Serbia

Serbia has 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 -2.6%. Looking ahead, the country is set to experience a strong recovery in 2021-2022, driven by robust consumer spending, surging fixed investment and rapid export expansion, while import growth will be more moderate. We forecast annual real GDP growth of approximately +7% in 2021 and +4% in 2022. That said, the Serbian economy continues to face a number of structural weaknesses, including a susceptibility to natural disasters, that can cause GDP growth volatility at times and a vulnerable export structure. Key export markets include Italy, Bosnia and Herzegovina, Romania, Russia, Montenegro and North Macedonia.

Inflation pressure should be temporary and currency stability should be maintained. 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 2021-2023. 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, mainly as a result of the strong rebound in domestic demand and rising food and energy prices, as well as some supply-chain and labor-market disruptions. These effects are expected to be transitory and to fade in 2022 so that inflation should fall back to the NBS’s target range. We expect a few moderate policy rate hikes until end-2022 but the overall policy stance of the NBS should remain loose, especially as the exchange rate has remained remarkably stable at 117-118 RSD per EUR since mid-2019.

Systemic political risk has gradually improved in Serbia since 2014. Since the elections in that year, the centre-right SNS – led by Aleksandar Vucic, President since 2017 – has governed the country, ushering in a period of more government stability and policy continuity. A three-year IMF program was successfully completed in early 2018, with significant progress on fiscal, public sector, financial sector, labor market and institutional reforms. This helped to turn around the economy. International relations have also much improved, though the Kosovo conflict remains unresolved, even as violence has largely disappeared. The Serbian government is committed to EU integration while maintaining good relations with Russia and China. In June 2020, the SNS was overwhelmingly reelected, receiving 61% of the votes, but turnout was very low at 49%, reflecting a boycott of main oppositon parties and the Covid-19 pandemic. Hence, the dominance of the SNS and President Vucic is seen with some criticism in the meantime, and challenges to the SNS could take an extra-parliamentary form.

The business environment in Serbia is slightly below average in our assessment of 185 economies. The Heritage Foundation’s Index of Economic Freedom 2021 survey assigns the country a good rank of 54 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. In addition, our proprietary Environmental Sustainability Index ranks Serbia only 134th out of 210 economies, reflecting serious weaknesses regarding renewable electricity output, water stress and the recycling rate.