Serbia

major macro economic indicators

(e): Estimate (f): Forecast

RISK ASSESSMENT

Normalization after a strong recovery

2021 was characterized by a strong economic recovery. While a lockdown was implemented in early 2021, the relatively strong focus of the Serbian economy on agriculture (8% of GDP), construction (7% of the GDP) and manufacturing (25%, especially basic products such as food and metals), helped to cushion the impact on the economy, which still grew dynamically at the beginning of the year. In addition, the vaccination campaign was very successful in the first half of 2021, but slowed down a lot in early December. The vaccination level did not save Serbia from two big COVID-19 waves last year. This year the economy should cool and return to a more gradual growth path. Investments (22% of GDP) and private consumption (68% of GDP) should be the main drivers of economic growth. Public and private investments are supported by big projects like the construction of the first metro network in Belgrade that started in November 2021 and will continue until 2026. Alongside further investments in automotive-manufacturing, the mining group Rio Tinto announced a USD 2.4 billion investment into the Jadar lithium mine in summer 2021, which has a potential production of 58,000 tonnes annually from 2026 onwards. However, due to protests, the future of this project is unclear. Private consumption should be benefiting from a still high savings rate (15.5% average in first half of 2021) and some progress in the labour market with the participation rate already reaching an all-time-high in autumn 2021. This should encourage wage growth. However, the purchasing power will probably decrease due to the strong rise of the inflation rate, which should peak above 8% this spring, because of high energy and food prices, as well as high import-prices. This price pressure should then slowly decrease, but the inflation rate will probably remain above the inflation target of the National Bank of Serbia (NBS) of 3% +/-1.5 percentage points until autumn. Therefore, the SNB could decide to increase its key interest rate by 50 basis points up to 1.5% in the first half of the year, which would be still noticeably below the pre-COVID-19 level of 2.25%. While the stronger increase of consumption should further pull imports, concomitantly, the expected recovery in the European manufacturing sector, especially in the second half of the year, should favour exports. Nevertheless, net exports should still weigh on the growth outlook, but not as much as in 2021. 

Consolidating public finances 

In April 2021, Serbia signed in a new Policy Coordination Instrument with the IMF, which will be in force until 2023. While it includes no financing, it still gives the government incentive for a sustainable budget. In 2022, most pandemic-related support measures will have expired, while revenues should further increase due to higher tax income (economic recovery + payment of postponed taxes from 2020/21). This should push the public deficit down below the Maastricht-target of 3% and stabilize the public debt below 60%. The structural trade-in-goods deficit should decrease slightly  in 2022 with their exports somewhat accelerating. Only cosmetic changes are expected in the structural net primary income outflow (repatriated foreign investors’ dividends and interests), which will still be more than offset by expatriated workers’ remittances. Services trade will remain in surplus. The stocks of external and foreign currency debt remain high (62% and 77% of GDP, respectively). 

Environmental issues are becoming a problem for the authoritarian government 

President Aleksandar Vučić is leading the country with his Progressive Party (SNS), which had, in late 2021, 173 out of 250 seats in the parliament. Including the other coalition and support parties, the alliance has 92% of all seats. The main reason for this huge majority was the boycott of the last elections in 2020 by major opposition groups that resulted into a weak turnout (48%). However, the power of the SNS, which has a strong control over the media and judiciary, crumbled in late 2021. From mid-September, thousands of people demonstrated on streets to protest against the lithium mining project of Rio Tinto due to the fear of resulting pollution of water and earth, and new legislation allowing the seizure of private property more easily for public projects. Although Vučić announced the road blockades were illegal, he suspended two key laws that would help the lithium-mining project, maybe to calm the public ahead of the next legislative election that was advanced to April 2022 to coincide with the presidential and municipal elections. In the meantime, Serbia has made no progress in its EU’s accession process in 2021, as-well-as in the dialogue to normalize its relationship with Kosovo, whose independence Serbia does not accept. Serbia is not in NATO and has close ties with Russia and China.

Last updated: February 2022