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Serbia, Montenegro and Kosovo Country Risk Reports Q2 2015

Serbia, Montenegro and Kosovo Country Risk Reports Q2 2015

Core Views

We see growing risk to social and political stability in Serbia and the region due to slowing economic growth, impending austerity measures and the emergence of radical Islamist cells in neighbouring Kosovo.

A series of planned austerity measures will weigh on domestic demand in 2015-2016, while a sputtering recovery in the eurozone and a looming recession in Russia will weaken exports, prompting us to revise down our growth forecast for Serbia.

While a plunge in Serbia's exports threatened its balance of payments in 2014, we expect exports to improve, helping the country avoid a crisis and register narrower current account deficits in 2015-2016. In addition, the forthcoming credit arrangement with the International Monetary Fund in early 2015 will boost investment inflows, ensuring external financing over our forecast horizon.

While dinar weakness dissuaded Serbia's monetary authorities from easing in December 2014, we expect the currency to stabilise in H115. This will allow the authorities to resume an easing cycle in the context of persistent supply and demand-side disinflationary pressures.

Major Forecast Changes

We have revised down our 2014 real GDP growth estimation for Serbia from -0.8% to -2.0%, and our 2015 forecast to -0.7% from 0.5% previously, as Q314 growth data showed that the deterioration of Serbia's macroeconomic outlook is more pronounced than we previously anticipated. The standby credit line arrangement with the International Monetary Fund (IMF), entailing harsh austerity measures, will further exacerbate the outlook for domestic demand in 2015 and 2016, already under strain by the spring and summer floods, which damaged infrastructure, housing, and production facilities.


Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Roadblocks To Serbia's EU Bid Firmly In Place
Disagreements with Kosovo and amicable diplomatic relations with Russia will remain a major roadblock to Serbia's bid to pursue EU
membership. We do not expect Serbia to achieve membership status within the next five to ten years.
TABLE: Political Over view
Long-Term Political Outlook
Unresolved Tensions Remain Despite Agreement With Kosovo
Unresolved regional tensions and a fractious domestic political environment are expected to continue to hang over Serbia's political risk
profile over the long term. In turn, the country's EU accession prospects and economic growth profile could suffer as a result. However,
owing to the large diplomatic presence in the region, which we expect to persist over the long term, we believe it is very unlikely that
lingering disputes will devolve into open conflict.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Activity
Downturn In Full Swing
A series of planned austerity measures will weigh on domestic demand in 2015-2016 in Serbia, while a sputtering recovery in the
eurozone, and a looming recession in Russia will weaken exports, prompting us to revise down our growth forecast for Serbia.
TABLE: Economic Activity
Fiscal Policy
IMF Deal View Playing Out
Pressed by a rapidly deteriorating macro outlook and fiscal and debt metrics, Serbia's policymakers adopted long-delayed spending cuts
in October, paving the way for a deal with the IMF which we expect in early 2015. The IMF deal will help anchor investor confidence
and, while painful to households in the short term, it will help boost investment and financial flows in the country, brightening the macro
outlook from 2015 onwards.
TABLE: Fiscal Policy
Monetary Policy
Dinar Stabilisation To Allow Easing
While dinar weakness dissuaded Serbia's monetary authorities from easing in December 2014, we expect t he currency to stabilise
in Q115. This will allow the authorities to resume an easing cycle in the context of persistent supply and demand-side disinflationary
pressures.
TABLE: Monetary Policy
Balance Of Payments
IMF Deal And Improving Exports To Stave Off A Crisis
While a plunge in Serbia's exports threatened its balance of payments in 2014, we expect exports to improve, helping the country
avoid a crisis and register narrower current account deficits in 2015-2016. In addition, the forthcoming credit arrangement with the
International Monetary Fund in early 2015 will boost investment inflows, ensuring external financing over our forecast horizon.
TABLE: Curent Account
Chapter 3: 10-Year Forecast
The Serbian Economy To 2024
EU Convergence Key
Serbia's convergence process with the more developed states of Western Europe is expected to continue apace over the long term,
with the harmonisation of its underlying domestic legal and regulatory framework with that of the EU being a fundamental factor driving
growth. This will lead to marked improvements in Serbia's business environment, enabling greater access to the export markets of EU
member states and enhancing the country's appeal to foreign investors in the process. That said, we caution that political instability,
particularly around Kosovo, poses the greatest risk to our forecasts, although the April 2013 agreement should go some way to cooling
tensions at a governmental level.
TABLE: Long-Term Macroeconomic Forecasts
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: Operati onal Risk
Availability Of Labour
TABLE: Emergi ng Eur ope – Availabilit y Of Lab our Risk
TABLE: Major Population Centres In Serbia
TABLE: Labour Force Employment By Sector
Crime Risk
TABLE: Emergi ng Eur ope – Crime Risks
TABLE: Crime Statistics
Chapter 5: Key Sectors
Autos
TABLE: Aut os Total Market – Hist orical Data And Forecasts
TABLE: Pase nger Car Market – Hist orical Data And Forecasts
TABLE: Commercial Vehicle Market – Hist orical Data And Forecasts
Food & Drink
TABLE: Food Consumpti on Indicators – Hist orical Data & Forecasts
TABLE: Alc oholic Dri nks Value /Volume Sales , Producti on & Trade – Hist orical Data & Forecasts
TABLE: Mas Grocer y Retail Sales By Format – Hist orical Data & Forecasts
Other Key Sectors
TABLE: Pharma Sector Key Indicators
TABLE: Telec oms Sector Key Indicators
TABLE: Defe nce and Security Sector Key Indicators
TABLE: Freight Key Indicators
Chapter 6: BMI Global Assumptions
Global Outlook
New Era For Oil
Table: Global Assumptions
Table : Devel oped States , Real GDP Growt H, %
Table : BMI VERSUS BLOO MBERG CON SENSUS REAL GDP GROWTH FORECASTS, %
Table : Emergi ng Markets , Real GDP Growth , %

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