Serbia

major macro economic indicators

(e): Estimate (f): Forecast

RISK ASSESSMENT

Serbian economy will continue to slow in 2023

The Serbian economy is set to continue to slow in 2023 due to persistently high inflation, lower demand from its main European trading partners, and increased borrowing costs which will weigh on consumption, exports and private investment. The Russia-Ukraine war has a modest direct impact on the Serbian economy as Russia accounts for around 4% of country’s goods trade exports and 5.3% of its imports. Serbia has condemned the violation of Ukraine's territorial sovereignty and voted in favour of a UN resolution demanding Russian forces to withdraw, but remains the only country in Europe to refrain from imposing sanctions on Russia. Nevertheless, the indirect effect of the war, which has materialised in globally higher energy prices in the European market, has spread to food and other goods prices owing to increased production and transportation costs. This pushed the yearly inflation rate in Serbia up to an average of around 12% in 2022, i.e., the highest inflation rate since 2008-2009 when the financial crisis hit Serbia. Price tensions are eroding households’ purchasing power and their consumption should therefore further decelerate over the 2022-2023 winter and spring months. It is expected that consumer prices will increase further throughout 2023, albeit at a slower pace than in 2022. To stabilise inflation expectations, the National Bank of Serbia (NBS) raised its policy rate on eight occasions by a cumulative 350 basis points to 4.5% by late 2022. Further interest rate hikes are expected in 2023. Rising interest rates have already and will further weigh on private investment as borrowing costs have increased. Modest support is likely to come from government spending in the form of aid for households and companies to cope with higher energy prices. Additionally, the minimum wage is likely to increase in 2023 as the labour market remains relatively robust. Net exports’ contribution to GDP growth should remain positive but moderate as imports increase at a faster pace than exports.

Slight decrease in the twin deficit in 2023

Late in 2022, the government agreed to a 24-month stand-by arrangement (SBA) with the IMF, giving Serbia access to financing support of EUR 2.4 billion. The arrangement will ease Serbia’s funding pressures and counter potential investor concerns over external and fiscal financing risks amid weaker economic activity. In return for financing support, Serbia has agreed to reforms monitored by the IMF. The public deficit is consequently likely to narrow in 2023 as the government curbs spending, but no tax increases are planned. Public debt should therefore continue to decrease gradually.

The current account deficit is expected to decline in 2023, but remains at a high level compared to that of the previous 7 years. The significant trade-in-goods deficit should narrow only marginally due to the country's import dependence. The small primary income deficit is likely to be totally offset by modest surpluses in services and secondary income (especially remittances) accounts. The current account deficit is likely to be financed by foreign direct investment inflows and a two-year stand-by arrangement with the IMF.

Conservative-nationalist Serbian Progressive Party remains the dominant political force

The Progressive Party (SNS) of the President Aleksandar Vučić won the snap parliamentary elections in April 2022 with 44% of the vote, giving it only 120 seats in Serbia's 250‑seat parliament (-68 seats compared to the 2020 election). This is the first time since 2014 that the party has not carried an absolute majority, which implies some leverage for its coalition partners. Mr Vucic benefited from the snap election and was re-elected in the presidential election held simultaneously, garnering 60% of the vote in the first round. In late October, after several months of discussions, a new coalition was formed between the SNS and the Social Party for Serbia (SPS) that included a number of independents and representatives of smaller regional parties (155 seats out of 250), and a new 28-member cabinet and prime minister were appointed. It will face formal parliamentary opposition for the first time in two years comprising the main opposition United Serbia coalition (38 seats), Moramo (13 seats), a new green party and a new right-wing tripartite bloc (35 seats). The pro-EU opposition will push issues such as SNS corruption, the environment and European integration, while the right-wing bloc will demand a tough stance on Kosovo and good relations with Russia and China. Serbia’s de facto leader is still Mr. Vucic, who continues to wield enormous influence over all aspects of domestic and foreign policy. At international level, the country wants to keep its strategic focus on the EU, but also maintain good relations with China and Russia at the same time, which will be challenging. Serbia’s refusal to apply EU sanctions against Russia brought strong criticism from the EU and the US. Viewed largely, the incumbent coalition is likely to remain in place until the next parliamentary elections in 2026, but Mr. Vucic could call another snap election with a view to bolstering the government's position. Meanwhile, the presidential election is scheduled for 2027, at which time Mr Vucic will be ineligible to stand for a third term.

Last updated: April 2023