Market Overview                                                                               

• Several important events have strongly impacted the business environment in Serbia in 2008. 

• First, the significant political developments over the last year given their influence on the business environment.  For much of 2007and the first third of 2008 Serbia endured consecutive election cycles resulting in an overall slowdown of reforms and creating a perception of political instability, which affected new investor interest in Serbia.  It also reduced the government’s ability to make reforms.  Frequent elections diminish predictability and minimize the ability of the private sector to develop business strategies and establish plans of future operations.  However, Following the proclamation of Kosovo’s independence on February 17, 2008 and the internationally broadcast riots in Belgrade on February 21,  the then-governing coalition dissolved the government and called for new elections.  The ensuing presidential, parliamentary, and municipal election results overwhelming favored the coalition supporting Euro-Atlantic integration.  In this remarkable turn of events, Serbia was able to alleviate investor fears, at least in terms of political stability and predictability.  For the first time in a number of years, attention turned away from Kosovo towards the economy.  The world economic crisis, while not yet affecting Serbia’s financial institutions and employment the way it has in the United States and Western Europe, has created a void of available capital, which has hampered inflows of FDI, which in turn has exacerbated budget shortfalls for the government.  Serbia has officially entered a recession (two consecutive quarters of declining economic growth) and lack of capital and budget shortfalls could very well mean the loss of jobs in Serbia.

• Second, significant developments have taken place affecting the overall business climate in Serbia in the past year.  Serbia has been a signatory to the Central Europe Free Trade Agreement (CEFTA) for several years, but many of the provisions in CEFTA came into force in 2008, which opened a much wider market in the Balkans and provided better regional opportunities for growth.  In 2008, Serbia enjoyed a trade surplus of $1.82 billion with CEFTA countries, which resulted primarily from the export of agricultural products such as grain-related products as well as different beverages and steel.  Exports from Serbia to CEFTA countries totaled $3.64 billion in the period from January to December 2008 while imports amounted to $1.8 billion.

• Serbia’s new government in Serbia also has taken steps to further improve the business environment in Serbia through legislative changes.  After a lengthy period of negotiations, Serbia signed the Stabilization and Association Agreement (SAA) with the European Union (although implementation is contingent of Serbia’s full cooperation with the Hague War Crimes Tribunal).  The signing of the SAA and its subsequent Trade Agreement with the European Union in April 2008 opened the door for Serbia to start systemic reforms and harmonize its legislation and subsequent implementation with EU standards.  This agreement paves the way for further introduction of international standards to the domestic market, which will further contribute to the predictability of the business climate.  In January 2009, the Serbian Parliament adopted a set of budget laws which included higher duties on some products and an amendment to the law on customs duties which will allow the unilateral implementation of the Interim Trade Agreement with the European Union.  Under this agreement, Serbia will phase out and eventually abolish tariffs on most goods imported from the EU bloc’s 27 members.  Import duties on all industrial products will be fully scrapped by the end of a 6-year transitional period, while duties on some agriculture products will remain at between 20% and 80% of their 2008 levels even after 6 years.

• Another positive initiative was the announcement of the project called the “regulatory guillotine,” which attracted the attention of the business community and foreign investors.  The guillotine’s aim is to identify and eliminate obsolete regulations, streamline complicated procedures and repeal redundant legislation.    This process will take time and first results may be expected not before 2010.

• Serbian authorities launched a controversial energy project with the Russian Federation in an attempt to provide a long-term solution to the energy dependency Serbia suffers.  Early in 2008, an energy agreement with Russia including the sale of the greater part of NIS’s shares, and promises to build a  gas pipeline throughout Serbia was signed.  The energy arrangement with Russian Federation envisages the gas pipeline and completion of  a gas storage facilities as a basis for distribution network development.  Russia’s subsequent cut off of gas to Europe in early January 2009, has increased domestic criticism of this agreement.

• On the macroeconomic side, 2008 was quite diversified.  The greatest success of the previous year was the solid gross national product (GNP) growth rate of more than 6%.  The growth was attributed primarily to an increase in productivity,  The rapid expansion in recent years of domestic credit, particularly to households, has fuelled a consumer boom that is reflected in a high demand for imports and an associated large current account deficit of around 17% of GDP (as of mid-2008).  Exports have grown strongly at more than 24% (in dollar terms), and they do not appear to be adversely affected by the significant real appreciation of the currency over the past 12 months.  Serbia’s trade deficit in 2008 reached $12 billion, an increase of 23.6% compared to the previous year.  While services continue to be the main driving force, a recovery in agricultural output (after last year’s drought) has boosted the economy this year.  Growth in the sector exceeded 10% in 2008.

• Monetary and fiscal policies have increasingly diverged over the past year.  The National Bank of Serbia (NBS) has operated a tight monetary policy, implementing a series of increases in the key policy rate in 2008, raising it to 15.75% at the end of December 2008.  Nevertheless, inflationary pressures, both domestic and global, have kept the inflation rate in double digits (as of mid-2008) and, although it returned to single-digit levels by December- reaching annual level of 8.6%.  The problem lies primarily in the high level of government spending, which was influenced by both the presidential and parliamentary elections held earlier in 2008.  This led to a general budget deficit in 2008 of 2.5% of GDP.  Consequently, a budget rebalance for 2008 was carried out in the last quarter of 2008.  The NBS will switch from targeting core inflation to targeting CPI inflation in 2009.

• Serbia’s unemployment rate has decreased from 21.6% in 2006 to 13.5% in 2008.  The jobless rate in 2009 is expected to remain unchanged or increase “slightly” due to the global economic crisis.

• Serbia has generated substantial income from the sale of state-owned companies.  According to the data of the Privatization Agency, as of November 2008, 1,763 companies were sold in 2008 for EUR 2.3 billion.  This sum does not include the incomes realized from the sale on the bankruptcy capital market.  Another 800 companies are awaiting privatization, but it is difficult to estimate how much can be made from their sale.  Since the year 2000 to the end of 2008, some EUR 20.98 billion has been withdrawn on the basis of long-term foreign debts in NBS.  Direct investments in this period are $15.3 billion, while donations, both monetary and in-kind from both foreign governments and non-government organizations were $3.38 billion.

• In late January 2009, the Board of Directors of the International Monetary Fund (IMF) approved a precautionary stand-by arrangement for Serbia amounting to $516 million.  The arrangement will last for 15 months and envisages that Serbia should withdraw as much of the money as needed for the strengthening of the foreign reserves.  The IMF program envisages restrictive fiscal policy as a precondition of accessing the funds such as a reduction of the budget deficit in 2009 by 1.75% of GDP, inflation control, and continuation of the structural reforms so as to strengthen the economic growth and export.  The program also includes limits to the rise of pensions and salaries in the public sector as well as rationalization of consumption, which, the IMF theorizes will free up existing government budgeted funds for  increasing the infrastructure investments.  Under an agreement between the government and NBS, regulated prices should not grow more than a cumulative 13% in 2009, when the central bank targets the CPI at between 6% and 10%.

• Serbia expects to complete negotiations with the European Commission in March 2009 to obtain at least EUR 400 million in financial assistance from the EU.  EU assistance would help Serbia with its budget if the 2009 revenues miss their tar

Market Challenges     

• Adequate financial resources for Serbian consumers/importers still remain a problem.  Foreign banks operating in Serbia have cushioned that problem during the previous years but due to the global financial crisis, lack of financial resources in 2009 could seriously impact further development, both on the side of production and consumption.
• The main macro-economic risk that the Serbian economy will face in the upcoming years will be the abrupt and significant decrease in foreign capital inflow and balance of payment issues.  For several years now, the Serbian economy has recorded a high and ever growing deficit in the current payment balance that has been covered by foreign investments and loans. An abrupt and significant decrease of foreign capital inflow would launch a payment balance crisis (decrease of foreign currency exchange reserves, depreciation of national currency, difficulties in maintaining foreign liquidity) resulting in disturbances in macro-economic stability (inflation, etc) and probably in a decreased economic activity as well.
• In order to attract foreign investment the government should formulate a clear economic policy which would provide a basis for an economic outlook for  the future. 
• Introducing prudent public spending, amending the fiscal policy, reshaping the anti-monopoly and public procurement legislation, and adapting advanced securities market regulation would all help maintain macro-economic stability in Serbia.
• Legislative activity in Serbia has significantly slowed during the last year.  Few laws, apart from those regulating the election of the new Government, have been adopted by the Parliament during the period of almost nine months.  More effort needs to be invested in restructuring legislative implementation mechanisms.  Even though innovative and contemporary legislation are being enacted, their impact is limited by the jungle of formalities, hidden in the by-laws.  This issue also relates to enhancing the administrative capacity and quality of public service.  Foreign businesses put special emphasis on this subject as its resolution carries multiple positive effects – more predictability, more efficient administration, and of course, less potential for corruption.

 

A large and strong private sector, supported by an efficient financial sector, is crucial for growth in Serbia. 

According to the World Bank’s Doing Business 2008 Report, Serbia’s overall world rank is 86.  According to the index, Serbia ranked at 90 for “Starting a business”, 110 for “Employing workers,” 121 for “Paying taxes,” and 149 for “Dealing with licenses.”

  

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 2009, $840 million of which was invested in 2008.  NIP will rely on privatization revenues, budget surplus (which will be nil in 2009), 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.  The overall goal of the plan is to increase foreign investment, employment, maintain Serbia’s annual economic growth rate, and achieve equal development of all regions. 

  The following describes market opportunities, both immediate and in the medium to long term:

  Agro-Business –Serbia’s agricultural sector contributed around 11.3% to total GDP in 2008.  Including  the processed food industry this contribution rises to 22%.  For a more detailed description of this sector and the opportunities it presents, please see the ‘Agriculture Sector’ section of Chapter 4: Leading Sectors for U.S. Export and Investments.

  Construction – Even amidst the current economic crisis, there are opportunities in this sector due to loans and grants from the IMF, World Bank, EBRD, and the EU, which are financing reconstruction projects.  Prior to the economic crisis, cities like Belgrade, Novi Sad, and Kragujevac were experiencing increases in commercial construction projects.  While some of these projects may be put on hold, they are bound to pick up as credit becomes more readily available.   It is time to look at this market segment as it is due to boom.   

  Transportation – Serbia occupies major road, rail air and river routes that link South-Central Europe and the Middle East with Western Europe.  The Serbian government has adopted an action plan that envisages investments of EUR 702 million in the Corridor 10 highway and railroad construction during 2009, with around EUR 470 million earmarked for highways and the rest to go towards railways.  According to government officials, the European Investment Bank (EIB) will lend Serbia EUR 540 million for Corridor 10 projects, the World Bank EUR 400 million, and the EBRD EUR 150 million.  Greece will grant EUR 100 million under its Hellenic plan for the economic reconstruction of the Balkans, and Serbia plans to secure another EUR 395 million in additional financing.

  The Serbian government is also prioritizing expansion of regional highway routes to improve regional transportation links, such as Vojvodina’s initiative to build a highway between Novi Sad and the Romanian border, another bridge on the Danube River, and a tunnel on Mt. Fruska Gora.

  The completion of Belgrade’s future railway terminal, Prokop, is the key project for the state railway company.  The government has decided to set aside approximately EUR 30 million from the 2009 budget to continue construction on this project, while the Belgrade Land Development Public Agency will secure a further EUR 25 million in 2009 to build roads linking the terminal with the surrounding transportation network.  Reconstruction of railway capacities attracted the attention of international financial institutions, which have issued preliminary approvals for EUR 342 million in lending for railway reconstruction and $80 million for rolling stock procurement.

  Telecommunications – Serbia needs further infrastructure development despite $1.8 billion already invested in this sector over the past seven years.  Telekom Srbija, a state-owned company, is the dominant telecom company in Serbia.  The most current statistics (mid 2008) show Telekom Serbia with 2,850,000 fixed line subscribers.  During the last five years, mobile telephone services have developed rapidly in Serbia with an average annual increase in mobile subscribers of 30%.  At the end of 2008, the total number of mobile telephone subscribers exceeded 8.5 million.  Serbia’s mobile penetration is estimated at 115%.  Telenor, Mobile Telephony of Serbia (MTS), Mobilkom Austria, and the mobile phone arm of state telecom provider Telekom Srbija share the mobile market in Serbia.  They compete in the introduction of new technology and new high-profit value added services.  Significant opportunities in this sector will be influenced by privatization of the telecom sector and the need to modernize existing, and in some areas obsolete, equipment.  Telekom Srbija and Telenor have introduced third-generation (3G) mobile services for commercial use.  For a more detailed description of this sector and the opportunities it presents, please see the ‘Telecommunications Equipment and Services’ section of Chapter 4: Leading Sectors for U.S. Export and Investments.

  Medical- Medical instruments and electronic equipment for medical use have strong market potential in the market.  With on-going reform of the health sector and $350 million in earmarks from the National investment Plan, Serbia’s need for medical equipment and technology will continue to grow.

  IT- Prior to the economic crises, computer hardware was forecast as a major growth market in Serbia.  However, with decreasing budgets for such items within the government, expectations for substantial growth in this sector may be pushed back to 2010.  Nevertheless, the government and many private domestic companies have plans to introduce computer technology in their operations. It’s only a matter of time until significant funds will be invested in equipment by such firms.  Likewise, the software industry will experience similar growth for the same reasons as described above.

  Energy- About 70% of Serbia’s electricity is generated by thermo-electric power plants which burn domestic soft coal.  Limited funds for regular maintenance and replacement of parts of the plants over recent years have resulted in a power production and delivery system in serious need of rehabilitation.  Plans to privatize the power generating systems in Serbia aim to boost the efficiency of production, the level of environmental protection, and bring additional capital necessary for maintaining the system.  Existing electrical plants are based on U.S. technology from the 1950s.  Projects for long-distance heating systems in big towns throughout Serbia could be attractive for U.S. companies.  In addition, there exists the potential for collaboration on renewable forms of energy.

  Industrialization- Average capacity utilization in factories in Serbia is just over 50%.  Even in enterprises where continued production is economically viable, equipment is in need of repair or modernization.  All industrial equipment can be imported at the same or slightly higher customs rates than new equipment.  Serbia mines copper, lead, and other non-ferrous metals for export.  Additional capital investment is required to make production more efficient.  In order to support development of this sector, the Serbian government announced a plan for the revitalization of the copper mine Bor, which is located in Eastern Serbia, in 2009

  Privatization of public enterprises began about seven years ago.  The number of the remaining public enterprises in Serbia will be privatized in the near term, but 2009 may see little activity due to the overall lack of capital in the world market.  Top targets include Telekom Serbia, Belgrade Airport Nikola Tesla, and the pharmaceutical joint-stock company Galenika.  Such privatizations could potentially lead to increased need for U.S. equipment and services for the new owners.  Serbia does allow for a joint venture model, the so called “flexible model”, that has been announced for the privatization of Serbia’s only auto manufacturer, Zastava, which was bought by Fiat (this deal alone could hasten a boom in the auto parts industry in Serbia).  This model means privatization through strategic partnership and aims to provide new investments, modernization, employment growth, and export.

  According to the World Bank’s Doing Business 2008 Report, Serbia’s overall rank is 86 in the world.  Serbia recorded a significant improvement in the field of “Getting credit” (ranking 13 in the world), and also a good position in the category of “Trading across borders” (58th place). 

Market Entry Strategy                                                                    

The Law on Trade, which regulates the activities of wholesalers and retailers, should ensure that any firm may operate in foreign and domestic trade in Serbia.  However, the government has not yet completed all the requisite institutional reform   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 country.  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.  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.N0SPAM.mail.doc.gov or zorica.mihajlovic@N0SPAM.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.rs