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Serbia, Montenegro and Kosovo Country Risk Report Q2 2016

Serbia, Montenegro and Kosovo Country Risk Report Q2 2016

Core Views

Serbia's economic rebound will remain on track in 2016, but growthwill remain tepid, as fiscal consolidation measures and structuralreforms will prevent a stronger recovery in domestic demand.

The opening of accession negotiations between Serbia and the EUat end-2015 offers little cause for optimism that the country will jointhe union any time soon. We see limited possibility that Serbia fulfilsthe EU's main condition for EU membership – normalising relationswith its former province Kosovo, as nationalist elements in Kosovo willobstruct progress on cooperation with Serbia. Meanwhile, Belgradewill continue to deny Kosovo's sovereignty for the foreseeable future.

Serbia's sovereign risk profile has improved on the back of the ongoingaggressive fiscal consolidation programme implemented byPrime Minister Alexander Vucic's cabinet. While 2016 will see somerelaxation of austerity, this will not jeopardise the country's improvedsovereign credentials, reflected in our forecast for the budget deficitto continue narrowing to 3.5% of GDP in 2016, and 3.1% in 2017,from an estimated 4.0% in 2015.

Improving external demand and subdued import growth outlook willsee Serbia's current account deficit narrow in 2016 and 2017. Thecredit arrangement concluded in February 2015 with the InternationalMonetary Fund will boost investment inflows, ensuring externalfinancing in the coming years.


Executive Summary
Core Views
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Recovery On Track, But Growth Remains Tepid
Serbia's economic rebound will remain on track in 2016, but growth will remain tepid, as fiscal consolidation measures and structural
reforms will prevent a stronger recovery in domestic demand.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal Policy
Sovereign Risk Profile Improving
Serbia's sovereign risk profile has improved on the back of the ongoing aggressive fiscal consolidation programme implemented
by Prime Minister Alexander Vucic's cabinet. While 2016 will see some relaxation of austerity, this will not jeopardise the country's
improved sovereign credentials, reflected in our forecast for the budget deficit to continue narrowing to 3.5% of GDP in 2016, and 3.1
%in 2017, from an estimated 4.0% in 2015.
Fiscal Policy And Public Debt Outlook
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
Monetary Policy
Monetary Easing To Resume By End-H116
The National Bank of Serbia will retain a cautious stance in the early stages of 2016 for fear of inducing further depreciatory pressure
on the dinar. However, we expect the authorities to resume monetary easing by end-H116, as inflation remains below target due to both
demand-side and supply-side disinflationary pressures.
Monetary Policy Framework
External Trade & Investment Outlook
External Imbalances Diminishing
Serbia will continue to make progress on addressing its external imbalances, with the help of the ongoing structural adjustment
programme under the auspices of the IMF. We forecast the current account deficit to narrow to 4.7% of GDP in 2016, and to 4.5% in
2017, from an estimated 5.0% in 2015.
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: TOP 5 EXPORTS IN 2014
TABLE: TOP 5 GOODS IMPORTS IN 2014
Chapter 2: 10-Year Forecast
The Serbian Economy To 2025
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 the 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.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Despite Start Of EU Accession Talks, Membership Remains Distant Possibility
The opening of accession negotiations between Serbia and the EU at end-2015 offers little cause for optimism that the country will join
the union any time soon. We see limited possibility that Serbia fulfils the EU's main condition for EU membership – normalising relations
with its former province Kosovo, as nationalist elements in Kosovo will obstruct progress on cooperation with Serbia. Meanwhile,
Belgrade will continue to deny Kosovo's sovereignty for the foreseeable future.
TABLE: POLITICAL OVERVIEW
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 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: EMERGING EUROPE – TRADE PROCEDURES AND GOVERNANCE RISK
Vulnerability To Crime
TABLE: SERBIA IMPORT AND EXPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Unfinished Business In 2016
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: SERBIA – MACROECONOMIC DATA & FORECASTS

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