2012-11-15 00:32:54 - Serbia, Montenegro and Kosovo Business Forecast Report Q4 2012 - a new country guide report on companiesandmarkets.com

With the formation a new government imminent following May elections, the next government will have to contend with a large and widening fiscal deficit. We expect the next administration to tighten the fiscal accounts and return to the IMF programme abandoned in February. Having gained EU candidate status on March 1, Serbia has now embarked on the long process of EU accession. While we expect accession talks to provide an important policy anchor for the country, we do not expect Serbia to join the bloc before 2018.

Major Forecast Changes

We have revised our budget deficit forecast for 2012 down from 4.9% of GDP to 5.8% because of delays in forming a new government following the May elections. We expect the

 

 

National Bank of Serbia to cut rates from 10.00% to 9.25% by the end of 2012 following the bank´s 50-basis-point rate hike in June.

Key Risks To Outlook

If Serbia does not quickly embark on a more sustainable fiscal trajectory, borrowing costs could spike and the dinar could sell off further, inflating foreign-exchange-denominated public debt. The suspension of Serbia´s IMF programme has already rattled investor confidence. Our sunnier view on Serbia´s long-term prospects is grounded in EU accession providing a policy anchor for the Serbian government. This convergence story requires Serbia to gradually normalise its relationship with Kosovo. However, there is significant tension between the two, and we highlight the potential for unrest in the short term.

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