Serbia

The economic outlook for Serbia has deteriorated as a result of the war in Ukraine. Previously, the country had emerged as a sound economic performer in the Emerging Europe region. Average annual real GDP growth increased from just +0.7% in 2010-2014 (compared to a regional average of +3.7%) to +3.2% in 2015-2019 (vs. +2.8%). In 2020, Serbia’s economy was less hit by the global Covid-19 pandemic than most others: real GDP declined by a comparatively modest -0.9%  (while the whole region contracted by -2.3%) and rebounded to an expansion of +7.4% in 2021 (vs. +6.4% for the region). However, in 2022, growth dropped to around +2% amid the energy crisis and surging inflation in the wake of the war. Looking ahead, Serbia is set to experience another year of subdued growth in 2023, given the impact of high inflation and rising interest rates on consumer spending and investment activity, as well as due to reduced trade dynamics with key trading partners in the EU.  

Inflation pressures will remain elevated though currency stability is expected to be maintained in 2023. The monetary policy framework is officially based on inflation targeting but in practice also on a “managed” exchange rate float. The National Bank of Serbia (NBS, the central bank) aims to keep the increase in consumer prices within a 3%±1.5pp band in 2023-2025. Improved monetary policy had indeed led to low inflation from 2014 until mid-2021, as well as exchange rate stability since 2016. This allowed the NBS to lower its key monetary policy interest rate steadily to 2.25% at end-2019 and further to 1.0% at end-2020 in order to support the economy in the wake of Covid-19. However, consumer prices increased beyond the upper band of the target range in September 2021 and eventually rose to more than 15% at the end of 2022, mainly as a result of surging food and energy prices, but also due to some supply-chain and labor-market disruptions. These effects are expected to fade only gradually in 2023-2024, and inflation is likely to fall back to the NBS’s target range only in 2024. The NBS embarked on a monetary tightening cycle relatively late in April 2022. Up to January 2023, it has hiked its key policy interest rate by a cumulative 425bps to 5.25%. We expect a few more moderate policy rate hikes until mid-2023. The exchange rate has remained remarkably stable at 117-118 RSD per EUR since mid-2019 and we expect this to remain the case in 2023.

Systemic political risk had gradually improved in Serbia from 2014 to 2022 but experienced a setback at end-2022 as tensions in northern Kosovo rose sharply to dangerous levels. Serious violent conflict has been averted for now as both sides made concessions under substantial international pressure. We expect that the situation between Serbia and Kosovo will remain tense and that a resolution of Kosovo’s status will remain elusive in the next two years at least. The Serbian government is committed to EU integration while maintaining good relations with Russia and China. But the Kosovo issue, Serbia's close relations with Russia as well as EU concerns over the rule of law will constrain Serbia’s progress towards EU accession.

The business environment in Serbia is slightly below average in our assessment of 185 economies. The Heritage Foundation’s Index of Economic Freedom 2022 survey assigns the country a good rank of 59 out of 185 countries. However, the World Bank Institute’s annual Worldwide Governance Indicators surveys continue to indicate considerable weaknesses with regard to regulatory quality and, in particular, the rule of law and measures to combat corruption. Our proprietary “Environmental Sustainability Index” ranks Serbia only 139th out of 210 economies, reflecting serious weaknesses regarding renewable electricity output, water stress and the recycling rate.