VZCZCXRO2967
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBW #1101/01 2980516
ZNR UUUUU ZZH
R 240516Z OCT 08
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0561
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPARTMENT OF COMMERCE WASHINGTON DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BELGRADE 001101 
 
SIPDIS 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN SR
SUBJECT: Serbia: January-August Macro Results - Waiting for the 
Global Economic Crisis to Hit 
 
Summary 
------- 
 
¶1.  Serbian macroeconomic indicators through August of this year 
show the first signs of the global slowdown that is beginning to hit 
Serbia.  Import growth slowed but continued to grow faster than 
exports, widening the trade deficit.  Local economists warn that the 
deficit threatens balance of payment sustainability with inevitable 
reductions in foreign investment as the global economy contracts due 
to the financial crisis.  Stojan Stamenkovic of the Economic 
Institute said that the global crisis could hit Serbia hard, causing 
a significant slowdown in GDP growth and recommended that the 
government reduce its 2009 budget accordingly.  End Summary. 
 
Industrial Production Growth Slows in August 
-------------------------------------------- 
 
¶2.  Serbian industrial production dropped by 8% in August 2008 
compared to the previous month, or 4.4% compared to August 2007. 
This slowdown reduced cumulative January-August 2008 production 
growth from 4.3% in July to 3.1% in August year on year (y/y).  The 
drop was distributed across nearly all sectors, led by the fall in 
tobacco and food industry production.  The only growth was in the 
chemical industry and base metals.  August results are typically 
weak with many Serbs on vacation, but few expect September results 
to reverse this trend. 
 
Retail Trade Falls in August, Still Up 6.8% Cumulatively 
--------------------------------------------- ------- 
 
¶3.  August 2008 retail trade volume was lower than in July by 0.7% 
in real terms.  However, accumulated Jan-Aug y/y retail trade volume 
increased in real terms by 6.8% due to the strength of Serbian 
economic growth early in the year.  The average monthly wage reached 
$543 in August 2008, and was up 4.23% in real terms for the first 8 
months of 2008 y/y.  Household demand decreased in July and August 
2008 over the same months last year in real terms by 4.7% and 3.9% 
respectively.  This reduction was mostly due to the reduction in 
consumer credit and an increase in household savings.  Inflation 
slowed down in the second half of the year and the consumer price 
index in September 2008 y/y reached 10.9%, mostly due to decreases 
in oil and food prices. 
 
Imports Growth Slows, But Trends Remain Upward 
--------------------------------------------- - 
 
¶4.  Serbian imports also recorded a slowdown in August, reaching 
$1.83 billion compared to the 2008 monthly average of $2 billion. 
Overall, import growth continues with a January-August 2008 value of 
$15.95 billion, up 40% y/y. Serbian exports grew slower than imports 
in the same period - at a rate of 38.6% y/y and reached $7.72 
billion, thus widening trade deficit to $8.23 billion.  The biggest 
contributors to export growth were iron and steel, road vehicles, 
and telecommunications devices, while the largest imports were oil 
and gas, and industrial machines. 
 
Current Account Deficit Up By 66.4% y/y, BOP Negative 
--------------------------------------------- -------- 
 
¶5.  Local economists, including the Economic Institute's 
Stamenkovic, warn that the growth in the trade deficit endangers the 
sustainability of Serbia's balance of payments.  The current account 
deficit increased by 66% in January-August y/y to $6.16 billion, 
mostly due to growth in the trade deficit.  This current account 
deficit has been sustainable because foreign direct investment (FDI) 
and international portfolio investment has been strong in recent 
years.  From January-August 2008 Serbia ran a $132 million balance 
of payments deficit that had to be covered from reserves.  While 
Serbian reserves of more than $12 billion can absorb this deficit in 
the short-term, it is a warning of the difficulties Serbia will face 
in the coming months.  The deficit was largely fueled by a stark 
turnaround in portfolio investments which went from a net inflow of 
$706 million in Jan-Aug 2007 to net outflow of $100 million in 
Jan-Aug 2008. 
 
Worldwide Crisis Ill-timed for Serbia 
------------------------------------- 
 
¶6.  Stamenkovic warned that Serbia could suffer from the global 
crisis in the coming year, beyond the initial hopes of simply facing 
an increased cost of international capital.  He expected slower GDP 
growth in Serbia and the 2009 budget should be cut to fit this 
assumption, since the slowing economy meant less revenues for the 
budget.  He listed several areas of concern: domestic demand would 
slow down due to decreased loans; growth in FDI would stagnate; 
cross-border credits had been reduced due to decreased liquidity of 
parent banks; EU economic slowdown would cut Serbian export growth 
since the EU is the biggest export market for Serbia. 
 
 
BELGRADE 00001101  002 OF 002 
 
 
COMMENT 
------- 
 
¶7.  The August statistics provide an early indicator that Serbia 
will not escape the effects of the global financial crisis.  The 
crisis hits Serbia at a particularly difficult time as the new 
government is seeking to deliver on election promises and continue 
the strong economic growth of the past three years.  Local economic 
leaders, including the Vice Chairman of   Raiffeisen Bank and the 
Securities Commission President, told us that the real effects of 
the worldwide financial crisis had not hit Serbia yet, but they soon 
would.  They claimed that liquidity in the Serbian banking sector 
was not threatened due to high reserve requirements (some as high as 
45%).  While the Serbian government has taken prudent measures to 
bolster confidence in the financial sector, such as increasing 
deposit insurance limits from $4000 to $65,000, the Serbian economy 
is slowing and the macroeconomic pressures in 2009 will be 
significant.  The Serbian government will be faced with difficult 
choices in the next month as they prepare the 2009 budget, with 
revenue growth stagnating.  The government hopes to renew its 
engagement with the IMF in order to find a scapegoat for looming 
budget cuts.  Clearly, Serbia will struggle in 2009 economically as 
the effects of reduced international investment, the slowing global 
economy and Serbia's long running trade deficits combine to 
challenge the new government's agenda of delivering a better 
standard of living through progress toward the EU.  End Comment. 
 
MUNTER