Overview of the Serbian economy

by Cristian Florescu

Although Serbia’s economy did not meet expectations in 2022 due to low investment, the successful execution of the Ohrid agreement on normalisation with Kosovo could result in an increase in European Union funds and investment.

Serbia, with a population of 6.9 million, stands as the biggest economy in the Western Balkans. Following the Yugoslav Wars, the United Nations imposed sanctions and embargoes on Serbia, isolating its economy and causing a significant loss of talent. However, after the removal of President Slobodan Milošević in 2000, the country experienced remarkable growth and wage hikes.

Although Serbia experienced a notable recovery from the pandemic and achieved a 7.4% growth in 2021, it fell short of the Vienna Institute for International Economic Studies’ projections for 2022 and only saw a modest 2.3% increase in GDP.

Last year, household consumption saw a boost from increased minimum wage and public-sector salaries. However, the government made changes to the price caps on food, electricity, and energy, which led to inflation.

Inflation for the year 2022 had an average of 11.9%, which is one of the lowest rates in the region. However, in March 2023, it reached 16.2%. Although unemployment is decreasing, it remains at a high rate of ten per cent.

At present, Serbia is assigned a BB+ long-term issuer default rating by Fitch.

Although public investment decreased by three per cent in 2022, the government’s public infrastructure investment helped maintain Serbia’s public investment at one of the highest levels in Central, Eastern, and South-eastern Europe (CESEE), accounting for 7.2 per cent of GDP.

Although the total investment stayed close to the regional average at slightly below 23% of GDP, it is important to note that domestic private investment is still lacking.

Serbia’s foreign direct investment (FDI) inflow displays a notable difference from that of its neighbouring countries, with China and Russia being more noticeably involved.

Although Serbia applied for EU membership in 2009, its foreign policy has differed greatly from that of the bloc. It has maintained friendly relations with Russia, even during its invasion of Ukraine and the resulting EU sanctions. This has caused uncertainty and led to a decrease in EU foreign direct investment, which now only accounts for 33% of total FDI – half of its previous level.

FDI from Russia, primarily from individuals seeking to avoid conscription, and China have helped to compensate for the decrease in EU investment. The percentage of FDI from Russia has risen to eight per cent, which is an eightfold increase, while the percentage of Chinese FDI has tripled to 32 per cent of total FDI.

According to Dr Branimir Jovanović, who authored Wiiw’s April forecast for Serbia, the country has significant investment requirements in both industry and infrastructure.

China, with its significant financial resources and global expansion plans, sees Serbia as a promising opportunity due to both economic and political factors. This is particularly relevant given Serbia’s proximity to the EU and its commitment to maintaining positive relationships with both the Western and Eastern regions.

According to Dr Jovanović, there are three primary types of Chinese FDI in Serbia. The first type consists of new Chinese companies that are establishing factories (referred to as greenfield investment). In 2022, five such companies have been announced, including Haitian International Holdings, Suzhou Yusei Machinery, Tristone Flowtech, Kuka Roboter, and Yanfeng Automotive Interiors.

The speaker mentions that there are several significant Chinese investments in Serbia, such as the Bor mine, the Smederevo steel plant, the Huawei Innovations and Development Centre in Belgrade, and the Shandong Linglong tyre factory in Zrenjanin. These investments have been expanding their activities in the country over the past few years.

The last component pertains to the investments that Serbia is making in collaboration with China for infrastructure projects, which include the Belgrade Metro, the solid waste management initiative for 65 municipalities, and the bypass encircling Belgrade.

The opening for China’s increase in FDI was partly due to political uncertainty regarding Serbia’s EU future. If a deal is implemented to normalize relations with Kosovo, it would reduce uncertainty and eliminate a significant obstacle to Serbia’s EU accession.

In March, the leaders of Serbia and Kosovo came to an agreement to implement the normalisation of relations in Ohrid, North Macedonia through verbal communication. A Joint Monitoring Committee was established a month later to oversee the implementation of the agreement.

In March, Serbia’s president, Aleksandar Vučić, stated that EU leaders had politely informed him that it would be beneficial for Serbia to accept the normalisation plan. They also mentioned that not accepting the plan could potentially cause a pause in the process of European integration, withdrawal of investments, and implementation of economic and political measures that could negatively impact the Republic of Serbia. They also mentioned that the visa-free regime with the European Union might potentially be abolished in a matter of weeks.

The EU is kindly offering incentives along with consequences for Serbia’s actions.

According to Dr Jovanović, if the deal is fully implemented, it could have a positive impact on Serbia. This is not only due to the potential donor conference that the EU has agreed to host, which could bring substantial infrastructure investment to the country but also because it could help to alleviate the current political uncertainty in Serbia.

If the deal is implemented and relations with Kosovo are normalized, Serbia may move closer to the EU. The primary factor that has kept Serbia close to Russia, the need for Russian support in the Kosovo dispute, would no longer be present.

Serbia could greatly benefit from an infusion of funds and a reduction in political uncertainty. According to Wiiw’s projections, Serbia’s GDP growth is expected to be only 1.5% in 2023, which is the lowest in the Western Balkans. However, there is still an opportunity for Serbia to exceed expectations.

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