OUTLOOK: 2022 Serbia

OUTLOOK: 2022 Serbia
By bne IntelliNews January 20, 2022


Extraordinary parliamentary and regular presidential and Belgrade elections will be held in April 2022. President Aleksandar Vucic and his Serbian Progressive Party (SNS), who have dominated the political scene for almost a decade now, are seeking — and are likely to secure — re-election. 

The latest poll from Factor Plus, for example, puts the SNS-led coalition on 57% of the vote and the United Opposition on just 12%. Vucic personally has huge support among the citizens of Serbia.

However, the mood of voters in Serbia is very volatile. For now, there is no leader who can defeat Vucic in the election, but the united opposition parties think that with the support of citizens they may yet be able to do so. That is why representatives of different parties are increasingly coming together for street protests throughout Serbia, and new political coalitions are being formed almost every day. The mass protests in December 2021 by Serbian citizens who opposed Rio Tinto’s plans to build a massive lithium mine in Loznica were backed by key opposition figures. 

As the elections approach, opposition parties will continue trying to use these and similar protests to achieve their political goals. It was a similar situation during the protests against a mooted second lockdown and curfew in Serbia in 2020, which met with strong resistance. The July 2020 protests may have started from anger among ordinary citizens at having their lives and livelihood disrupted, but they were swiftly coopted by far-right groups. 

With the upcoming elections in mind, Vucic and other government officials were quick to back away from Rio Tinto’s lithium project as the mood in the country turned against it. Other populist steps including a one-off €100 handout for young adults were also taken in recent weeks. 

In the longer-term, Serbia and its leadership are charting a precarious course between East and West. Vucic has set EU enlargement as a priority, while balancing relations with Russia, China, the EU and the US. The Russians, and more recently the Chinese do not view these ties with the West with great sympathy. 

Meanwhile, Russia continues to be Serbia’s strongest backer in the unresolved conflict with Kosovo. Serbia is under pressure to normalise its relations with Kosovo, which unilaterally declared independence in 2008, and finding a resolution to the conflict is the only way either state can progress towards EU accession. However, any Serbian politician to advocate for recognition of Kosovo would swiftly find themselves highly unpopular. 

Another potentially major problem for Serbia is the situation in Republika Srpska, the Bosnian Serb-majority entity in Bosnia & Herzegovina. Bosnian Serb leader Milorad Dodik wants to return authority from the state level to the entity level for the armed forces, judiciary and tax administration, but for others in Bosnia and the region this looks like a move towards secession. The US has openly emphasised that relations between Washington and Belgrade will depend on Serbia's relations with Bosnia.


GDP growth: The National Bank of Serbia (NBS) estimates that GDP will grow by 6.75% in 2021, and that in 2022 it will grow by 4.5%. In line with the economy’s performance in the first three quarters of the year, the projected GDP growth for 2021 has been revised upwards from 6.5% to a range of 6.5-7.0%. 

The Serbian economy is expected to grow 4.5% in 2022, the World Bank said in its Global Economic Prospects, a forecast that is 0.8% higher than its June 2021 estimate. The World Bank forecasts growth of the Serbian economy of 4.0% in 2023, which is slightly higher than the growth estimate of 3.9% in June.

The International Monetary Fund (IMF) expects growth of 4.5% this year. IMF officials noted in October that the economy was recovering well from the crisis caused by the coronavirus pandemic and that the economic results have been better than expected.

Due to the new investment cycle, GDP growth is expected in the range of 4-5% in the coming years, according to the NBS. These estimates are in line with the IMF’s projections. Risks from the international environment include the recovery of the eurozone, delays in production chains, energy crises and high commodity prices, and risks from the domestic environment to higher foreign direct investment (FDI) inflows and the growth rate of public investment, according to the NBS.

External environment: The NBS estimates that the current account deficit will range from 4% to 5% of GDP in the medium term.

A smaller decline in exports than imports, and lower primary deficit income in 2020 led to a lower current account deficit than anticipated, at 4.1% of GDP (€1.9bn), against a projection of 5%. In the first 10 months of 2021, a current account deficit of €1.6bn was recorded. The increased surplus in trade in services and surplus in secondary income contributed to the improvement of Serbia’s current account balance. 

This year the NBS expects a current deficit at the same level as last year, ie. at 4.1% of GDP. Since 2015, Serbia's current account deficit has been completely covered by net FDI inflows, which is expected in the coming years, when there is a projected net FDI inflow of about 5% of GDP. 

Inflation and monetary policy: In Serbia, inflation has been tightly controlled by the NBS for the past eight years, hovering at 2% a year. The absence of the expected higher inflation at the beginning of 2021 was the result of lower growth in food prices (primarily vegetables).

The increase in inflation from April 2021 in Serbia was driven by temporary factors — the increase in food prices and world oil prices, as well as the extremely low base from the same period in 2020. Some food prices were also pushed up by the drought in Serbia last summer. Rising prices have prompted the government to cap prices of some basic foodstuffs. 

Inflation was 7.5% in November 2021. About three quarters of year-on-year inflation was determined by factors that monetary policy cannot influence — food and energy prices. The NBS estimates that inflation will reach its peak in late 2021 and early 2022, and that from mid-2022 inflation will begin to calm down.

Industrial production: In the first nine months of 2021, the volume of industrial production grew by 7.3%, according to the Ministry of Finance.

Activation of new production capacities primarily as a result of FDI maintained activity in the processing industry despite the pandemic, which with a low base from the same period of 2020 led to an increase in production of 6.4% in the first nine months of 2021.

All three sectors of industry expanded, with two thirds of the contribution coming from the increase in manufacturing production of 6.4%, with growth in 17 of 24 segments in this sector. 

In addition, the growth in the volume of mining production of 21.9% is the result of strong growth in the exploitation of metal ores, while the volume of electricity production was 4.4% higher.


Real economy 

Retail: The service sector (including retail) that was most affected by the pandemic in 2020 is seen as the dominant driver of growth currently, the Ministry of Finance said in late 2021.

Preliminary data on retail trade in November 2021, the latest available, shows that turnover was up by 21.2% at current prices and by 10% at constant prices compared to the same month of 2020. In the first 11 months of 2021, retail trade turnover increased by 15.2% year on year at current prices, and by 10.1% at constant prices.

Major players in the grocery retail segment include Delhaize Serbia, Mercator-S and Lidl Srbija, the last of which has been expanding rapidly. There are also a number of local players, while Germany-based retail chain Mix Markt is opening new stores in Serbia and other Western Balkans countries. 

CEE BIG bought two shopping centres in Serbia – Kragujevac Plaza and Kruševac Shopping Park – from NEPI Rockcastle for €60.8mn in a deal announced in 2021. That leaves NEPI Rockcastle, which is focussing on core dominant properties and increasing its presence in countries with investment grade ratings, with just one shopping centre in Serbia, Promenada Novi Sad. In a separate deal, Athos Group bought Delta City, one of the most popular shopping centres in Belgrade, from Hyprop Investments Limited and Homestead Group in September.

A study by real estate company Cushman & Wakefield says that after a strong development cycle in the retail segment, development activity slowed down in 3Q21 when there were no new completions. This comes after around 275,000 sq m of modern retail space was delivered to the Belgrade retail market between 2017 and 2021. The extension of IKEA's Retail Park Ava is planned for 2022. 

Banks: According to the NBS, banks have significant capital reserves, which allows them to successfully deal with credit risk, even in the case of the presumed most pessimistic scenario, in stress tests.

The ratio of loans and deposits of clients, which amounted to 85.4% at the end of October 2021, speaks of a stable structure of financing and liquidity of the banking sector in general, the central bank said. 

At the end of October 2021, the share of non-performing loans (NPLs) in total loans was 3.5%.

At the end of October 2021, there were 24 commercial banks operating in Serbia. Net assets of the banking sector amounted to €42,054mn and capital to €6,151mn. Gross bank loans amounted to €25,367mn, of which gross NPLs were €883mn. 

According to the NBS, deposits amounted to €31,055mn, and profit before tax €406.2mn. The return on assets (ROA) of the banking sector is 1.2%, the return on equity (ROE) 8.0% and the net interest margin 2.7%.

Industry: The main ongoing story in Serbia’s industrial sector is the Jadar lithium mine project pursued by international mining company Rio Tinto. The project is intended to meet growing international demand for lithium, an important input for batteries for electric vehicles (EVs), as well as smartphones and other electronic products. However, following a series of mass protests and road blockades in autumn 2021 that have continued into January 2022, the government appears to have backed away from the project, at least for now. 

Rio Tinto said in January it is pushing back the expected date of the first saleable production. “At the Jadar lithium-borate project in Serbia, as a result of delays in the approval of the Exploitation Field Licence (EFL), which is a prerequisite to publish the Environmental Impact Assessment (EIA) and commence the consultation process, we are revising development timelines. Based on current estimates and subject to receiving all relevant approvals, permits and licences, first saleable production is expected to be no earlier than 2027 (previously 2026),” said the statement published on Rio Tinto’s website.  

Given this is a highly political sensitive topic, more clarity is expected on the Serbian government’s position after the general and presidential elections in April. 

Among the major industrial companies in Serbia, Chinese companies Zijin Copper and HBIS were the largest exporters from the Western Balkan country in the first eight months of 2021, according to Ministry of Finance data. As the international economy recovered, HBIS Group Serbia Iron & Steel restarted one of its two blast furnaces in August 2021, after shutting them down a year earlier amid a slump in demand caused by the pandemic. 

Zijin Bor Copper has outlined plans to invest $1.9bn over the next six years, as announced by the Serbian government. China's Zijin Mining Group previously injected $350mn in the capital of RTB Bor when it bought the Serbian copper mining and smelting company in December 2018. 

Energy & power: Like other countries in Central and Southeast Europe, Serbia is embarking on its green transition but will not easily give up traditional energy sources such as coal, as communities depend on these industries for their livelihoods. 

Serbia has pledged to reduce its carbon emission levels to meet EU standards, which includes eventually reducing or abandoning coal as fuel to produce power and heat, and replacing it with renewable capacity. Serbia says it is targeting 40% renewables in its energy mix, but for the moment it remains heavily dependent on coal and it has been building new coal capacity. 

According to President Aleksandar Vucic, Serbia is not considering shutting down thermal power plants for now, despite an agreement with the Energy Community. Vucic says Serbia needs a secure source of electricity in the current turbulent times.

Meanwhile, the share of renewable energy generation is growing, and the energy and mining ministry estimates that the share of renewable energy sources in electricity consumption will come in at around 25% for 2020. 

Serbia imports around 85% of the natural gas it uses from Russia. As the expiry of its long-term contract approached, Vucic agreed with Russian President Vladimir Putin that the gas price would be kept at $270 per 1,000 cubic metres for six months. Putin also promised "exceptional" terms after that period — which takes Serbia past the April 2022 elections — comes to an end.

To boost energy security Serbia is considering buying a stake in a nuclear power plant in the region (most likely Bulgaria or Hungary) or even building its own small modular nuclear power plant. Serbia has agreed on cooperation with the Russian Institute for Nuclear Energy. 

Construction: According to the Ministry of Finance of Serbia, favourable trends in the construction sector continued in 2021, with a real growth in the value of construction work performed by 16.5% and the number of issued building permits up 32.9% in the first nine months of the year. At the same time, the production of cement and construction materials increased by 13.9% and 12.6% year on year, respectively.

Major sectors: The largest sector of the Serbian economy is the services sector, which accounts for a total of 67.9% of GDP. It is followed by the industrial sector (26.1% of GDP) and the agricultural sector (6.0% of GDP).

According to the Ministry of Finance, the service sector is characterised by positive trends. Retail trade continued to record real growth, standing at 4.3% in September. At the same time, the tourist activity measured by the number of tourist arrivals and overnight stays increased by 31.8% and 20.4% year on year, respectively. In the first eight months of 2021, tourism and ICT services with an increase in exports of 50.4% and 25.5%, respectively, determined slightly more than half of the total growth of exports of service activities of 26.0%.

The Serbian government has been keen to attract export-oriented foreign direct investment (FDI). Major companies include automaker Fiat Chrysler Automobiles (FCA), whose production has been affected by shortages of semiconductors and other inputs since the start of the pandemic. Serbia is also home to automotive suppliers such as cable and harnessing manufacturing company Yura Corporation and Leoni, which is set to become the largest private industrial employer in Serbia in 2023, when a new plant in Kraljevo will create up to 5,000 jobs.


Budget and debt

At the end of November 2021, members of the Serbian parliament adopted the Law on Budget for 2022, which envisages revenues of RSD1,516.8bn and expenditures of RSD1,717bn, so that the budget deficit will amount to RSD200.2bn, or 3% of GDP. 

As of the end of the second quarter of 2021, the total external debt amounted to 65.8% of GDP. Companies' indebtedness increased by €507.0mn, and the banking sector decreased its indebtedness by €260.3mn compared to the end of the previous year. At the same time, public sector indebtedness increased by €1.3bn. Compared to the end of 2020, the ratio of external debt to exports was reduced, while the ratio of external debt to GDP remained unchanged, according to the Ministry of Finance.



The market capitalisation of the Belgrade Stock Exchange (Belex) in mid-December 2021 was €4.6bn. Total turnover on the BELEX during 2021 amounted to €350.6mn, down by 15.6% compared to the previous year. 

The stock exchange index Belex15 increased during 2021 by 9.64%, and the index BELEXline by 9.29%, according to figures published on the website of the Belgrade Stock Exchange.

In November 2021, an agreement on the migration of the Belgrade Stock Exchange to the trading platform of the Athens Stock Exchange was signed in Athens.