Serbia – stable growth is impossible without domestic investments

Serbia lacks investment from domestic businesses, and fixed assets are insufficient to provide stable, long-term growth. Growth in gross fixed capital formation in the H1’19 was 8.2 per cent, which was the main demand factor in stimulating the growth of GDP.

Investments in fixed assets still have insufficient share of GDP – less than 20 per cent, which is significantly less than is necessary for a long-term, stable growth. The second problem for sustaining economic growth is that foreign direct investment (FDI) in the H1’19 amounted to EUR1.93bn, or more than half of total gross fixed capital formation.

All countries with rapid economic growth had a higher share of domestic investment in GDP than Serbia has. Serbian macroeconomists agree that the country should have at least a 25 per cent share of investments in the GDP and that two thirds of the investments should be from domestic sources. If it is known that a large part of the construction industry is in the formation of gross value added, with the fall of industrial production, the validity of the investment structure may be raised. Commenting on the fact that GDP growth in the H1’19 was 2.9 per cent, and that it is planned to grow 3.5 per cent for the whole year, some Serbian economists recently said that the chances to achieve this forecast are slim and that growth will be smaller than planned. It depends on many factors, first of all, trends in the economies of EU countries, the effects of Brexit, as well as the value of Serbian export, primarily of food products.

Encouraging data on y/y growth in manufacturing was recorded in July, and production downturns were overcome in areas that caused a drop in overall production, such as the chemical industry, which underwent overhaul in the first six months. Cumulative decline in production continued in the January-July period, but was mitigated: in the total industry at 1.3 per cent and in the processing industry at 1.4 per cent. Production declined by 1.2 per cent y/y and in the energy companies by 0.5 per cent.

Economic growth in the Q2 was 2.9 per cent y/y, the Republican Bureau of Statistics announced in September and adjusted the result in the Q1 from 2.5 to 2.7 per cent. GDP growth in the Q1 is slightly lower than the National Bank of Serbia estimated. It seems less likely for Serbia to achieve the planned economic growth in the whole year by 3.5 per cent. The National Bank estimated that GDP would grow by about 4 per cent annually in the Q3, and more than 4 per cent in the Q4. Today, things are more pessimistic and it seems that Serbian economy is returning to a growth rate of 3 per cent.

It is 2.9 per cent less than expected, and after the 2018 growth based on one-off factors, Serbia is back to 3 per cent, which the Fiscal Council described in its studies as a long-term trend of the Serbian economy. Whether it will be 3 or 3.5 per cent is not a big deal because it will not have a big impact on either the salaries or the standard of living. Citizens need rates of over 5 per cent a year as Central and Eastern Europe countries have bigger growth rates than Serbia. And in fact, because Serbian base is smaller, it should be the other way around. That points to the fundamental problems of Serbian economy: corruption, the rule of law and the efficiency of the institutions.

Kosovo customs charges have a negative impact on the food industry and manufacturing sector. There are recession signs from Germany and from Italy that affect the Serbian economic trends. The country does not have enough domestic or public investment, so the possibilities to reach almost magical 3.5 per cent are quite slim. This growth is mainly concerning the services, notably construction, transport and trade, and indicates structural problems. Investments in low value-added industries limit the economic growth.

However, GDP and industry figures show some improvement in the Q2 q/q. Between April and June, GDP grew by 1.2 per cent. The highest growth was recorded by construction, 16.8 per cent, information and communications 8.2 per cent, as well as traffic and trade with 5.1 per cent growth. Considering consumption, the highest growth was recorded in household consumption — 3.2 per cent, government consumption increased by 2.4 per cent, gross investment by 8.6 per cent, while exports increased by 9.1 per cent and imports by 10.9 per cent. Interestingly, y/y growth in investment in the H1 was 8.2 per cent, while in the same period last year it was as much as 14 per cent. But we have to remember that in the H2’18 investment growth slowed significantly to just 5.7 per cent, so it remains to be seen whether the second half of this year will also see a decline or more evenly distributed investments.

The latest industrial data is also positive. In July, industrial production increased by 3.7 per cent y/y. Mining is still lower than last year (2.3 per cent y/y), mainly due to the extraction of oil and gas and metal ores. But the manufacturing industry is up 6 per cent y/y. On the other hand, problems persist within the energy and gas sectors.

The recovery of the industry on a monthly basis is expected as overhauls in the oil and chemical sectors have been completed, but the problem remains with public companies. Public enterprises, and even state-owned electric utility power company Elektroprivreda Srbije , which is significant for Serbian economy. The lack of corporate governance, market rules and responsibilities result in a lack of investments and this influences the entire economy.

High foreign investment in Serbia is a result of bribery as the Serbian economists claim. According to the latest ranking of the London-based Financial Times, Serbia is at the top of the list in terms of FDI, as it had 107 FDI projects last year, 26 more than in 2017. It states that Serbia is attracting 12 times the amount of FDI greenfield than might be expected from an economy of its size.

Foreign investors are offered subsidies per employee, cheap land like 120 hectares on Belgrade waterside, or cheap electricity and other infrastructural benefits. The total FDI so far is estimated at EUR38bn or 80 per cent of GDP, but there are no detailed data.

Meanwhile, the investment climate for domestic investors is unattractive. High growth rates can be achieved not only by FDI but also by domestic ones. The share of public investments in GDP is about 3-3.5 per cent annually, while it should be about 5 per cent. It means Serbia need to invest another EUR400-500m. If the share of FDI in GDP is 6-7 per cent then the domestic private sector investment should reach 25 per cent of GDP. This would be a real push toward higher rates of economic growth.

Vedran Obućina is an analyst and a journalist specializing in the Croatian and Middle East domestic and foreign affairs. He is the Secretary of the Society for Mediterranean Studies at the University of Rijeka and a Foreign Affairs Analyst at The Atlantic Post.

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