Serbia in 2018: the challenges ahead

   In a country that flaunts its European direction and,  at the same time, its attraction to Russia, between a center of Belgrade lit up for months and other towns where a rusty time stands still, between alarms and reassurances coming from opposing politicians, between unsatisfied entrepreneurs and others who enthusiastically choose Serbia, between the websites that exalt the country as a figurative Eldorado where everything is possible and others that tell about corruption and poverty, for those who already do business in Serbia or intend to it is really difficult to predict what will happen in 2018. If the economic growth really reaches 3%, if inflation and exchange rate remain stable, if the government is not overwhelmed by conflicts between cabinet members or as a result of external pressures, if an agreement will be reached on Kosovo, if Serbia, in short, can still be considered a bet worth going for or it will remain an eternal candidate for an economic and geopolitical recovery that has been delayed for too long.

Economic scenario

Also this year’s effective growth of the Serbian gross domestic product will not match the forecasts.  By admission of the same Prime Minister, it will be under 3%, although the International Monetary Fund confirm its figures still now. Mark Twain said that “most people  (and especially politicians, we add) use statistics like a drunk man uses a lamppost; more for support than illumination” is true, we should ask ourselves why is it always that, in Serbia, final statistics are always worse than forecasts. When international institutions are constantly wrong, this cannot be attributed to government propaganda. There were certainly detrimental factors that had been curbing the country’s potential for decades. Investors must take this into account, and focus on Serbia as a country of opportunities, rather than limitations.

In the absence of definitive analytical data, we can assume that the deviation is due to the process of polarization of economic activities between the capital city and the rest of the country. Capital is growing well above the national average, under the influence of the service and construction sector (although the speed of the issuance of electronic building permits is slower than many cities and towns), while entire areas in the country are in a continuous recession, or rely solely on foreign direct investments, which are often focused on labour-intensive operations that pay minimum wage, or a wage slightly higher than the national minimum of 230 EUR a month net, which buffers unemployment, but does not promote local economic development.

Labour-intensive investments are not the only way to develop the undeveloped areas of the country.

The country suffers the fact that, for years, it has been proposed to investors only because of the low labour costs, and that many investors have left, or underestimated other country’s benefits, such as low energy costs, good logistics position, young people who speak several languages with excellent IT and relational skills. For Italian investors, Serbia has less rigid bureaucracy and lower taxation than their home country.

Resistance is growing to such low wages, and even in the poorest areas of the country, they prefer cultivating a piece of land over working in a factory, while the high turnover, in the end, creates difficulties for many companies in finding a constant supply of workforce. Sooner or later, this phenomenon will force many companies to pay their workers more, which, in turn, will augment labour costs.

In a way, Serbia has already started to contemplating about new incentive models. Serbian Development Agency (RAS) now applies more stringent criteria in rewarding incentives, mainly taking into consideration what impact are investors going to have on the territory they are investing in, and what are the real salary costs.

Gone are the days when Serbia was giving 10,000 EUR per each new (promised) job, but there are still websites that are disseminating this wrong information whether by accident, or on purpose. In the coming years, investment subsidies will be increasingly aimed at rewarding wage dynamics and development of the poor areas in the country. Even today, if a company has declared bankruptcy, or is controlled by creditors, or is managed by company administrators in its country of origin, it is not eligible for Serbian state subsidies.

So, a country with no more elements of interest? None, at all. If anything, there will be fewer superficial assumptions regarding investments focused only on short-term savings on labour costs. More realistic business plans will have to be developed, capable of intercepting the positive factors that Serbia can offer.

Inflation trends in Serbia in the last 10 years (source: Trading Economics)

Moreover, the country should maintain the recently attained macroeconomic stability, more so than of four years ago, when the exchange rate fluctuated too much, when the interest rates on bank deposits in dinars were at 16% but inflation at 15%, and the public deficit always edging on bankruptcy. The country is pursuing stability in all areas – inflation should be around 3%, bank rates close to 2% for best clients, the dinar / euro exchange rate should improve, while the legislative and bureaucratic framework should resort less to constant legislative changes and additional interpretations.

Politics

Aleksandar Vucic’s position is not as strong as people perceive to be. If we had a complete knowledge of the facts, more than half of the government ministers are considered as somehow untrustworthy by Vucic who has probably reached the maximum of his centripetal capacity, with no other subjects that could be incorporated into his political project.

The composition of the current government “is not painted in Vucic’s mono-colours”.

The inevitable alliance with the Socialists, who have always had a close relationship with Moscow, must be balanced with a more pro-Western government component, recruited both inside and outside the Serbian Progressive Party. The “Cencelli handbook” (the method to determine the political pound of each partner in the distribution of power)  of Serbian politics applies not only from Vucic’s desk, but it also goes through the chancelleries of the United States, Russia, Germany, Turkey and Scandinavian countries. Those who are amazed by Vucic’s recurring attempts to convene early elections in the absence of a consistent opposition do not grasp that the election results and the popularity of the state president are meant to send a message more to foreign partners than the Serbian population.

The opposition is weak and fragmented by rancor and jealousy, while those who want to emerge as leaders immediately become the fodder for the pro-government tabloids. The former Belgrade mayor, Dragan Djilas, who retired after leading the Democratic Party to the minimum electoral flop in 2014, again running for the same office as Mayor of Belgrade is not a sign of the opposition’s health. If anything, he is the only candidate that can enjoy a certain level of media neutrality thanks to his media center that distributes advertising to almost every media of the country.

Prime Minister Brnabic is carving out her political space through reforming the public sector.

The first minister Ana Brnabic will aim to conquer more and more political space, showing that she is not, as many believe, a Vucic marionette, but a political subject capable of evolving through the consensus in the polls and providing reassurance to the international circles that support her. The longevity of Brnabic’s government, and her personal success in politics, in a country where religion is still adding fuel to the fire of homophobia, will depend on the success of the government’s reforms which the international institutions and certain countries, like the US and the EU, have been asking for years.

The main unresolved issue to be tackled is the public sector and state enterprises, which are today a mastodon comprising of more than 700,000 people in a country that has only 2.9 million workers, including those that work unregistered or just one hour a week. The latest data suggests that the public sector, where many civil servants receiving a salary of just over 300 EUR a month, remains a safe haven for hundreds of thousands of Serbs, where, unlike in many private companies, the salary is always on time.

Ban on employment of more civil servants (to be interpreted loosely) will not be enough to curb the sector’s spending, and the government will have to decide whether to proceed with horizontal cuts, reducing the quality of public health and education, or undermining many politically-appointed job positions in ministries and central administration. In any case, to think that the redundant civil servants might start their own business and go to work in the private sector is naive or a mere propaganda: they will only enlarge the so-called “informal” sector, perhaps proposing themselves as “facilitators” towards their former colleagues. If it really does come to significant cuts, protests and strikes in the public sector seem inevitable.

Every project relating to the public sector digitalization inevitably involves a reduction in the personnel required for the various procedures, as well as a growth in the number of people who are able to supervise the digitalized processes. It is still not clear how the state can appeal to highly qualified Serbian university graduates to come and work in the public sector, if it does not enact laws that would increase the salaries for high-qualified personnel and to facilitate the return of the intellectual diaspora.

On the labour front, the expected increase in the untaxed part of personal income will bring a few euros more to workers but no benefits to employers. The state budget, especially the pension fund, is not able to support a reduction in taxes and contributions which will remain at 70% of the net salary. If the informal solution for so many employers is to pay only the minimum salary, while the rest of it is paid cash-in-hand, that will certainly result in tougher inspection, more regularity checks, more incentives to emerge from grey economy or to increase the amount regular paychecks.

The great challenge in the internal economic policy will be to start local economic development in an endogenous way, by promoting new businesses or re-launching others that possess skills and traditions that can compete in the international market. There are excellent instruments supported by international credit institutions such as the EBRD or the European Investment Fund, but often there isn’t enough competence to access these funds.

All governments so far have declared their commitment to developing the country’s agriculture, but so far, the country does not seem to have a clear strategy for this segment. On one hand, the Vojvodina plain has a natural potential which is among the best in Europe, but with extremely low yields due to the scarce investments in irrigation and agricultural machinery, with the production that is still too focused on cereal grains, sugar beet and sunflower that does not generate big margins. The shift from growing cereal crops to fruit farming appears to be slow, also as a result of the scarce financial resources of individual farmers. The hilly and mountainous Central Serbia needs a development strategy of high value-added products with a strong emphasis on quality and recognizability in foreign markets, with the first tentative steps being made in this direction.

The call for submission of applications for IPARD funds for financing of agricultural machinery was launched a few days ago and it represents only a modest example of the European funds that will be available once the Agency for the payment of European funds for agriculture and rural development opens. Serbia has to learn how to use these funds, or otherwise it will repeat Croatia’s experience which failed to use almost 90% of the available funds. This will depend heavily on the Government, the Ministry of Agriculture, and their will to engage qualified and competent personnel in this segment.

After the state concluding long-term land purchase agreements with the companies from the United Arab Emirates or funded by China, many foreigners were led to believe that it was easy to find available arable land in Serbia. Swayed by the ever growing land prices, which doubled in the last five years in the best parts in Srem County, for instance, quite a few foreigners were convinced that good deals could be made here. However, the recent legislation stipulates extremely rigid conditions regarding land purchase by foreign natural persons, which, in any case, cannot exceed 2 hectares. The legislation stipulating foreign companies purchasing or controlling the use of land remains ambiguous.

International scenario

The appointment of Brian Hoyt Lee’s as the American ambassador to Macedonia in late November sent  a strong signal to the whole area. It is unrealistic to think that the diplomat, who only two months ago told the Serbian political leadership in no uncertain terms to stop “sitting on two chairs” and to definitely choose whether they want to be of pro-European and Atlantic orientation, will simply follow and support the regime change that made Zaev the prime minister of Macedonia. He is more likely going to operate as a US proconsul in the Balkan area by, first and foremost, putting pressure on Aleksandar Vucic in regard to his relations with Russia, which were re-consolidated during Vucic’s recent trip to Moscow.

After the long meeting with Putin in Moscow (two and a half hours), Vucic reiterated that Russia was “one of our strategic partners in all areas”.

Russia, which proposed to Serbia to become a part of the Turkish Stream gas pipeline, continues with its geopolitical influence through energy not only to condition the Balkan region but entire Europe, in coordination, in this case, with Erdogan. It is easy to hypothesize an increase in regional tension as one of the biggest subjects of Serbia’s diplomatic relations. Serbia’s multilateralism, pragmatically ready to collaborate with countries with radically different geopolitical goals, will increasingly prompt certain countries to demand the evidence of loyalty.

For the USA, the inevitable direction is to insist on Serbia recognizing Kosovo, becoming a NATO member, and in the last place, the country’s accession to the EU. Russia will not stop trying to obtain a diplomatic status for Nis’s “humanitarian aid center”, which actually monitors the Camp Bondsteel’s activities in Kosovo. It will also continue boosting the military cooperation with Serbia through generous weapons supplies while complicating the issue of Serbia’s possible accession to NATO. The almost enthusiastic reception that Recep Tayyip Erdogan got during his official visit to Serbia in October will surely affect not only the investments but also the negotiations on Kosovo (where Russia was invited to act as a mediator). It will be necessary to discern whether Erdogan’s equidistance will be repaid through a crackdown on the Turks close to Fetullah Gulen who are managing a school in Belgrade as well as the secular Turks who recently have decided to settle in the Serbian capital, as the Turkish ambassador has been calling for.

The privatization of the agro-industrial conglomerate PKB, with its 26,000 hectares of land, will surely be down to a political choice, given that the main two companies have remained in the competition – one from the UAE and the one from the People’s Republic of China. Should the government favour the prodigal Emir Muhammed bin Zayed of Abu Dhabi (traditionally close to the American Republicans), who already manages no less than 40,000 hectares of land, or Xi Jinping, who intends to bring many Chinese companies to Serbia under the framework of the One Belt, One Road vision, as China stands as an alternative global power to the US and Trump’s style. This will be a political rather than an economic choice, which will show how the country’s leadership intends to stand up in certain global relations.

Comparison between investments from the EU and Russia (source: Radio Free Europe / Radio Liberty)

Today, the risks of instability in the country are derived less from the public budget and internal political tensions than from the relations between many countries which Serbia claims to be a sincere friend with. As in any situation in life, we must choose who is a bigger friend. The European Union, that accounts for 70% of the Serbian external trade, now seems unable to offer a convincing vision of the future for the Serbs. The same multi-polarity pursued by the Serbian foreign policy seems a way to avoid choices and devise a plan B in regard to the EU integration which Brussels itself no longer seems interested in as before, and definitely not interested in expediting it.

What should be done?

For those who have been told about Serbia with a slapdash attitude, the challenges facing the future of Serbia can elicit concerns and push aside certain too optimistic ideas. But understanding the complexity of a country is the first step towards operating in it. The time has made for Serbia to make a quantum leap, and the same can be said for anyone implementing investment projects in the country.

This post is also available in: Italiano

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