provided a forum for constructive discussion with the government, business and academics. The isolation of Jelasic in defending the floating exchange rate highlighted the pressures he faces. President Tadic's participation reflected his increasing awareness that economic issues, not political issues, will be key to his ability to maintain political stability in the coming year and to build his legacy as a Serbian leader. End Comment. BELGRADE 00000245 003 OF 003 MUNTER