2012-02-06 07:30:04 - Fast Market Research recommends "Serbia, Montenegro & Kosovo Business Forecast Report Q2 2012" from Business Monitor International, now available

Core Views A fter a clash in Serb-dominated northern Kosovo, tension between Belgrade and Pristina has been steeply rising, putting EU candidate status at jeopardy. Nonetheless, due to the large diplomatic presence in the region (which we expect to persist over the long term), we do not believe it likely that lingering disputes will devolve into open conflict. A new EUR 1.0bn Stand-By Arrangement (SBA) approved by the IMF in August 2011 reaffirms our positive medium-term outlook for Serbia's economy. The renewed IMF agreement is particularly important for Serbia, not only because it acts as further recognition of the soundness of the economic policy that the Serbian authorities have been pursuing in recent years, but also, and most significantly, because

it boosts near-term economic stability in the country. Major Forecast Changes F ollowing the strong rise in expenditures witnessed thus far in 2011, alongside weaker than expected revenue growth, we have been prompted to revise our Serbian public deficit forecasts, now expecting the shortfall to remain at 4.5% of GDP in 2011, up from 4.2% previously, falling to only 3.9% of GDP in 2012, from 3.5% previously. That said, we note that Serbia's medium-term fiscal outlook remains positive, thanks to the country's self-imposed fiscal responsibility rule and the need to comply with IMF conditions. O n the back of softening real GDP growth, moderating consumer inflation, and the reduced risk of a balance of payment crisis following a new EUR 1.0bn SBA with the IMF, we have revised our end-2012 interest rate forecast and expect additional cuts to 9.00% (from 10.00% previously), as the National Bank of Serbia will address increasing macroeconomic headwinds stemming from the slowdown in global growth. Key Risks To Outlook We highlight a significant upside risk to our fiscal deficit estimates, were the eurozone debt crisis to intensify further from current levels. This would lead to a more pronounced slowdown in the eurozone countries, which would have immediate and significant effects on the Serbian economy. Severe fiscal austerity would in turn have to be implemented in an effort to keep the IMF SBA in place, and respect the debt ceiling which, at the moment, is only a couple of percentage points from being reached. A sudden outflow of hot money, in light of heightened financial market volatility and further potential for the eurozone debt crisis to escalate, would draw down foreign reserves as the large current account deficit can no longer be financed by foreign capital flows. This would lead to a strong depreciation in the dinar which in turn would leave Serbian assets exposed to a sharp correction. The NBS would then be presented with limited scope for rate cuts at a time when global growth is softening
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