Serbia's ruling Progressive Party (SNS) emerged as the winner ofthe April 24 general election, which will reaffirm public support forPrime Minister Aleksandar Vucic's austerity agenda and structuralreform programme. The principal political risks to the current Serbiangovernment are regional. Serbia's rising migrant population isplacing an increasing burden on Serbia's social stability, and poorrelations with Croatia are delaying Serbia's EU accession. Domestically,with its large majority in parliament, the government is taskedwith ensuring that it implements its own manifesto effectively andovercome the challenges from the newly-elected far-right partiesand the fractured opposition.
The recovery of Serbian real GDP growth will consolidate in 2017and 2018 on the back of rising consumer spending, substantialinvestment, and less severe government austerity. Growth will belimited, however, by rising imports, and unreformed state-ownedenterprises. We forecast GDP growth of 2.8% in 2017, and 3.1% in2018.
Serbia's current account deficit will stabilise in 2017 on accountof weaker external demand, stronger import demand, and risingcommodity prices. However, the deficit does not pose a major riskto economic stability, given that structural reforms are increasingexport potential and attracting more foreign direct investment. Weforecast the current account deficit at 3.3% of GDP and 3.2% in2017 and 2018, respectively.
We expect the National Bank of Serbia will begin a rate hiking cyclein 2017, bringing the main policy rate to 4.50%. Stronger domesticeconomic performance and rising global commodity prices, alongsiderising developed economy rates will prompt the cycle.
The pace of fiscal consolidation in Serbia will slow in 2017 on accountof slowing reform momentum, weaker revenue collection andpolitically motivated spending hikes. Government debt will remainhigh at 71.5% of GDP in 2017, leaving Serbia's fiscal position andsovereign creditworthiness vulnerable to shocks.