HYPO BANK: Exit from recession and slow growth of Serbian economy

Serbia`s economy came out of the recession in mid-2015 and now registers growth very slowly. Production, exports and the construction industry are recovering, while inflation is kept on a very low level. These are the most important conclusion that Marko Danon, a financial analyst at Hypo Alpe Adria Bank, listed for the September issue of Economic Digest - Finance and Market Trends Guide.

Credits for exiting the recession go primarily to the growth of demand for domestic goods in line with gradual recovery of the eurozone as well as to the growth of investments. On the other hand, demand by households and the state stil has an adverse effect on business activities, which is in accordance with tough fiscal consolidation measures, Danon points out. Global deceleration of the eurozone caused by the Greek debt crisis and a drop in the value of indices on Chinese stock markets, will be felt in Serbia as well.

Following the 1% growth in the second quarter, the third quarter was marked by drought in our country which will lead to a decline in agricultural production. Considering that this could weaken domestic net exports, a relatively modest growth of GDP of about 0.5-1% could be expected this year.

In line with somewhat bigger external demand, the current account deficit of the balance of payments was reduced by about 30% y-o-y in the first half of the year, while FX reserves grew approximately EUR 80 million. Deficit reached as low as EUR 0.7 billion, that is, nearly 4.5% of the gross domestic product.

This external balancing kept Dinar stable most of the year. However, given that Serbia's current account deficit is still among the largest in eastern and central Europe, it is possible to expect Dinar to depreciate nominally.

Inflation is at a record low in the past few years, which also causes interest rates to go down. The report says that the influence of drought on food prices will be one of the crucial inflationary pressures in the following period. It won't be possible to return annual inflation within the target range of 4 +/- 1.5% before early 2016.

In order to encourage business activities, NBS alleviated the restrictiveness of monetary policy in the conditions of low inflation and stable national currency. Since March, the reference rate has dropps a total of three percent, reaching five percent after the September session of the NBS Executive Board.

In the first seven months of this year, consolidated budget deficit dropped 65% from the same period last year, to RSD 39 billion or nearly 2% of GDP. This is primarily a result of 5.4% growth of revenue y-o-y and 2.4% decrease in expenditures, all in line with the reduction of public sector pensions and wages and somewhat lower rate of implementation of public investments.

If the state keeps borrowing money to reduce deficit, public debt will most likely continue to grow from current 75% of GDP towards the level of about 76-77%, it is concluded in Hypo Alpe Adria Bank's Finance and Market Trends Guide.

Addiko bank ad Beograd

Narodna banka Srbije Beograd

Hypo Alpe Adria Bank

Economic Digest Finance and Market Trends Guide

inflation

export

Marko Danon

fiscal consolidation

NBS

reference rate