VZCZCXRO0860
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBW #0950/01 2551544
ZNR UUUUU ZZH
R 111544Z SEP 08
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0412
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BELGRADE 000950 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV SR
SUBJECT: SERBIA: PRIVATE BANKS SHARE VIEWS ON FINANCIAL 
VULNERABILITIES, BUSINESS CLIMATE 
 
REF: Belgrade 886 
 
SUMMARY 
------- 
 
¶1.  (SBU) Executives from Serbia's major private banks met with 
Embassy econoffs on September 4-5 to discuss the country's financial 
vulnerabilities and overall business climate.  The banks voiced 
strong concerns about Serbia's current account deficit but expressed 
confidence about continued external financing in the near term. 
Banks were committed to the Serbian market for the long term, as 
bank lending continued to be brisk and had not been affected much by 
the global credit crunch.  While the bank executives welcomed the 
new government's economic agenda, they were downbeat about the 
recent pension hikes and the lack of fiscal discipline that the 
government had thus far exhibited.  The most important message we 
received was that the banks were heavily invested in Serbia and were 
not inclined to rush for the doors in the event of a financial 
crisis.  End Summary. 
 
FINANCIAL VULNERABILITIES: CONCERN, BUT NOT PANIC 
--------------------------------------------- ---- 
 
¶2.  (U) Serbia's banking sector is dominated by foreign banks, 
mainly from Austria, Italy, and Greece.  Out of 34 banks in Serbia, 
20 are majority foreign-owned, 6 are majority domestic-owned, and 8 
are majority-owned by the state, according to the National Bank of 
Serbia's (NBS) latest banking supervision report.  The top 10 banks 
account for 69% of bank assets, while foreign-owned banks account 
for 75% of bank assets.  We met on September 4-5 separately with 
executives from Societe Generale (France), Piraeus Bank (Greece), 
Alpha Bank (Greece), and Raiffeisen Bank (Austria). 
 
¶3.  (SBU) Everyone we spoke to expressed serious concern about 
Serbia's current account deficit, estimated to be near 20% of GDP in 
the second quarter.  At the same time, however, they downplayed the 
likelihood of a crisis or financing difficulties over the next 12 
months and were hopeful that continued high growth rates and 
investment could sustain the needed capital inflows over the near 
term (Serbia's GDP grew by 7.5% in 2007).  High short-term interest 
rates due to the National Bank of Serbia's (NBS) strict 
anti-inflation targeting regime were also a factor in drawing in 
external funding for now and propping up the dinar.  Mila 
Korugic-Milosevic, chief economist at Piraeus, told us that the 
current account deficit was sustainable if Serbia continued to 
attract at least $4.5 billion of foreign direct investment (FDI) 
every year.  (Note: At a Foreign Investors Council (FIC) event on 
September 10 Deputy Prime Minister Dinkic said that the government 
expected $4 billion in FDI in 2008 and was aiming for $5 billion/yr 
in the next three years.  End Note.) 
 
¶4.  (SBU) The banks felt the dinar was overvalued, but views were 
mixed as to how much of a concern this was.  Korugic-Milosevic and 
Zoran Petrovic, deputy chairman of the managing board at Raiffeisen, 
noted that currency appreciation was a feature of transition 
economies.  Countries in Eastern Europe had experienced high 
inflation and surging capital inflows in the first decade of 
transition, which drove up the real value of the currency.  Serbia, 
therefore, was in the same position that Central European economies 
were in 10 years ago.  However, Panagiotis Vlasiadis, Alpha Bank 
Executive Board President, told us privately that the strong dinar 
could degrade Serbia's already weak competitiveness, observing that 
only export growth could reduce the economy's financial risks over 
the next several years. 
 
BANKS COMMITTED TO THE SERBIAN MARKET 
------------------------------------- 
 
¶5.  (SBU) All of the banks emphasized that in the event of a 
speculative attack or a financial crisis, they were heavily invested 
in Serbia for the long term and had no intention of leaving the 
country.  Goran Pitic, Societe Generale (SocGen) Board of Directors 
President, said that credit lines would remain open and, perhaps 
more importantly, that SocGen would keep viewing Serbia as rife with 
profitable lending opportunities, "even if a year or two of crisis 
happens."  Pitic also quipped that if banks left, "where would they 
go?"  Other countries' banking sectors were "saturated."  Piraeus 
Bank, according to Korugic-Milosevic, had established 47 branch 
offices in the country (16 in Belgrade) and was making "too much 
money" to justify pulling out of Serbia. 
 
¶6.  (SBU) Petrovic and Vlasiadis unequivocally expressed similar 
sentiments and mentioned that Serbia and the Western Balkans were 
strategic, long-term investments for their respective parent banks. 
Southeastern Europe accounted for 30% of Raiffeisen's foreign 
business.  When we inquired about whether pulling out of the country 
in the event of a crisis was considered, Petrovic said, "no chance." 
 
BELGRADE 00000950  002 OF 002 
 
 
 Raiffeisen was committed to Serbia's market for the long term, and 
an occasional market flare-up was the "price you have to pay" to do 
business overseas.  Vlasiadis said humorously that Alpha would "bolt 
down" the building and ride out any coming storm if necessary. 
Alpha, like other banks and creditors, would continue to lend, but 
at higher rates. 
 
BANK LENDING REMAINS ROBUST 
--------------------------- 
 
¶7.  (SBU) The executives told us that they understood the necessity 
of fighting rising inflation, which was now above 10%, but they all 
complained about the NBS' credit restrictions, as the central bank 
had raised rates from the end of December to May from 9.75% to 
15.75%.  Despite the monetary stringency, their corporate clients 
could absorb the higher rates, or avoid them by using cross-border 
loans in euros, and thus lending continued to be quite profitable. 
Infrastructure, construction, chemicals, food processing, and 
refinancing were some of the key areas the banks were targeting for 
growth.  The banks also said that the global credit crisis, despite 
resulting in somewhat higher borrowing costs, had not affected loan 
volume. 
 
PENSIONS, POPULISM HARM MACROECONOMIC OUTLOOK 
--------------------------------------------- -- 
 
¶8.  (SBU) Pitic, Korugic-Milosevic, Petrovic, and Vlasiadis were 
quite critical of the new Serbian Government's fiscal largesse. 
They all praised the renewed focus on attracting greenfield 
investment and tackling infrastructure problems but took a negative 
view about the recent hike in public pensions (reftel).  Pitic said 
the major risk now for Serbia's business climate was the 
government's unwillingness to quit populist policies and focus on 
investor-friendly reform.  Vlasiadis predicted that higher pensions 
would stoke further inflation and perpetuate the NBS' strict 
monetary stance.  Petrovic shared this view and said that the 
"overall budget is growing too much."  The budget revisions for 2008 
would send a message about the government's commitment to fiscal 
discipline.  The prospect of pensions at 70% of wages was "totally 
crazy," according to Petrovic, and he added that he would not be 
surprised if the Finance Minister resigned if the budget deficit 
continued to increase next year. 
 
COMMENT 
------- 
 
¶9.  (SBU) On balance, the banks were cautiously optimistic about 
Serbia's near-term economic prospects, but more wary about the 
economy going into 2010-2011.  Bank executives do not believe a 
financial crisis is imminent, but the country's external 
vulnerabilities merit serious concern.  If the economy continues to 
grow at 7%-8%, and Serbia continues to draw in sufficient FDI 
inflows, the economy could boost exports and mitigate the financial 
risks.  If growth slows, an inability to attract greenfield 
investors, and/or fiscal measures (e.g., more pension increases) 
that raise the budget deficit and public expenditures, could cut 
investor confidence and tilt risks to the downside.  Our 
conversations once again came down to greenfield investment and the 
overall business climate.  Everyone agreed that ultimately 
export-oriented FDI held the key to the country's most pressing 
economic problems.  Prime Minister Cvetkovic, as well as several 
other ministers, used all the right talking points at the September 
10 meeting announcing FIC's yearly recommendations to the government 
on economic policy.  How much progress the new government makes in 
achieving their goals to build infrastructure, streamline 
regulations and improve the business climate will ultimately depend 
on their ability to govern, rather than just campaign for office. 
The bankers believe there is a window of opportunity for the 
government to set the economy on a path of sustainable growth. 
However, without budget restraint, action on legislation and 
implementation of reforms, macroeconomic pressures could lead to 
difficulties in the future.  End Comment. 
 
MUNTER