Market Overview                                                                               

• The political risk associated with doing business in Serbia is still high compared to some other countries in the South East Europe.  The primary issues of concern in Serbia revolve around the stability of the weak coalition government currently in place in Serbia and its response to Kosovo’s declaration of independence on February 17, 2008 (see Chapter 2: Political and Economic Environment for further information). 
• Pro-western elements of society are working toward keeping the country’s future direction on the path of economic stimulation that will create stability, prosperity and, ultimately, integration with the European Union.  This vision was reaffirmed in the presidential election in January 2008, which was won by the pro-democracy, pro-European Union candidate Boris Tadic.
• Before Kosovo’s declaration of independence, Serbia continued to make progress in structural and institutional reforms over the past year.  This was driven by strong domestic demand, fiscal consolidation, reduced debt, good macroeconomic outlook, and legislative improvements aimed at fostering EU integration.  The country’s recent history however, has created a special challenge for the government to bring the black and gray economies to the surface and to create a transparent legal/regulatory framework for a market-oriented economy.  
• After attracting $4.5 billion of FDI in 2006, the cumulative level of FDI in Serbia decreased $3 billion in 2007.  This drop in FDI was due to a slower pace of privatization following Parliamentary elections at the beginning of 2007 and a six-month delay in forming the government.  According to the EBRD, even with the lower number, Serbia is ranked fourth in Southeast Europe, after Bulgaria, Romania and Croatia and before Bosnia, Montenegro, Albania and Macedonia in total 2007 FDI. FDI counted for roughly 10% of Serbia's GDP in 2007.   
• The current account deficit, which equals 10% of GDP, is still too high, and Serbia must speed up structural reforms in order to boost productivity and exports.  Inflation stood at 10.1% by year end 2007. 
• Serbia’s trade deficit increased 41.2% in 2007 from the previous year to $9.52 billion, with exports rising 37.3% to $8.82 billion and imports growing 39.3% to $18.3 billion.  The increase in imports was mainly due to energy, which accounted for 17.3% of all imports last year, copper and iron ore, as well as rising demand for foreign goods.  The growth in exports resulted from privatizations and restructurings of companies, the implementation of the Central European Free Trade Agreement (CEFTA), agricultural surpluses and the preferential treatment of Serbian textiles in the EU.  The biggest importers of Serbian goods were Italy, with $1.09 billion, Bosnia-Herzegovina, $1.04 billion, and Montenegro, $850.9 million.  The largest exporters to Serbia were Russia, with $2.63 billion, Germany, $2.17 billion, and Italy, $1.78 billion.  Commerce with EU member countries accounted for more than a half of Serbia’s overall foreign trade last year.
• Serbia’s GDP grew by an estimated 7.5% in 2007 over the previous year, and stood at $44 billion, while GDP per capita stood at around $5,500.  Experts calculate that GDP will grow between six and six and a half percent in 2008.  The greatest contributors to the GDP growth in 2007 were: transportation, trade, financial mediation, and processing industry.  Industrial production rose by an estimated 4.6% in 2007, and was mainly led by the processing industry.  Significant growth was achieved in the sectors of construction as well as in retail trade.
• In 2007, some $560 million were allocated for financial assistance, which mainly targeted Serbia’s budget, transport infrastructure, the energy sector, local governments, and civil society.  The largest portion of funds came from the EU and the biggest single donor was Germany.  This assistance came in the form of soft loans and grants.  The final draft of the sustainable development strategy in Serbia, which is one of the requirements for joining the EU, was adopted by the government in December 2007, and is expected to reach the parliament’s agenda in March or April 2008.  The implementation of the development strategy in Serbia will require some EUR 20 billion over the next ten years.

Market Challenges                                                                            

• There are some challenges and factors that inhibit trade and investment.  For example: lack of relevant legislation and enforcement, inefficient bureaucracy; a slow moving court system; organized crime influence in all sectors of the economy; corruption; intellectual property rights violations; and a complicated and often non transparent tendering process.
• Adequate financial resources for Serbian buyers still remain a problem, but it is not as acute as it was in years past as there are more foreign banks operating in Serbia. 
• A large and strong private sector, supported by an efficient financial sector, is crucial for growth in Serbia.  In 2007, newly established private companies only employed 200,000 people.  During 2008, the Serbian government must focus on strategic investors.  The restructuring and subsequent sale of highly indebted industrial conglomerates is a pre-condition for further development.  Incomplete judicial reform and frequent changes of legislation make foreign companies feel uncomfortable.  Vestiges of years of socialist economics further complicate administration and prolong a  lack of an institutional framework for entering the Serbian market.  Around 50,000 workers are expected to lose their jobs in 2008 as part of the privatization process that is slated to last until 2010.  To meet this challenge, the Ministry of Labor, Employment and Social Policy has devised a special plan in cooperation with the UN Development Program (UNDP), whereby severance packages will be invested in job creation rather than given to redundant staff for personal spending.  The program started with its implementation in late January 2007.

Market Opportunities                                                                       

• Serbia is the natural regional center of trade and investment in South East Europe.  The Serbian government plans to set aside about $2.1 billion for projects envisaged by the National Investment Plan (NIP) through the end of 2008, $720 million of which were invested in 2007.  NIP will rely on privatization revenues, budget surplus, international loans, and the EU pre-accession funds as its sources of financing (the pre-accession funds are expected to provide $1.5 billion by 2011).  The plan sets aside $546 million for the overhaul of road infrastructure, around $481 million for projects encouraging economic development, and $414 million for the health sector through the end of 2008.  It is aimed at increasing employment, keeping Serbia’s annual economic growth rate at 7% in average over the next five years, and achieving equal development of all regions.  According to the government report, Serbia’s capital investments should be worth about $1.5 billion a year, so that the country could “make up for what was lost in the 1990s”.
• Second phase of privatization and finding strategic partners for state-owned companies could bring significant economic improvement, speed-up transition and establish the conditions for an inflow of investment capital.  The following sectors will benefit: oil industry (the state-owned oil company, NIS, was sold to the Russian state-owned company, Gazprom, in January 2008 in a no-tender sale- see below), electric-power generation and distribution, mining of copper, telecommunications and construction companies, agriculture.  Petrochemical, pharmaceutical and defense industries hold promise as well.  According to the Serbian Privatization Agency, 1,852 companies have been privatized since 2001, with sell off receipts reaching $2.5 billion. In 2007 alone, the Agency recorded $410 million in privatization revenues, while agreed investment stood at nearly $300 million.  Serbia’s objective is to eliminate socially-owned property by the end of 2008.
• Serbia has moved up 27 spots from its 2006 ranking to the 68th place in the 2007 World Bank and the International Finance Corporation (IFC) Doing Business report, which ranked 175 world economies based on how easy it is to set up businesses and obtain licenses, along with the complexity of tax and regulatory issues.  Serbia raced ahead of all former Yugoslav states with the exception of Slovenia, but remained behind EU candidate neighbors Romania and Bulgaria.  In addition, Serbia ranked 60th in terms of time needed to start a business, but scored only 110th with respect to the ease of property registration. According to the report, it takes 18 days to start a business in Serbia and 111 days to register property.  The World Bank commended Serbia for simplifying customs procedures, introducing mediation as an alternative to the court system, and establishing the agency for licensing bankruptcy managers (which Serbia did in the second half of 2006).

·         Several sectors look to provide good market opportunities in the future, including: agro-business, construction, transportation, airport development, telecommunications, medical instruments, computer hardware, environmental technologies, franchising, and insurance. 

Market Entry Strategy                                                                    

• The Law on Trade, which regulates the activities of wholesalers and retailers, formalized that any firm may operate in foreign and domestic trade in Serbia.  However, the government has not yet completed all the institutional reform for doing business in the country: making some kind of local representative “a must”.   A carefully chosen local agent or distributor is the most effective method for entering the Serbian market.  Many U.S. firms have found that it is more efficient and cheaper to hire a good local agent or distributor than to conduct direct sales.  Some firms may lack sufficient capital to handle product marketing and wide distribution.  A confirmed letter of credit should be used in conducting business with a new local partner since some firms may have payment problems.
• Serbia has enacted specific legislation outlining guarantees and safeguards for foreign investors.  The Foreign Investment Law in Serbia (2003) establishes the framework for investment in the republic.  The law eliminates previous investment restrictions; extends national treatment to foreign investors; allows for the transfer/repatriation of profits and dividends; provides guarantees against expropriation; and allows for customs duty waivers for equipment imported as capital-in-kind.
• Foreign companies should visit the market and become acquainted with business practices and customs.  Good networking and establishing relationships with both, government officials and business people is very often crucial in achieving success.  The U.S. Embassy provides Gold Key Service (GKS) and offers business briefings and facilitation of all necessary meetings and contacts for U.S. companies interested in the Serbian market. 

• International consulting firms present in Belgrade such as Deloitte and Touché Tohmatsu International, PriceWaterhouseCoopers and KPMG can be helpful in establishing the bona fides of potential local partners.  The Embassy’s Commercial Section can provide International Company Profiles (ICPs) that encompass a thorough background check on potential clients and potential representatives (contact: boris.popovski@N0SPAM.mail.doc.gov or zorica.mihajlovic@N0SPAM.mail.doc.gov ).  Reports include up to date information on potential partners.  Local organizations may also be useful in verifying credibility of a potential local partner: Chamber of Commerce of Serbia: http://www.pks.co.yu/