VZCZCXRO1020
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBW #0095/01 0331623
ZNR UUUUU ZZH
R 021623Z FEB 09
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0927
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BELGRADE 000095 
 
UNCLASSIFIED 
SIPDIS 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON EINV ETRD EFIN SR
SUBJECT: Serbia: Global Crisis Begins to Pinch 
 
Summary 
------- 
 
¶1.  End of year 2008 statistics show a slowdown in economic activity 
across Serbia.  Faced with these downward trends, the Finance 
Ministry will likely revise 2009 GDP growth estimates down from 3.5% 
to 2%.  The dinar is steadily declining, registering a 34% loss 
against dollar since October 2008.  January 2009 government revenues 
were down 10%.  The government held several meetings with key market 
players and promised to provide $1.7 billion in subsidized loans to 
businesses and consumers to bolster demand.  Several deals and 
tenders have been canceled or postponed due to the crisis.  The 
sharp slowdown in revenues and the rapid slowdown in the economy 
have finally spurred the government to confront the crisis, rather 
than just hoping it will not hit Serbia.  End Summary. 
 
Industrial Production Sinks 
--------------------------- 
 
¶2.  Despite optimistic assessments from some ministers last fall, 
including Economy Minister Mladjan Dinkic, that the global economic 
crisis would not significantly affect Serbia, third and fourth 
quarter 2008 statistics suggest otherwise.  In August 2008, 
industrial production reversed its growth trend and fell monthly by 
0.9% in real terms due to a drop in basic metal (U.S. Steel), rubber 
and plastics (Tigar-Michelin), and textile production.  Industrial 
production dropped a further 3.4% year-on-year in October and 2.6% 
y/y in November.  Projections indicate that annual industrial 
production for 2008 will record a modest increase of about 1.5% over 
2007, thanks to strong growth in the first half of the year. 
 
2008 GDP Growth Slows Sharply, Lower 2009 Projections 
--------------------------------------------- -------- 
 
¶3.  Year-on-year GDP growth for 2008 dropped from 8.5% in the first 
quarter, to 6.3% in the second quarter, and then to 4.9% in the 
third.  The National Bank of Serbia (NBS) estimates fourth quarter 
growth will be only 2% and 2008 annual GDP growth will be 5.4%. 
This is down from the mid-year 2008 projection of 7%.  In response, 
Finance Ministry State Secretary Vuk Djokovic told uson January 12 
that the ministry plans to lower its 2009 GDP growth estimate from 
3.5% to around 2%.  Mid-January 2009 government revenues were down 
10% compared to mid-January 2008.  Finance Minister Dragutinovic 
said this was due to lower VAT collection and suggested tax evasion 
as a culprit, beyond the economic slowdown. 
 
Export & Import Trends Reverse 
 
------------------------------ 
 
¶4.  Production in export-oriented industries fell due to decreased 
orders from abroad, driving both imports and exports lower, a trend 
not seen since the Milosevic era.  Since July 2008 when monthly 
exports totaled $1.16 billion, exports have fallen sharply to just 
$686 million for November, a 41% drop.  The bulk of the collapse was 
due to a 26% fall in iron and steel exports and 19% fall in 
non-ferrous metals exports.  Note: The majority of this decline is 
due to sharp cuts in orders at U.S. Steel's operations in Serbia. 
End Note.  July 2008 imports totaled $2.2 billion, but then dropped 
36% to $1.4 billion in November.  The crisis was softened by 
agricultural exports, particularly to CEFTA countries.  The trade 
deficit shrank from $1.1 billion in July 2008 to $720 million in 
November, due to decreased imports. 
 
Dinar Depreciates 34% against Dollar 
------------------------------------ 
 
¶5.  Since October 1, 2008 the dinar has fallen 34% against the 
dollar, from 54to 73 dinars to the dollar.  NBS has been selling 
reserves regularly to slow the pace of the dinar's decline, but the 
Bank has not been able to reverse the downward trend for more than a 
few days at a time.  NBS continues to draw criticism from businesses 
suffering exchange rate losses who think NBS needs to more 
aggressively prevent sharp currency fluctuations.  In a January 30 
meeting with us Goran Pitic, the head of Societe Generale Bank in 
Serbia, told us that NBS needed to be more transparent and more 
sophisticated in making foreign exchange market interventions. 
 
Loan Repayment Still Alright, Leasing and Retail Suffer 
--------------------------------------------- ------- 
 
¶6.  The weaker dinar did not, however, affect loan repayment even 
though 80% of all loans are euro-indexed.  The share of consumer 
non-performing loans (NPL) increased from 1.2% in December 2007 to 
1.4% in December 2008 while business NPL rose from 5.1% to 6.3%. 
Pitic told us that Societe Generale's default rates had stabilized 
in January after the slight rise at the end of 2008.  According to a 
recent study by Italian UniCredit Banking Group, 17% of households 
in Serbia are heavily indebted, spending more than 30% of household 
 
BELGRADE 00000095  002 OF 002 
 
 
income on repaying debt.  This is moderate compared to Romania (31%) 
and Croatia (27%).  However, payment default on vehicle and 
equipment leases increased with NPL up 16.4% in December 2008 y/y. 
Retail turnover also suffered due to the global financial crisis, 
declining 7% in real terms in November 2008 compared to October 
¶2008.  Salaries, in the meantime, recorded real growth with December 
2008 average take home pay 12% higher in y/y nominal terms and 3.85% 
in real terms. 
 
Postponed Investment, Failed Tenders and Lost Deals 
--------------------------------------------- ------ 
 
¶7.  Several industries reported delayed and cancelled deals due to 
global crisis.  Car maker Fiat announced it would postpone investing 
$260 million in Zastava for ten months.  Copper mining and smelting 
company RTB Bor failed to attract a bidder in the third attempt 
privatize the firm.  The tender for the sale of tourist complex 
Stara Planina failed as potential bidders requested reduced 
investment obligations.  Bus producer Ikarbus reported it lost a $36 
million deal in United Arab Emirates due to the crisis. 
 
The Government Response Finally Begins 
---------------------------------- 
 
¶8.  In January 2009, the parliament finally adopted a set of crisis 
measures which included raising state guaranteed deposit insurance 
from EUR 3,000 to EUR 50,000 and eliminating taxes on interest 
earnings and securities gains three months after the government 
proposed it, drawing widespread criticism.  The government hopes to 
shrink state consumption, maintain the standard of living, and 
provide business incentives such as soft loans with particular focus 
on export-oriented industries and foreign investors.  President 
Boris Tadic, Prime Minister Cvetkovic, Economy Minister Dinkic, and 
NBS Governor Jelasic have met with the businesses, union leaders, 
and bankers over the past few months to discuss further strategies 
to weather the economic storm. 
 
$1.7 Billion in Loans to Businesses and Consumers 
--------------------------------------------- ---- 
 
¶9.  On January 29, The Serbian government approved a series of 
stimulus measures that would support low interest loans to 
businesses and consumers totaling $1.7 billion to stimulate the 
economy.  Loans would come partially from the budget, but also from 
banks with support from state guarantees and from international 
organizations.  Economy Minister Dinkic said at a press conference 
following the government's approval that only $42 million would come 
from money allocated in the 2009 budget and an additional $69 
million would come from the Development Fund.  Banks would provide 
the rest.   The program includes: working capital loans (12 month 
term) totaling $555 million with a government would subsidized 
interest rate; investment loans (3-5 year terms) of $236 million, 
with 30% of the capital provided by the government and 75% of the 
risk guaranteed by the government; consumer loans with subsidized 
interest rates totaling $278 million for purchase of durable 
consumer goods produced in Serbia; and $625 million in loans from 
international institutions such as the European Investment Bank, 
KfW, EBRD and the Italian government that would target small and 
medium size enterprise lending.  Interest rates would be between 
5.5% and 6.5%, half the current commercial rates.  As a condition, 
borrowers would be prohibited from laying off workers.  Loans would 
be disbursed through commercial banks selected by NBS and through 
the government's Development Fund.  Economy Minister Dinkic said 
loans to consumers would be only for the purchase of domestically 
produced durable goods.  said the government plans to have the loans 
programs in place by late February. 
 
COMMENT 
-------- 
 
¶11.  The sharp slowdown in the Serbian economy and especially tax 
revenues in the last three months of 2008 and the first month of 
2009 has brought the economic crisis to Serbia.  Serbia must not 
only be flexible and prudent in identifying policies that will help 
it weather the crisis, but it must be quick and decisive in 
implementing those policies.  As of now, the prognosis for a 
recovery in production and exports in 2009 is grim.  The government 
has, at least, begun to react to the crisis and try to prime the 
pump.  Continued pressure on the exchange rate as a result of 
Serbia's continuing trade deficit and the government's limited 
ability to stimulate demand within the constraints of an IMF 
stand-by arrangement will leave the economy vulnerable.  The 
government is moving toward a more coordinated economic policy and 
the next few months will be critical.  End Comment 
 
MUNTER