VZCZCXRO4405
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBW #0156 0420630
ZNR UUUUU ZZH
R 110630Z FEB 08
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 2172
INFO RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/USDOC WASHDC 0037
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS BELGRADE 000156 
 
SIPDIS 
 
SIPDIS 
 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON EINV SR
SUBJECT: Serbia: Markets React to a Roller-Coaster Political 
Environment 
 
Ref: Belgrade 155 
 
Summary 
------- 
 
¶1.  Following President Tadic's reelection February 3, the primary 
Belgrade Stock Exchange index rose by 6.34% on February 4, but then 
returned to its long-term downward trends after PM Kostunica refused 
to discuss signing a political agreement with the EU.  The dinar 
exchange rate followed the same path, with the dinar strengthening 
after the election but than sharply declining by 5% on February 7, 
forcing the National Bank (NBS) to intervene.  Serbian markets are 
sending clear messages about the market view of positive 
(profitable) political developments and negative (loss-making) 
political developments.  End Summary. 
 
Post-Election Stock Exchange Jumps, Then Falls 
--------------------------------------------- - 
 
¶2.  On February 4, a day after Tadic's reelection, the Belgrade 
Stock Exchange (BSE) blue chip shares index BELEX 15 rose 6.34%, its 
second largest one day gain.  Investors demonstrated relief in 
Tadic's victory.  However, already on February 5, political 
uncertainty hit the market after Prime Minister Kostunica's negative 
comments on the EU movement toward launching a security and law 
enforcement mission in Kosovo.  As the government paralysis 
continued throughout the week, the BELEX 15 slid further -- down by 
4.17%, 4.25% and 1.34% from February 5-7 respectively, annulling the 
initial post-election gains.  The BELEX 15 regained 1.1% on February 
8, following the government decision on the sale of RTB Bor (septel) 
and after President Tadic made a statement saying he would schedule 
to meet with PM Kostunica in order to calm the political situation. 
 
 
Central Bank Increased Bank Lending Rate By 0.75% 
--------------------------------------------- ----- 
 
¶3.  NBS Governor Jelasic announced on February 6 that the NBS had 
increased the primary bank interest rate from 10% to 10.75% in order 
to suppress growing inflation and to ease pressure on the dinar. 
Jelasic said that the economic situation in Serbia was deteriorating 
with accelerating inflation, growing current account deficit and 
slowing GDP growth. 
 
Dinar First Strengthens then Falls, NBS Intervenes 
--------------------------------------------- ----- 
 
¶4.  Similar to the stock exchange results, the dinar appreciated 
post-reelection by 1.8%, reaching 81.44 dinars/euro.  However, in 
the next few days, the dinar began sliding, even with increased 
interest rates, until the morning of February 7 when the drop 
sharpened to 5% in one day, reaching 85.5 dinars/euro.  The NBS 
intervened to prevent further devaluation and sold $29 million in 
reserves to stabilize the currency at 83 dinars/euro.  These flows 
highlighted Jelasic's February 4 warning that the "foreign exchange 
market is highly sensitive to political risks and in the short run 
the stability of the forex market depends on participants' 
expectations regarding political stability and macroeconomic 
trends." 
 
Comment 
------- 
 
¶5.  The recent events demonstrate the vulnerability of the Serbian 
economy and the need for political stability and predictability. 
The markets' movements are also an indicator of the potential 
economic cost of slowing Serbia's advance toward the EU.  So far the 
effects of this week's political instability have been felt only in 
the markets.  In our discussions with current and potential U.S. 
investors none of them have changed their plans in Serbia, but they 
have expressed concern that the current political paralysis must be 
resolved soon.  End Comment. 
 
MUNTER